Top 10 default retirement age risks for employers

The abolition of the default retirement age will have several knock-on effects for employers. John Charlton points out what is most at risk.

With the ramifications of the default retirement age (DRA) approaching at a speed of knots, employers face many uncertainties except one – that they will have to deal with more and more employees working past the age of 65.

Research from insurance company Prudential – the “Class of 2011” survey – showed that among 1,500 people due to retire in 2011, 62% were considering postponing their retirement and continuing to work. Around 55% of the “Class of 2011” said that they would look to work for another two to five years, with one in 10 looking to work for another five to 10 years.

Labour market statistics, published in February 2011, for the fourth quarter of 2010 show that the number of workers aged 65 and above in employment was 874,000 in the three months to December 2010, an increase of 23,000 compared with the previous quarter. The total in employment is up 104,000 (13.5%) on the previous year.

Alan Beazley, policy and research adviser at the Employers Forum on Age, says: “Employers should not worry about hordes of workers hanging on until they drop. Those who do want to stay probably want to do so only for two to three years maximum, and there is evidence that most will make retirement decisions based on a wide range of factors, including, for example, whether their partner works, what wealth they have and their health.”

Employers facing a rise in workers aged over 64 must be aware of the risks that they face in meeting the rigours of the scrapping of the DRA on 1 October 2011. They should be adjusting policies and practices now – for example, 30 March 2011 is the final date on which they can issue the minimum six months’ notice of retirement, which will be effective from 1 October.

Employers must ensure that they understand the provisions around the scrapping of the DRA on 6 April 2011. They should be adjusting policies and practices now. For example, 5 April 2011 is the final date on which they can issue a notice of retirement using the default retirement age and statutory procedure, and this is only where the employee will have reached age 65 (or the employer’s higher normal retirement age) by 30 September 2011.

David Brown, associate at Simpson Millar, says: “Employers that are yet to review their contracts, policies and procedures should make it an immediate priority. Failing to do so could lead to expensive claims in the not-so-distant future – especially as the compensation limit for age discrimination claims remains uncapped.”

There are many risks for employers to consider, including:

Contractual retirement age

This involves retiring people as they approach 65 on the grounds that it is a proportionate means of achieving a legitimate aim. The Government calls this the employer-justified retirement age. Georgina Jones, associate, Sacker & Partners, says: “It’s technically feasible, but relatively difficult as the Government would likely be opposed to it. It would have to be non-discriminatory and a proportionate means of achieving a legitimate aim, for example in succession planning.”

Jo Broadbent, counsel, Hogan Lovells, adds: “Workforce planning has been found to be a legitimate aim in some cases and the ECJ [European Court of Justice] has been willing to accept that collectively agreed retirement ages are a legitimate way of giving employment opportunities to younger workers. However, employment tribunals to date have been more sceptical.”

Major risks

Employment lawyers contacted by Employers’ Law magazine named the following as major risks once the default retirement age is abolished:

  • Age discrimination and unfair dismissal claims designed to “test” whether or not an employer’s decision to impose a contractual retirement age is justified.
  • Age discrimination claims from older employees who are approaching or have reached the old retirement age and who are being performance managed.
  • Age discrimination claims designed to “test” contractual or discretionary redundancy policies that continue to apply a taper or cap to the payments received by older employees.
  • Difficulty in being able to justify a particular age for retirement.
  • The need for employers to tackle underperformance and health issues head on with a greater risk of conflict with employees.
  • Difficulties in undertaking succession planning.
  • Additional expense when offering some benefits to all staff due to rising insurance premiums.

Cutting benefits to employees aged 65 and over

Brown says: “Employees kept on after the age of 65 are able to claim age discrimination if their benefits are less favourable than those of other age groups. Insured medical benefits tend to be more expensive to provide for those who are older. To meet this concern the Government intends to bring in exceptions for certain insured benefits, such as medical benefits, which will apply to staff over the state pension age.”

Retirement through compromise agreements

Broadbent says: “Once the DRA is abolished, employers could choose to force employees to retire and ask them to sign compromise agreements waiving unfair dismissal and age discrimination claims. There is ongoing uncertainty about whether compromise agreements can be used to compromise claims under the Equality Act 2010, because of the way in which the relevant section has been drafted.”

Broadbent believes that employers will be wary of using such agreements and affected employees may demand “relatively substantial compensation”. She also warns that employers should ensure that any agreement is “without prejudice”, meaning that the parties agree not to use the agreement as evidence in a later legal claim.

