Victoria Mance & Pranav Yajnik: Successfully managing an ageing workforce

The challenges of managing a workforce within the context of an ageing population are faced by all employers at a time when organisations are struggling to achieve “inter-generational fairness”. Two of the competing priorities are set out in the CIPD’s Manifesto for Work (July 2014): addressing youth unemployment through a variety of measures; and ensuring a pensions framework through which workers can build a sustainable retirement. 

The Acas Employment Relations Comment from March 2013 “Age Management At Work: adopting a Strategic Approach” is a succinct and thoughtful assessment of many of these challenges. Its observation that “age management is not simply about older workers” is a key point always to bear in mind. Since the abolition of the default retirement age in 2011, employers have not been able to rely upon an employee’s retirement at a certain specified age. That may be a helpful element in an employer’s approach to retention of key skills but at the same time it creates an employee engagement challenge, should younger workers view the prospect of promotion opportunities as lessened in the short or medium-term. 

This balancing act is captured persuasively in the observation that: 

“The expression “age management” is a broad, umbrella term potentially embracing many disciplines and specialisms. At its heart it involves a strategic and holistic approach to managing age in which the analysis of demographic risks and the identification of appropriate interventions are considered.”

This article highlights some of the legal hurdles that employers face in their attempt to address inter-generational fairness when managing a workforce of different ages. We outline some pensions and employment law considerations for employers employing older workers and suggest some techniques for risk management when formulating an employer’s “appropriate interventions”, particularly the use of retirement ages. The legal risk faced by employers stems from the potential for uncapped compensation if a dismissal is found to be discriminatory.

Encouraging retirement: pension provision for older workers 

Employers will wish to encourage a savings culture and to put in place suitable and appropriate pension provision, so that employees can afford to retire. Issues around pension benefits for older workers in the trust based occupational pensions context are beyond the scope of this article, and tend to be largely fact specific.  

In a DC world, the level of pension contributions is key to retirement affordability. The least risk approach for employers is to set the same employer contribution rates for all employees, regardless of age. Due to cost considerations and workforce planning, employers may wish to incentivise older employees to save more.  

Age related pension contributions are permissible under The Equality Act (Age Exceptions for Pension Schemes) Order 2010, if the aim in setting any age related contributions is to make “more nearly equal” the pension payable at retirement. That is, age related contribution bands appropriate to the work force may be used when setting contribution rates on the basis it costs an older employee more to build up the same level of pension provision as a younger worker, as the funds will be invested for a shorter period of time. An example would be if employees have the option of increased employer contribution rates in their 30s, 40s, 50s and 60s respectively. Advice should be sought on whether any age bands selected are appropriate to the workforce and will fall within this exception.  

Pensions auto enrolment legislation requires employers to auto enrol all qualifying jobholders up to state pension age, and may auto enrol workers up to age 75. Pension scheme members who reach normal retirement age and who remain in service should be provided with continued pension provision (unless the member chooses to opt out). This will require continuing employer and employee pension contributions, on the same terms as applicable to workers who have yet to reach normal retirement age unless any differences may be objectively justified. Consideration should be given to any investment options applicable, particularly where a lifestyle investment strategy assumes a targeted retirement age below the worker’s actual age.  

Employers and pension trustees should also ensure death in service benefits continue to be payable in respect of older workers, and consider any age restrictions that may be imposed by insurers.  

Flexible Working

Now that the right to request flexible working has been extended to all qualifying employees, it will be a useful tool for employees to manage working into old age (for example, if they want to phase in their retirement). Faced with a greater proportion of older individuals in the general population, employers may expect to see a rise in requests for flexible working not only from older employees but from younger ones too, aimed at enabling them to care for their aged dependants.  

Employers should ensure not only that their flexible working policies are up-to-date and that they consider each request in a way that maximises employee engagement, but also that employees understand the benefits of flexible working in striking the correct balance and retaining valuable skilled employees. 

The scope for employer-justified retirement ages and compulsory retirement policies?

If an employer automatically dismisses an employee merely because s/he has reached a particular age, the employee will have a claim for unlawful discrimination, unless the employer is able defend itself by operating an employer-justified retirement age (EJRA) lawfully.

