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Green light for redundancy payment cap – but for how long?

12 July 2010

A recent decision is good new for employers operating contractual redundancy payment schemes, but the position may change in the future.

The Employment Appeal Tribunal (EAT) has confirmed that it was not age discrimination to apply a cap on payments under a contractual redundancy scheme to prevent workers nearing retirement receiving a ‘windfall’.

In this case, the employer operated a scheme under which payments were made to employees who took voluntary redundancy. The scheme was agreed with the recognised trade unions and payments were calculated on a formula of 3½ weeks’ pay for each year of service.

However, the scheme contained a cap that had the effect of limiting the maximum payment under the scheme to the amount the employee would have earned at their current rate of pay if they had remained in employment until the company’s normal retirement age of 65.

The claimant, Mr Hastie, took voluntary redundancy after nearly 40 years’ employment when he was about 2¼ years from retirement.

On the basic formula operated by the scheme, Mr Hastie would have been entitled to £90,000 but, after imposing the cap, his actual payment was £76,560.

Mr Hastie brought employment tribunal proceedings alleging the cap was both directly and indirectly discriminatory on the grounds of age. 

An employment tribunal found that the employer did not have a legitimate aim in imposing the cap. It identified the only possible legitimate aim which might be considered was preventing employees from receiving a windfall and, therefore, went on to consider if the imposition of the cap constituted a proportionate means of achieving that aim? 

The tribunal held that it did not: the loss to the claimant of just over £13,000 was significant to him, the saving to the employer as a proportion of the total redundancy bill was not.

The EAT overturned this decision. It held that the tribunal’s rejection of the ‘windfall’ justification could not be upheld.

The EAT said it was ‘self-evident’ that the purpose of the scheme was to compensate employees who took voluntary redundancy for the loss of earnings they had a legitimate expectation of receiving had their employment continued. Therefore, unless the scheme had incorporated a cap it would have resulted in payments which exceeded what was necessary to meet that purpose. 

The EAT found that it was both legitimate and proportionate for the scheme to incorporate the cap and that a cap was a more accurate way of preventing a ‘windfall’ than by the application of a taper (also common feature in contractual redundancy schemes).

It was also critical of evidence submitted on behalf of the employer which muddled up two distinct questions.

The EAT felt it was necessary to separate the legitimate aims that there may have been for having the scheme at all and the legitimate aim of whether the cap should be applied. 

It also stressed that the desire to avoid a ‘windfall’ was entirely independent of any questions about an employee’s future entitlement to an occupational pension.

Comment

While this decision gives some welcome confirmation that caps on payments under a contractual redundancy scheme linked to retirement age can be lawful, this position could be subject to change in the future.

The default retirement age of 65 at which an employer can currently lawfully require an employee to retire is being reviewed by the Government and some change is expected later this year.

If the default retirement age is abolished altogether, as many have called for, then employees may legitimately expect to carry on working beyond the current retirement age so the application of a cap at age 65 would no longer have a legitimate purpose.

Employers who operate such schemes with a cap on the maximum payment can breathe a sigh of relief for now, but need to keep the position under review.

(Source: Kraft Foods UK Ltd v Hastie UK EAT/0024/10).

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