“If the conversation [on a compromise agreement] is not without prejudice, the employee might be able to rely on it in a subsequent claim as evidence that the dismissal was discriminatory and unfair,” says Broadbent.

Alex Lock, partner at Beachcroft, adds: “There are no increased risks provided that an employer and employee are able to agree terms and the compromise agreement is validly executed, then the risk is the same as for any other type of claim.”

Dismissals on the grounds of incapacity/lack of capability

The DRA gave employers a way to show workers near retirement the door if their performance fell below par. That will change. Broadbent says: “Once the DRA goes, that option will no longer be available and employers will have to manage underperformance or ill health for older members of the workforce in exactly the same way as they would for a younger employee. Consistency of treatment will be especially important. There should be clear evidence of why the employer is taking action, to avoid any suggestion that it is simply because of the employee’s age.”

If underperforming or ill older employees are treated differently to younger colleagues, they will have a strong case to pursue an age discrimination claim.

Dealing with age-related disabilities

Jane Moorman, partner, Howard Kennedy, says: “The employer would notionally have the same obligation to make adjustments for an employee who was, say, 66 who faced a disability as they would for an employee who was 46 with the same disability. The only factor which might affect the extent of the adjustment would be the cost of the adjustment having regard to the period the employee might reasonably continue in employment. For example, if an employee of 35 were to lose their sight it may be reasonable to provide them with Braille or other training.

“By contrast, an older worker may not be able to give an employer the reassurance that they will continue for any length of time and that may be a factor which an employer may take into account in determining whether or not it is reasonable to incur a cost to meet an adjustment. Whether or not it is reasonable for an employer to take into account the potential longevity of the employee’s employment will depend upon the potential costs being faced and the likelihood that the employee will wish to continue in employment for a reasonable period. This is likely to be an area for dispute with employees going forward.”

Handling performance management issues

James Willis, a senior associate at Thomson Snell & Passmore, says: “As in any case of underperformance, employers must clearly document their concerns. Employees should be counselled on what is required of them; they should be given time to improve and be provided with the relevant support and coaching. This process can take time and require a series of letters, meetings and warnings. Only once reasonable efforts to improve an employee’s performance have failed should an employer consider dismissing an employee.”

quotemarksCreating clear career paths for staff will be difficult for employers that are faced with an ever-ageing population.”

Jane Moorman
Howard Kennedy

Moorman adds: “Creating clear career paths for staff will be difficult for employers that are faced with an ever-ageing population.”

Retiring an employee aged 65 and over for declining performance

Willis says: “An employer should ensure it goes into any such conversation with its eyes wide open. In reality, an employer ought to be tackling performance or health issues in relation to older workers in exactly the same way as it would for younger workers. If an employer wishes to seek to persuade an employee to retire, then it needs to be prepared to consider offering some sort of termination package under the terms of a compromise agreement, in order to ‘buy off’ the risk of unfair dismissal and age discrimination claims.”

Calculating redundancy payments for those aged 65 and over

Justin Govier, partner at IBB Solicitors, says: “Statutory redundancy pay calculations for those 65 or over are not affected by the abolition of the DRA. Since 1 October 2006, all employees, regardless of their age, have had an entitlement to a redundancy payment. The qualifying period remains at two years’ service and the maximum amount of service that can be taken into account remains at 20 years. Employers with a written contractual redundancy policy should ensure that these policies are reviewed to ensure that they are not discriminatory.”

Excluding those aged 65 and over from training/development programmes

Broadbent says: “When offering training opportunities, employers will need to consider how long an employee will have to remain in employment before the business will benefit from the training that has been provided.

“If it is clear that the employee will not remain in employment for that period, it may be possible to justify excluding an older employee from the training. Employers will need to take care with this sort of argument where it is not clear how long the older employee will stay – younger employees who are offered training could also leave employment before the business has benefitted, but are nonetheless still offered the training. This would make it more difficult to argue that the employer was justified in not offering the training to its older employees.”

Equal opportunities policies

Broadbent says that equal opportunities policies should be changed once employers decide whether or not they will manage without a retirement age or if they will rely on a contractual retirement age.

“Once that decision is made, equal opportunities policies and other documentation, such as contracts of employment, should be amended accordingly, either by removing references to retirement, or by explaining the employer’s policy with regard to retirement and the procedures to be followed,” he explains.

Beachcroft’s Lock adds: “These policies should be amended to reflect the fact that employers cannot rely on someone meeting a certain age to leave the business.”

XpertHR provides more information on the abolition of the default retirement age.

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