When age is an issue

As is becoming widely known, UK employers need to ensure that they will comply with age discrimination legislation which comes into force on 1 October 2006.

The effect of the new legislation is that it will be unlawful to discriminate against current or prospective employees on the grounds of age or apparent age unless an exemption applies – for example, the legislation permits (subject to conditions) a compulsory retirement age at 65 or above or discrimination where there are valid health and safety considerations or there is other “objective justification”. There are also some other exemptions for pensions, which are the obvious benefits open to older employees, but not available to younger employees.

The legislation aims to prevent discrimination on the grounds of any age. Someone who applied for a job would have a possible claim if he or she found out that he or she had been rejected either because of grey hair or because they looked too young.

However, the effect of the new legislation on benefits has so far received little attention. An example would be employee share schemes, which are offered by many of the larger hotel chains. These schemes give employees the benefit of receiving shares in their employing group either free or on favourable terms. If the schemes comply with Revenue rules, there are often sizeable tax breaks for both companies and employees alike.

Under a plan known as the SAYE Plan (where monthly savings are made along with the PAYE deductions), employees can save up to £250 per month. Savings are held with a bank or building society and can be made for 3 or 5 years. Employees then have the opportunity to use those savings and the tax-free interest in their savings accounts to buy shares at a discount of up to 20% of the share price at the time when they started saving. So, if a share price was £1 in March 2003 and had risen to £2.50 in March 2006, the employee might be able to buy shares at 80p and sell them at £2.50 making a £1.70 profit per share. However, employees always have the choice to buy shares – if they want, they can just take the cash they have saved instead, so it is a risk-free arrangement.

Another plan is the Share Incentive Plan or “SIP”. Employees can either save up to £125 per month and buy shares (and the company can give free matching shares to make this more attractive) or can be given up to £3,000 of free shares each year. So long as the employee holds the shares for 5 years, there is no tax to pay at all on the shares. Even if the shares are held for 3 years, the tax treatment is favourable.

Both plans normally only offer favourable tax treatment if employees remain employed for 3 years. However, tax legislation provides that employees who leave before the end of that period and who are retiring are able to receive shares and receive favourable tax treatment.  Oddly, retirement at any age over 60 allows shares to be received in this way under the SAYE plan, but retirement at any age over 50 allows favourable treatment under the SIP.

The age discrimination legislation states that no employer will commit discrimination merely by complying with another statutory requirement. The employer can simply point in his defence to the relevant Revenue rules requiring this provision.

However, there are two things to look out for even here. First, employers should make sure that their schemes provide that they have the minimum retirement age permitted by the Revenue. Employers are only protected to the extent that they try and minimise the age discrimination as much as possible.

Another area for possible claim lies in employees who leave in the 3 years following an award of free shares under a SIP. Companies can (but many choose not to) permit employees to keep their shares even if they leave for non-retirement reasons. If a company does not permit this, could an employee who leaves in those circumstances and loses all his shares claim that he has been discriminated against compared with someone who has retired and kept his shares?

The real problem in this and other areas of benefit provision is the uncertainty. Age discrimination is not automatically unlawful. In addition to pointing to compliance with statutory requirements, employers can defend any claim if they can show that their scheme rule or practice is “objectively justified”. However, the legislation does not give any meaning to this term in the context of age discrimination and so employers will just have to wait for a series of tribunal cases to be heard by higher courts in order for the judiciary to supply the meaning. ACAS and DTI guidance says that discrimination cannot be justified on the grounds that it is cheaper, but has not gone much further.

Companies which operate non-Revenue approved share schemes, usually over larger numbers of shares for their executives, are even more exposed because these schemes do not have to comply with any statutory requirements and so do not benefit from any protection. 

These and other areas are likely to be debated over the next few months as advisers and companies get together and try and puzzle out how the new legislation affects long-standing practices. This is yet again an example of legislation coming in with little thought given as to the consequences. Companies may just end benefits for older employees so as to avoid the risk of claims, which would seem to benefit no one in the long term.