UK: Can An Employer Dismiss To Avoid Enhanced Pension Benefits?

Last Updated: 2 December 2009
Article by Richard Martin and Jessica Halling

Recent months have seen a flurry of legal activity concerning the Age Discrimination legislation.

First, the High Court considered the Heyday challenge to the default retirement age of 65 and held that this is not contrary to the Equal Treatment Framework Directive. This means that for now the default retirement age of 65 is here to stay (or at least until the Government review due in 2010, after which it could be removed completely or increased to 68 or 70 subject to a further review).

Second, there have been two important cases reported in this Inform which have considered whether it is discriminatory to dismiss employees shortly before they become entitled to enhanced pension benefits. These cases concern the very generous right for public sector employees to take early retirement once they reach the age of 50.

London Borough of Tower Hamlets v Wooster

The first case concerns the decision of the Employment Appeal Tribunal (EAT) in London Borough of Tower Hamlets v Wooster.

Mr Wooster had worked for the London Borough of Tower Hamlets (Council) since 1973. He was seconded to a registered social landlord (EHH) following a restructuring in 2001. By a letter dated 9 October, the Council gave Mr Wooster 12 weeks' notice of dismissal for redundancy on account of the fact that the work for which he was seconded was coming to an end. The Council confirmed that the notice period would be used to try to find him alternative employment, but encouraged Mr Wooster to apply for voluntary redundancy and set out the financial incentives.

Under the terms of the Council's pension scheme, Mr Wooster was entitled to advantageous early retirement terms if his employment terminated after his 50th birthday on 11 July 2007. EEH offered to fund the extension of Mr Wooster's secondment until that date. The Council, however, refused stating: "If you are going to pay his salary then you can pay his bloody pension when he is 50. If he goes now we do save the pension." Mr Wooster successfully applied for voluntary redundancy and then presented a claim for unfair dismissal and age discrimination.

The Tribunal upheld both claims. The Council did not appeal the unfair dismissal decision, but did appeal the Tribunal's finding that Mr Wooster had been directly discriminated on the grounds of age as well as the Tribunal's basis for calculating remedy.

The EAT held that the Tribunal had been entitled to draw an inference that the Council's failure to redeploy Mr Wooster, or extend his employment by seconding him, was motivated by a wish to terminate his employment before he reached the age of 50. The Council failed to put forward any justification defence (justification of direct age discrimination is possible providing the treatment is a proportionate means of achieving a legitimate aim) and therefore the redundancy dismissal constituted unlawful age discrimination. The EAT also held that when deciding remedy, the Tribunal was entitled to reach its conclusions concerning the employee's future prospects on the basis of what it considered would have taken place had the employee being treated fairly and not discriminated against on grounds of age.

Woodcock v Cumbria Primary Care Trust

The second case has similar facts to the first, although crucially, in the second case the Cumbria Primary Care Trust (CPCT) had pleaded the justification defence.

Mr Woodcock was Chief Executive of North Cumbria Primary Care Trust (NCPCT). Under Government plans in 2005, NCPCT was to be subsumed into CPCT. He applied for the role of chief executive of CPCT, but was unsuccessful. His employment transferred to CPTC and he was warned of the risk of redundancy. Attempts to find alternative employment were unsuccessful. When CPCT became aware that if Mr Woodcock remained in employment until he turned 50 on 17 June 2008 he would be entitled to advantageous early retirement benefits (which would cost CPCT in the region of £500,000 to £1,000,000), CPCT served Mr Woodcock on 23 May 2007 with 12 months written notice of termination for redundancy so that his dismissal would take effect on 22 May 2008 shortly before his 50th birthday. CPCT had not carried out any redundancy consultation prior to serving notice. Mr Woodcock brought a claim in the Tribunal.

The Tribunal held that Mr Woodcock's dismissal constituted less favourable treatment on the ground of his age, but that it was justified as it was a proportionate means of achieving a legitimate aim. When considering justification, the court noted two EAT cases of importance. In the first case, Cross and ors v British Airways plc, it was held that avoidance of cost alone cannot be justification for discrimination but that it can be put into the balance with other justifications. In the second case, Loxley v BAE Systems (Munitions and Ordnance) Ltd, it was held that a discriminatory act to avoid an employee receiving a windfall can be a legitimate feature of a redundancy scheme. The Tribunal identified that CPCT's aim was to terminate Mr Woodcock's employment for redundancy and to avoid the enhanced pension costs of doing so when he turned 50. The Tribunal also found that the dismissal of Mr Woodcock "prior to consultation being carried out was a legitimate aim". In deciding whether Mr Woodcock's dismissal without consultation was a proportionate means of achieving a legitimate aim, it considered the fact that Mr Woodcock only wanted a chief executive role, that he was aware that redundancy was a possibility immediately after his CPCT chief executive job application was unsuccessful, the fact that CPCT delayed in giving him notice of termination gave him an extra year's employment and his position and work for the NHS was recognised in the large redundancy payment of £230,000 he had received. As such the Tribunal concluded that consultation would have achieved nothing and that Mr Woodcock's dismissal was a proportionate means of achieving CPCT's aims.

What now?

The Tribunal decision in Woodcock has received criticism in the press. Its reasoning on the CPCT's legitimate aim appears to be flawed because the only reason given by CPCT for dismissing Mr Woodcock before he reached the age of 50 was on account of cost and the EAT in Cross expressly held that cost should not be the only reason. Conversely, if the Tribunal was relying on the principles in Loxley to avoid Mr Woodcock receiving a windfall, then this also seems to have been misconstrued. It is difficult to see how entitlement to enhanced early retirement benefits can be construed as a windfall when such a benefit is often a key part of the bargain under which an employee provides his/her services to the employer.

We understand that both the Wooster and Woodcock cases are subject to appeal. The Woodcock case is itself only a first instance decision in any event.

There is a suggestion in the cases that public sector employers may be able to justify the age discrimination on the basis that paying an enhanced pension to an early retiring employee will reduce the employer's ability to fund public services eg providing healthcare within the NHS. That argument will presumably not be available to private sector employers where Cross will prevent them relying on cost alone to justify discrimination. Private sector employers may feel that that distinction is itself unfair when they could argue that the cost that prevents the public sector employer providing public services will in the same way prevent the private sector employer doing whatever it is set up to do. Certainly there does seem to be a degree of artificiality about the distinction.

It might also be observed that in both cases the employer got itself into difficulty because of the very generous and expensive enhanced pension arrangements available to employees over a certain age.

Whilst historically enhanced early retirement benefits were a great way of managing the workforce, allowing older employees to be moved on to make way for younger employees, these benefits do not sit comfortably with the Age Discrimination legislation. Further their cost, with pensioners living ever longer, is becoming prohibitively high forcing employees into the sorts of actions seen in these two cases, treatment which would not be meted out to younger employees. The existence of the generous retirement arrangements is encouraging employers to discriminate on age grounds against the very people intended to benefit from those arrangements.

On that basis, and given that the enhanced arrangements themselves discriminate on age grounds, perhaps the answer is that employers ought to be thinking about removing the enhanced benefits that are causing the problem in the first place. That way, employees can be treated equally regardless of their age without the cost of enhanced benefits actually acting to the detriment of older employees.

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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