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Retirement - plans for the future?

23 November 2010

This article was included in the November 2010 issue of People - the Employment and Pensions newsletter

Employers are not generally permitted to discriminate against employees on the grounds of age. As an exception, legislation currently permits the compulsory retirement of employees at or above the age of 65, which is known as the default retirement age (the “DRA”). For a dismissal to be fair, employers must follow a procedure, which includes giving employees notice of their intention to retire them. But this is all about to change...

The new coalition Government is now looking at abolishing the DRA. If this happens, employers will not be able to retire employees against their will unless retirement can be objectively justified. Objective justification requires the employer to demonstrate that retirement is a proportionate means of pursuing a legitimate aim.

In Europe

In the recent EU law case of Rosenbladt v Oellerking Gebäudereinigungsges. mbH, the Court of Justice decided that the automatic termination of an employee’s contract at the age of 65 did not amount to age discrimination. At first glance, this case would appear to give hope to a UK employer operating compulsory retirement clauses for its workforce. In reality, this is unlikely to be of assistance. The case centred on German national rules, enabling an employer and trade union to adopt such a clause as part of a collective agreement. Effectively, the Court endorsed the German national rules because they underpinned Germany’s social policy of providing job opportunities for the young and alleviating strain on the labour market. (For further information about the German approach to retirement ages, please click here to read an article by Swen Schöne, from our Hamburg office.) In the absence of the DRA, there will be nothing comparable to this in UK law.

In the UK

Back in the UK, the high profile Heyday challenge paved the way for the Government's proposals to abolish the DRA. Following this landmark case, retirement ages have not been far from the headlines. For example, the Court of Appeal decided earlier this year in Seldon v Clarkson Wright & Jakes that a rule under a partnership deed of a law firm providing for the retirement of partners at age 65 did not amount to age discrimination. As partners are not employees, the DRA was not applicable and it was necessary to consider objective justification. The Court accepted the aims of the law firm, which included providing employees with the opportunity of partnership after a reasonable period, were legitimate and the use of a compulsory retirement age to achieve it proportionate.

In reaching its decision, the Court of Appeal noted that the legitimate aims of an employer must be consistent with the Government’s social policy. In setting the DRA, it was said that the Government’s social policy was to provide better prospects of employment and promotion for young people.

Government consultation

However, if the DRA disappears, it may be more difficult for an employer to show its legitimate aims are consistent with the Government’s social policy. In its consultation document, Phasing out the Default Retirement Age, the Government advocates removing the DRA to allow people to work longer, which it considers will boost the economy and be fairer for older employees who would otherwise be forced to retire. This perhaps suggests a different social policy to that which gave rise to the DRA.

The key proposals are as follows:

  • Retirements using the DRA would cease completely on 1 October 2011 and employers would be unable to issue new notifications of retirement using the DRA on or after 6 April 2011;
  • There would be a six month transitional period (from 6 April 2011 to 1 October 2011) so that retirements that were already in progress could continue through to completion, provided that a notification of retirement is issued prior to 6 April 2011, the date of retirement falls before 1 October 2011 and all requirements of the DRA procedure are met.
  • Although the Government is proposing to remove the DRA, it would still be possible for employers to operate a compulsory retirement age, provided they can objectively justify it.

Based on the recent case law, it appears that an employer may have a better chance of objectively justifying compulsory retirement where it:

(a) considers whether its business needs make it appropriate to have a retirement age specific to its sector and/or different groups of employees;

(b) consults its workforce on its proposed retirement age;

(c) is able to enter into collective agreements on retirement with trade unions; and

(d) provides for good quality pension packages to its workforce as compensation for retirement.

However, this is not guaranteed. Even if objective justification of compulsory retirement is possible, there are still risks for the employer. An employer might decide that it should have a lower retirement age for its white collar compared with its blue collar workers because there is greater competition for white collar jobs. But this might, for example, create the risk of separate sex discrimination claims.

The consultation also suggests that an employer will no longer be able to fairly dismiss an employee by reason of retirement. So if an employer escapes a claim for age discrimination, it may still face a claim for unfair dismissal unless it can show another fair reason for dismissal (for example, capability or "some other substantial reason"). This gives rise to other difficulties. In particular, it remains to be seen how employers will be able to approach retirement discussions in practice, without fear of potential claims. One of the suggestions in the consultation is to introduce additional guidance or a code of practice to encourage dialogue between employers and employees about retirement plans.

Way forward?

We do not yet know the outcome of the Government consultation. The Department for Business, Innovation and Skills has, however, provided some indication of the likely timescales. This confirms that the Government intends to develop and refine guidance for employers and individuals, working with ACAS, from November 2010 until September 2011 and will draft regulations to remove the DRA and lay them before Parliament by April 2011.

Many employers will feel that both the timescales, notwithstanding the transitional arrangements, are particularly short, given the impact this will have on the workforce. Employers are therefore advised to start considering how the absence of the DRA may affect their organisations now. Many employers will need to move quickly to implement the outcome of the Government's consultation so watch this space...