Acas probably under-estimated just how challenging this might be for employers in its 2011 guidance “Working without the default retirement age”, when it stated that:

“Employers who wish to use an EJRA need to consider the matter carefully. They will need to ensure that the retirement age meets a legitimate aim, for instance workforce planning (the need for business to recruit, retain and provide promotion opportunities and effectively manage succession) or the health and safety of individual employees, their colleagues and the general public. As well as establishing a legitimate aim an employer will also need to demonstrate that the compulsory retirement age is a proportionate means of achieving that aim.” 

As such, an employer faces the prospect of unfair dismissal and age discrimination claims unless they are able to fairly dismiss that employee for a reason set out in the unfair dismissal legislation, or they are able to objectively justify a mandatory retirement age for that employee.  

Age-related capability dismissals?

In cases where job performance deteriorates because of an employee’s old age, the fair reason is most likely to be capability; in order for the employer to lever the dismissal into the capability bracket, it must act reasonably in treating that reason as sufficient to dismiss the employee in question.  What this usually amounts to is a performance management procedure preceding the dismissal to allow the employer to demonstrate that the performance of the employee is so reduced as to allow the employer to dismiss the employee for the reason of capability. 

The use of these procedures is well-established, especially across larger organisations. Whether the procedure is a harbinger of dismissal or a method of correcting the performance of under-performing employees, employers using the procedure at a sensitive time in the employee’s life (the end of their working careers when performance may diminish because of natural factors out of their control) risk throwing shade over an otherwise successful career.  

Employers should expect that employees may cite in argument against a performance-driven EJRA some of the research relied upon by Age Concern in its judicial review challenge to the retention of the default retirement age prior to its removal (to the effect that there was no general evidence of declining performance until age 70).

An employer which consistently applies a well-established well-constructed procedure to all its employees, of whatever age, throughout its organisation, is less vulnerable to an age discrimination claim. The challenge though is that, in relation to many roles, an objective demonstration of a decline in performance may well be very difficult indeed to demonstrate.

Justifying retirement ages 

Much of the combat in the age discrimination arena has concentrated on the objective justification defence allowing an employer to mandate a discriminatory retirement age if it can show, in respect of that particular employee, that the mandatory retirement age is a proportionate means of achieving a legitimate aim.  

A clutch of recent decisions, including the well-known case of Seldon -v- Clarkson Wright & Jakes, have begun to build a frame within which an employer can assess its proposal’s proportionality and legitimacy. 

Mr Seldon was a partner in a law-firm called Clarkson Wright & Jakes. The firm compulsorily retired him on 31 December 2006, at the age of 65, in accordance with the mandatory retirement age in the partnership deed (which he had signed). Mr Seldon issued Employment Tribunal proceedings arguing that he had been discriminated against because of his age.  

The Tribunal held that the retirement age was a proportionate means of achieving the firm’s legitimate aims. Mr Seldon appealed to the Employment Appeal Tribunal, the Court of Appeal and then to the Supreme Court.  

The Supreme Court rejected Mr Seldon’s appeal and gave guidance on the approach to proportionality: “The means chosen have to be both appropriate and necessary … The means have to be carefully scrutinised in the context of the particular business concerned in order to see whether they do in fact meet the objective and there are not other less discriminatory measures which would do so.” 

And so the case was remitted to the Employment Tribunal, for it to decide whether the firm’s application of a mandatory retirement age of 65 was a proportionate means of achieving a legitimate aim.  t found that it was; but Mr Seldon appealed again to the Employment Appeal Tribunal on (among others) the ground that there was nothing in the Employment Tribunal’s conclusion which dealt with whether the firm’s circumstances explained why it applied that particular mandatory retirement age of 65 and not one of 66 or another age.  

The Employment Appeal Tribunal found that the Employment Tribunal was entitled to conclude that 65 was a suitable retirement age. The Employment Appeal Tribunal rejected Mr Seldon’s case in relation to the particular age chosen because no retirement age could ever be justified since any age greater than the chosen retirement age would always be less discriminatory and therefore the chosen retirement age could never be the least discriminatory means of achieving the aims. It held that the correct test was to think about whether the chosen retirement age was reasonably necessary to achieve the aims.

