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Court ruling clarifies legitimacy of caps on redundancy payments to employees nearing retirement age

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Most contractual redundancy schemes apply some form of reduction for employees who are approaching retirement age, either through a tapering provision or a cap. There has been some concern that such provisions are vulnerable to challenge on the basis of being discriminatory on the grounds of age.

However, helpful guidance on the legitimacy of caps was provided by the Employment Appeal Tribunal (EAT) in the recent case of Kraft Foods vs Hastie.  The Employment Appeal Tribunal ruled that an age-based cap on a contractual redundancy payment will not amount to age discrimination, provided the cap is proportionate. Redundancy schemes that provide tapers may not be on such strong footing, however.

Hastie had been employed by Kraft for almost 40 years. Aged 62, he accepted voluntary redundancy. The unusually generous scheme provided 3 ½ weeks’ pay for every year worked, entitling Hastie to a payment of £90,100.

But the scheme contained a cap that limited the overall compensation to sums due from the date of termination until the normal retirement age (65).  As Hastie was 62, his remaining pay until retirement would only have been £76,500. Applying the cap therefore reduced his redundancy payment by around £13,600.

The original tribunal found that the cap was disproportionately applied to those reaching retirement age and this constituted unlawful discrimination under the Employment Equality (Age) Regulations 2006.  Kraft appealed against the tribunal’s decision.

The EAT allowed the appeal. Although it found that the cap did indirectly discriminate against employees reaching retirement age, there was an objective justification defence; the cap was a proportionate means of achieving a legitimate aim. 

The purpose of the scheme was to compensate employees for the loss of opportunity to earn remuneration over the remainder of their employment. The legitimate aim of the cap was to prevent an employee from receiving a windfall whereby they could recover more from the scheme than they could have earned from Kraft had they remained in employment until retirement. The cap was therefore a proportionate means of achieving a legitimate aim.

It may come as a surprise to some employers that a discrimination claim could arise from what appears to be such a generous entitlement. However, the main point coming out of this case is that caps are to be preferred over tapers. The EAT went as far as commending the cap in this scheme for its precision, stating that it was arguably more accurate than the application of a taper. Limited support was also given to the claimant’s argument that the removal of the taper from the statutory redundancy scheme in 2006 suggested that the practice of tapering could not be justified.

This casts some doubt on the use of tapers in such a situation. However, that is not to say that tapers are never going to be justified. If the reason for the tapering is connected with a windfall – say, an unreduced early pension – then this may be sufficient. This was the point made in the earlier case of Loxley vs BAE Systems Land Systems

What should employers do if faced with a claim?

  • Employers should spend time carefully articulating why the cap was set up and what it was intended to achieve. This will assist the tribunal in deciding whether the employer has a legitimate aim.
  • Both the tribunal and the EAT were critical in this case of Krafts’ witness’s understanding of the reason behind the cap. Employers should therefore ensure that any tribunal witnesses are comfortable with, and understand, the explanation for the cap. This will maximise the chance of it being found to be a proportionate means of achieving a legitimate aim.
  • The EAT stressed the distinction between the ‘windfall’ argument and the fact that the scheme would cost more if it did not incorporate the cap. The EAT accepted that it would have been open to the respondent to run that as a separate point. It is therefore worthwhile considering all the arguments to defend such a claim.
  • And finally, prevention is always better than cure – redundancy policies and procedures should be reviewed on an ongoing basis to determine whether there are any potentially discriminatory provisions. Changes can then be made at that stage, which may avoid expensive litigation further down the line.

Catriona Weir is solicitor in the employment team at Dundas & Wilson