Share the Wealth
10 October 2006 Paul Randall
New regulations on age discrimination in the workplace came into effect on 1 October 2006. Most employers are probably aware of this legislation and may be in the process of reviewing their employment practices and policies. However, the scope of the regulations is wider than they may realise.
Many companies (particularly if listed) operate employee share plans which enable employees to acquire shares in the company on favourable terms. Such plans often have provisions in the governing rules, or are operated in a particular way, which could potentially discriminate between employees on the grounds of age.
For this reason, share plan rules and grant policies need to be reviewed and action taken where necessary to avoid potential claims.
WHAT COULD BE DISCRIMINATORY?
The main areas where there could be potential age discrimination are as follows:
Grant policy: awards under discretionary plans are generally made only to directors and senior managers, who tend to be older employees when compared with the general workforce. In practice restricting employee share plans to senior employees could therefore discriminate against younger employees.
Service qualifications: some plans require employees to have a certain period of service with the company or group before they are eligible to participate in the plan. This can potentially discriminate against younger employees. However, the regulations exempt service periods of up to five years. As employee share plans are unlikely to have longer service requirements, this should not be a problem.
Prohibition on awards to employees approaching retirement: share plan rules for listed companies often prohibit any employee who is within a certain period of his normal retirement date from participating, in order to comply with institutional investor guidelines applicable at the time when the plan was adopted. Such restrictions are probably discriminatory.
Statutory retirement ages in approved share plans: plans which are approved by HM Revenue & Customs (in order to attract tax relief) must include by statute a specified retirement age which can be within a range of ages, depending on the type of plan.
A participant who retires before the specified age may have reduced rights, or a disadvantageous tax position, compared with someone who retires after the specified age. Having a specified age higher than the minimum allowed by statute, therefore, could result in an age discrimination claim.
Treatment of early leavers: in discretionary plans, in particular, there are often different rights of exercise or vesting of awards on cessation of employment, depending on the circumstances, including retirement.
For example, performance conditions may still apply in some cases but fall away in others, or pro-rating of awards may apply to some categories of leaver but not others. Any such provisions which treat retirees differently from other categories of early leavers, or early retirees differently from those who retire at 'normal' retirement age, may be discriminatory.
Forfeiture provisions in a share incentive plan (SIP): if SIP rules provide for the forfeiture of shares on early retirement, that may be discriminatory.
Sharesave plans: normally, the rules of an approved Sharesave plan allow participants who have held their options for more than three years to exercise on ceasing employment. If, however, the plan rules treat certain categories of leaver differently in this situation, such provisions may be discriminatory, depending on their terms.
HOW CAN DISCRIMINATORY PROVISIONS BE DEALT WITH?
There are three possible solutions:
Objective justification: even where an age-discriminatory practice is in place, a defence is available where the company can show that the practice is 'a proportionate means of achieving a legitimate aim' (usually referred to as 'objective justification'). Where a company feels that a particular practice can be objectively justified, the reasons for that justification should be recorded immediately in writing.
Statutory requirement defence: it is a defence against a claim of age discrimination to show that a particular action was required by statute. The fact that a particular action was permitted by statute is not a good defence. This can help where the statute requires certain provisions to be included in approved plans.
Amend the plan rules: plan rules may be amended to remove or adjust potentially discriminatory provisions. Plan rules for listed companies typically stipulate that shareholders' approval is not required for amendments made in response to changes in legislation (although this should be checked).
A combination of measures may be appropriate.
DO AWARDS GRANTED BEFORE 1 OCTOBER 2006 APPLY?
The regulations do not apply retrospectively so awards not subsisting at 1 October 2006 (because they have already been exercised or have vested or lapsed) will not be affected. However, subsisting awards will be subject to the regulations and any discriminatory provisions contained therein will theoretically become void.
This being the case, amendments made to plan rules to deal with discriminatory provisions should if possible apply to existing awards as well as to new awards. Note, however, that this would be subject to the agreement of HM Revenue & Customs in the case of an approved plan.
It is also important that any future action taken in respect of a subsisting award for example - the exercise of discretion to allow exercise or vesting on cessation of employment - should be based on objective criteria unrelated to age.
Where age-discriminatory provisions or practices exist, solutions can usually be found, but it is important that employers operating employee share plans review their plan rules and grant policies to identify any problem areas.