Age discrimination and incentive schemes - English Court of Appeal judgment

The Court of Appeal has confirmed that it is open to an employer to objectively justify including ‘retirement’ as a good leaver reason in a long term incentive plan (LTIP) by reference to a specific retirement age even though doing so constitutes direct age discrimination.

The case will give comfort to those employers who wish to link the retirement good leaver provision in their incentive plans to a particular retirement age and those who link their retirement good leaver provision to a retirement policy which specifies a normal retirement age. It may also encourage employers who no longer include ‘retirement’ as a good leaver reason in their incentive plans to do so again. 

In Air Products v Cockram, Mr Cockram’s claim related to unvested LTIP awards which he forfeited when he resigned from employment. The default position under the Air Products LTIP was that unvested awards were forfeited on termination of employment. There was, however, a good leaver provision which applied to employees who left employment on or after ‘the customary retirement age’, which was age 55, which resulted in them keeping their unvested awards. Mr Cockram was aged 50 when he resigned and lost his unvested awards. Mr Cockram claimed that this amounted to unlawful direct age discrimination. 

Direct age discrimination is the only type of direct discrimination which can potentially be objectively justified. The test for objective justification is the same as for indirect discrimination – whether the otherwise unlawful provision or treatment is ‘a proportionate means of achieving a legitimate aim’ – but with one, very important difference. In the case of direct age discrimination, an aim will only be a ‘legitimate aim’ if it accords with a social policy aim.

The Employment Tribunal initially held that Air Products was able to objectively justify the LTIP retirement good leaver provision. This decision (which was overturned by the Employment Appeal Tribunal) was reinstated by the Court of Appeal which held that the Air Products LTIP retirement good leaver provision was lawful. 

Specifically, the Court held that the Employment Tribunal was entitled to find that:

• the aims of the retirement good leaver provision in the LTIP were:
  • to act as a retention incentive to employees not to leave employment until age 55 and then to provide some incentive to employees to retire from age 55 in order to create opportunities for younger employees; and
  • to achieve consistency between employees in Air Product’s defined benefit and defined contribution pension schemes;
• these aims met a real need and were legitimate since they accorded with the social aim of intergenerational fairness. Intergenerational fairness is a broad social policy aim. It covers a wide range of aims, from facilitating access to employment by young people to enabling older people to remain in the workforce, from sharing limited opportunities to work in a particular profession fairly between the generations to promoting diversity and the interchange of ideas between younger and old workers. The Court of Appeal held that the retention element of the good leaver provision also accorded with the social policy aim of striking a balance between encouraging retention on the one hand and ensuring a mix of generations of staff on the other hand;
• although the provision was clearly in the best interests of Air Products as an employer, this did not necessarily mean that it would not accord with a social policy aim - steps taken in an employer’s best interests may nevertheless be directly related to what is regarded as legitimate social policy;
• setting the age at 55 was appropriate to achieving the specified aims. There was a rational basis for choosing 55 as opposed to any other age as it tied in with the minimum pension age set in the UK in 2010. Although the choice of a particular age resulted in the provision being a ‘bright line’ rule under which a departing employee aged 54 would lose all their unvested awards while an employee of 55 would keep all their unvested awards, this is a common, and acceptable, feature of benefits on retirement.

The Court of Appeal also made some helpful comments on the evidence employers should put forward when seeking to objectively justify this type of provision:

• the detail and weight of evidence required will depend on what proposition the employer is seeking to establish;
• where the proposition is that a provision excluding retiring employees under the age of 55 from the right to take unvested options under an LTIP tends to encourage them to stay with the company until the specified age, this proposition is surely so obvious that it barely requires evidence at all;
• in this case, it was not necessary to adduce evidence that the provision actually did encourage retention as it would be difficult to isolate the causative effect of the provision.

Following the introduction of age discrimination legislation in 2006, employers have been taking a variety of approaches to retirement in their incentive plans. Some have removed references to ‘retirement’ completely from their good leaver provisions, leaving it to the discretion of the Remuneration Committee as to whether an employee should keep their awards when they retire. This case gives encouragement to these employers that there is certainly scope to justify including retirement as a specific good leaver provision. 

For tax favoured share plans, HMRC has made clear that it does not expect ‘retirement’ to be defined in plan rules. It has stated that companies should determine whether a termination of employment constitutes ‘retirement’ in accordance with their retirement policy. In relation to these plans, this case has made it more likely that an employer would be able to justify a policy which refers to a specific retirement age. 

The Freshfields People and Reward team advised Air Products in its successful defence of this claim, in the ET, EAT and Court of Appeal.