18 August 2008

It has been suggested recently that job insecurity is partly to blame for employees not taking their holiday entitlement or their lunch breaks. Workers seemingly have every right to be worried as reports among employers are also anticipating a need to make redundancies. You can’t put off the inevitable but offering enhanced redundancy pay to those affected may be of some relief. Watch out though, calculating the financial advantage could put you at a disadvantage if you’re not careful.

The relative freedom that employers had to make enhanced redundancy payments to workers was curbed in October 2006 when the Employment Equality (Age) Regulations came into force. Since then, enhanced payments awarded according to age and/or length of service have been potentially unlawful. Employers can rely on an exemption but only if the payment is calculated in a certain way. The Regulations permit employers to make more generous payments when the formula used mirrors the method for calculating the statutory redundancy payment with one or more of the following adjustments being made:

• Removing or increasing the statutory cap on a week’s pay 
• Multiplying the number of weeks pay for each year of service by a figure of more than one
• Multiplying the total amount produced by a figure of more than one

Enhanced redundancy schemes not covered by this exemption, that have some other basis for calculation, are not automatically unlawful but will need to be to be objectively justified.

The Regulatory Impact Assessment, which accompanied the Regulations, suggests that the practice of paying enhanced redundancy payments could be quite widespread. A report by IFF Research Ltd for the Department of Trade and Industry in 2001 found that 48% of employers made some improvement to the statutory entitlement. A CIPD survey the following year, based on smaller sample of mostly large employers, found that 72% of them paid redundancy compensation above the statutory minimum. As a consequence of the Regulations employers will have been expected to have reviewed their schemes but it is unlikely that many will have chosen to withdraw from these arrangements altogether. The fact that these schemes are sometimes contractual, or may have become contractual through custom and practice, also supports the notion that they could be just as prevalent today.

Just recently, two employers with a practice of making enhanced redundancy payments have had their schemes put under scrutiny by an employment tribunal and the EAT. In MacCulloch v Imperial Chemical Industries (ICI) the employer operated a scheme that entitled the Claimant to just over 55% of her gross annual salary as she was made redundant at the age of 36 and after 7 years' service. Had she been between the ages of 50 and 57 with at least 10 years’ service she would have been entitled to 175% of her gross pay. She claimed the scheme amounted to both direct and indirect age discrimination. Whereas, in Loxley v BAE Systems Land Systems (Munitions & Ordnance) Ltd the employer’s scheme tapered payments for employees aged 57 or over and excluded those above the company’s pensionable age of 60. Mr Loxley, who was excluded on grounds of his age, brought a claim for direct age discrimination. In both cases it was accepted that the exemption did not apply and it therefore fell to the employers to justify their provisions.

Exceptionally, with age discrimination, both direct and indirect discrimination can be objectively justified. The same test is used in both instances and requires the employer to show that the discriminatory impact is a proportionate means of achieving a legitimate aim. In both cases the EAT held that the tribunal had failed to consider properly the issue of proportionality when making their original findings that the schemes were objectively justified. Even though these cases have now been remitted back to a tribunal on this point, they still provide some useful guidance for employers with similar arrangements. In particular:

• Encouraging and rewarding loyalty is a legitimate aim for justifying the use of schemes like the one implemented by ICI, even if, as in this case, a maximum cap of 10 years service is applied.
• Generosity alone is not a legitimate aim nor is an employer justified in making more generous payments simply to encourage older workers to leave. However, encouraging turnover by way of offering assistance to older workers, who are perhaps more vulnerable is, in principle, capable of being a legitimate aim. 
• It is potentially justifiable both to exclude from a scheme those who are entitled to immediate pension benefits and to reduce the amount payable to employees nearing retirement age, as in the BAE case, to ensure that those who are entitled to a pension after their redundancy do not receive a windfall.
• Employers can not rely on the scheme being contractual as a reason for justification. If the scheme is discriminatory it has to be changed whatever expectation the parties have.

It is worth noting that the Heyday case currently before the ECJ is challenging the use of the objective justification test in cases of direct discrimination. The preliminary ruling, which is expected later this year, could result in a narrower approach, which would require the Government to legislate for specific aims that are capable of justification. 

Even if you don’t offer any enhancements there is a distinct possibility that you could be paying more in the event of a redundancy in the near future. The TUC has been campaigning to increase the statutory cap on a week’s pay for redundancy purposes from its current limit of £330 per week. It is understood that, at the Labour Party’s national policy forum last month, a commitment was made by Labour to improve the amount of statutory redundancy pay if the party is re-elected.