The Court of Justice of the European Union (CJEU) has recently decided two age discrimination cases which both deal with the exception in article 6(2) of Council Directive 2000/78/EC. (This is the framework legislation locally implemented by member states which allows age discrimination in respect of the fixing of ages for admission or entitlement to retirement or invalidity benefits, and under those schemes for employees or groups or categories of employees, and in respect of the use in the context of such schemes of age criteria in actuarial calculations). 

In Toftgaard -v- Indenrigs-og Sundhedsministeriet (CFU) & others intervening, the claimant was employed by the Danish Civil Service and dismissed aged 66 for redundancy. Civil servants in Denmark dismissed for redundancy receive their original salary for three years, unless they are 65 or older (as these people are able to retire). The question was whether this was age discrimination.  

The CJEU held that the three-year pay benefit was not covered by the exception in article 6(2) as it was not a retirement or invalidity benefit and that it was not justifiable because although there was a legitimate objective, it could have been achieved by less restrictive measures.  

In Kristensen -v- Experian, the employer provided greater employer contributions to the pension scheme if an employee was older. The claimant argued that this discriminated against younger employees. Again, the difference in treatment was not covered by article 6(2) because it did not relate to “admission or entitlement” to pension benefits.  

The CJEU was of the view that justification may be possible in this case (giving as examples enabling older workers who entered employment late to build up pension over a short period, including younger workers in the scheme at an early stage while enabling them to have a larger disposable income, and the need to cover risks whose cost increased with age). But it remitted this point for the national court to decide.

Key factors for employers to bear in mind

It is important that Seldon was decided in the context of a partnership structure and the Supreme Court decision emphasises that the business in question has to be the focus. A small partnership, a local business, a regional concern, a national concern or a multi-national conglomerate will all have different contexts – indeed, in most organisations larger than a small business, what is a proportionate way of achieving a legitimate aim for one employee or group of employees will not be so for another.  

Employers should take care, when deciding that a mandatory retirement age is capable of justification, to examine the employee’s immediate circumstances as well as the wider business context, because a tribunal or a court will heed both.  Whilst identifying a legitimate aim may be viewed as a reasonably straightforward exercise based on Seldon, satisfying the test of proportionality will be more challenging.

The employer should give documented thought to alternatives which do not involve discrimination or which are less discriminatory.  Merely plumping for the easiest option (for example, using age as a discriminator for planning for succession) may not always be the best decision. Also, in terms of such assessment, unless there is evidence of the balancing of competing inter-generational interests envisaged by Acas then both the legitimate aim and the proportionality may be open to challenge.

If an employer does implement discriminatory practices in reliance on the justification defence being available to it, it should gather strong evidence to support its contention that the aim is a legitimate one and the means are proportionate.  In the recent case of Lockwood -v- Department of Work and Pensions and another, the Respondents presented the Court of Appeal with a suite of independent statistics and analysis in support of their defence of justification. However, statistics alone may be insufficient for a large employer if there is no attempt to articulate why the legitimate aim is felt to be worthy of being viewed as having superior priority or interest than others.

Conclusion

Despite the relatively recent provenance of the phrases “inter-generational fairness” and “age management”, the discussion above clearly shows the issues and competing issues and priorities which they encompass. The key message is that employers face different legal and human resources challenges in dealing with a workforce consisting of different age groups. Despite an employer maintaining the aim of consistency across its organisation, there is rarely a “one-size-fits-all” policy or model which can deal with everything. Employers should tailor the management of their employees’ skills and performance appropriately to their age, while simultaneously monitoring the risks raised by age discrimination.  

Further case law will develop around the already well tried employer-justified retirement age, although whether this will be helpful for employers remains to be seen; the Supreme Court clearly expects persuasive evidence to establish a successful defence. Flexible working and encouraging greater pension saving in an increasingly defined contribution environment are further hurdles for employers to leap. It is expensive to get it wrong: compensation for discrimination claims where the employer is found liable is uncapped, and employers will find that taking advice early when they are considering age-related matters may, in the long-term, save them significant expense.

Victoria is a Senior Associate in the Pensions team and Pranav Yajnik is a Lawyer in the Employment team at international law firm CMS.