UK: Age Discrimination And Enhanced Redundancy Schemes

Last Updated: 5 November 2008
Article by Clare Cruise and Linda Farrell


Many employers operate enhanced redundancy schemes under which they agree to make payments in excess of the statutory redundancy entitlement. Such schemes may, for example, provide that statutory redundancy payments will be increased by an overall multiplier or that actual pay will be used in the calculation rather than the capped weekly pay under the statutory regime (currently Ł330 per week).

Despite the removal of the upper and lower age limits under the statutory scheme, statutory redundancy payments are still calculated on the basis of length of service and a multiplier linked to age bands. Whatever the basis for enhancing redundancy payments, most schemes similarly adopt calculations based on age and/or length of service. What then is the impact of the Employment Equality (Age) Regulations 2006 ("the Age Regulations") on this approach?

Calculating a benefit based on age gives rise to direct age discrimination whereas a calculation based on length of service will give rise to indirect age discrimination (as length of service is inextricably linked indirectly to age). However, both direct and indirect age discrimination is capable of being objectively justified if the discriminatory provision is a "proportionate means of achieving a legitimate aim".

Before the Age Regulations came into force, the Government reviewed the statutory scheme but decided to leave the multipliers untouched, on the basis of its conclusion that it best reflects the different economic position of the three age bands and thus amounts to a legitimate aim.

The statutory exemption

In Regulation 33 of the Age Regulations it is provided that it will not be discriminatory to pay enhanced redundancy payments provided that payments are calculated in accordance with the formula for statutory redundancy payments, with the following adjustments specifically permitted:

  • The cap on a week's pay can be removed or adjusted;

Example: actual pay is used or a multiplier is applied to the cap.

  • The "appropriate amount" allowed for each year of employment (one and a half weeks' pay, one week's pay or half a week's pay - referable to the age of the employee) can be multiplied by a figure of more than one;

Example: the amounts are increased to three weeks' pay, two weeks' pay and one week's pay.

  • A multiplier of one (or more than one) can be applied either to the basic statutory redundancy calculation or to a calculation that has been enhanced by either or both of the preceding methods.

However, enhanced redundancy schemes that have some other basis for calculation will still need to be objectively justified.

The issue of objective justification of non-exempted contractual redundancy schemes was considered by the EAT recently in two cases - MacCulloch -v- Imperial Chemical Industries plc 2008 andLoxley -v- BAE Systems Land Systems 2008.

The ICI scheme: This scheme provided that employees would receive payments calculated on the basis of age and length of service (up to a maximum of 10 years). The formula used meant that the amount due under the scheme varied significantly depending on these factors. For example, employees aged between 50 and 57 who had been with ICI for at least 10 years were entitled to 175% of their gross annual salary. However, Ms MacCulloch was made redundant by ICI when she was 36 and after 7 years' service and was entitled to only 55% of her gross salary.

The BAE Systems scheme: This scheme provided for a payment calculated on the basis of age and length of service but the amount began to taper downwards once an employee reached 57, so that those aged 60 or over were entitled to nothing. This was designed to prevent those aged 60 receiving a windfall, as they would otherwise have got both their pension and a contractual redundancy payment. The compulsory retirement age was subsequently increased to 65 (which meant that the windfall justification was less clear cut) and the pension age also increased to 65. However, employees could still take a pension from 60, subject to a 4% reduction per annum.

In both cases the EAT held that, in principle, there were legitimate aims to justify use of age and length of service in the schemes. However, there remained issues as to whether the measures adopted were a proportionate means of achieving those aims. Both cases were remitted back to the Employment Tribunals to consider these points further.

In the ICI case, the EAT helpfully gave guidance on what could constitute a legitimate aim for incorporating age as a factor in an enhanced redundancy scheme. It found that encouraging and rewarding loyalty, encouraging turnover and facilitating career progression for other staff, giving higher payments to older workers to reflect the fact that they would have more difficulties finding new jobs and reducing payments to older workers once they became entitled to pension benefits so that they did not receive a windfall, were all potentially legitimate aims.

The EAT also considered what was a proportionate means of achieving these aims. In its view, such a proportionality test should look at whether the scheme would have a detrimental effect on any individuals and, if so, the extent of the disadvantage and the impact that a different scheme would have on a range of employees. A scheme with fixed rules which did not vary with individual circumstances was in itself a feature which needed to be justified. In the EAT's view, if direct discrimination was reflected in general rules or policies then the discriminatory effect of the measure would be greater than a policy which was cast in neutral terms but had indirect discriminatory effect (e.g. length of service) and to that extent direct discrimination might be harder to justify.

In contrast to the above cases, inGalt and others -v- National Starch and Chemical Limited 2008 an Employment Tribunal has found that the employer failed to justify a non-exempt enhanced redundancy payment scheme.

The National Starch scheme: This scheme provided for a payment based on three weeks' gross pay for each year of service under age 40, and four weeks' pay for each year of service over age 40.

The Tribunal found in favour of the Claimants who successfully argued that they had been less favourably treated on the grounds of age. Although the Tribunal accepted that the employer's aims in implementing the enhanced redundancy pay formula (to ensure that there was no industrial unrest and that there was an orderly closure of its site) were legitimate, it found that the way in which it implemented these aims had not been a proportionate means of achieving them.

On the face of it, this decision seems difficult to understand and it should be noted that it has not been considered at appellate level. However, what appears to have been decisive is that, although the employers contended that older workers deserved higher redundancy payments on the grounds that they were likely to find it more difficult to find alternative employment, no evidence of this was produced and it was clear that the employers had not consciously considered this aspect of the formula during the negotiations with the recognised trade union (who, incidentally, had raised no concerns regarding the enhanced redundancy scheme).


Justification of age discrimination is still being developed both in terms of legitimate aims and proportionality, although both issues are fact-specific at the end of the day. However, to gain the best chance of arguing objective justification, the practical consequence of the above decisions is that, when drawing up a non-exempt enhanced redundancy scheme, employers should:

  • consider and identify the aims of the scheme;
  • consider and identify the justification for the specific enhancements offered;
  • assess the discriminatory impact of the scheme on a range of employees;
  • consider the impact that a different scheme might have on those employees;
  • properly explain the reasons for treating employees differently on the grounds of age and/or length of service to employees or their representatives and undertake a genuine and thorough consultation process;
  • ensure that factors relevant to the aims of the scheme and the consideration given to proportionality and the balancing exercise are recorded in contemporaneous documents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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