---

What’s the Problem?

On 1 October 2006 the Employment Equality (Age) Regulations 2006 [1]  (the "Regulations") came into force in the UK.  The Regulations prohibit discrimination in employment on grounds of age.  Unlike the U.S. age discrimination legislation, the Regulations make it unlawful to discriminate against the young or old.  They cover all aspects of the employment relationship, from recruitment to termination, as well as everything in between.  Employee equity participation is a common and powerful tool for both the recruitment and retention of staff and the UK’s tax legislation is full of incentives for both employers who offer share based incentives and employees who participate in such schemes.  These schemes are primarily designed to reward employees who stay with employers for a period of time and to penalise employees who leave, except in certain defined circumstances.  Unfortunately for employers, such schemes frequently discriminate on grounds of age.

What Could This Cost Your Business?

Participation in an option scheme or plan often constitutes a valuable part of an employee’s total remuneration package.  Options incentivise because their value on vesting can be significant.  As compensation or damages are unlimited, a successful claim by an individual employee could be costly and litigation by a group or class of affected employees could seriously impact the viability of the scheme or plan for all.

Impact on Employee Share Schemes

Employee share schemes commonly contain age-related rules, including:

• the ability to determine eligibility for awards or options on the basis of a qualifying period of continuous employment;
• the ability to make awards of free shares or grants of options by reference to an employee’s length of service;
• provisions giving option holders who reach a specified age the right to exercise, even if they continue in employment;
• the requirement previously contained in the guidelines of the Association of British Insurers ("ABI") excluding employees within six months of their expected retirement age;
• provisions allowing exercise in the case of early retirement, provided that at least three years has elapsed since the date of grant;
• provisions for options to vest early on leaving employment because of retirement; and
• provisions for a specified age so as to prevent the triggering of PAYE and National Insurance contribution liabilities on exercise before the third anniversary of the date of grant due to retirement.

As well as the age-related rules of the schemes themselves, the policies adopted by employers regarding eligibility and size of grant may also have age-related provisions.

Age-related rules and policies will be unlawful unless they are required by other legislation (e.g. tax legislation regarding HM Revenue & Customs approved share incentive plans) or can be objectively justified under the Regulations.

The Regulations

The Regulations prohibit the following actions:

• direct discrimination (less favourable treatment on grounds of age); and
• indirect discrimination (the application of a provision, criterion or practice which puts the claimant’s age group and the claimant at a disadvantage).

Both direct and indirect discrimination can be justified objectively if they are "a proportionate means of achieving a legitimate aim" and the particular circumstances make the discrimination appropriate and necessary.  Legitimate aims must correspond with a real need of the employer and include: the health, welfare and safety of employees; business needs and efficiency; encouraging and rewarding loyalty; training requirements; and recruiting or retaining older people.  Although cost may be a factor which can be taken into account when justifying discrimination, cost alone cannot constitute justification: discrimination is not justified just because it is more expensive not to discriminate.

Issues of Particular Concern

As can be seen from the examples set out above, age-related rules and polices generally fall into one of the following three categories:

• access;
• grant levels; and 
• leaver provisions.

 

The types of provision which fall into each category, the age-discrimination issues raised by those provisions and possible solutions to such issues are considered in detail below:

What’s the Issue?	What’s the Solution?
Access
Limiting participation to senior employees who are generally older may indirectly discriminate against younger  employees.	Review policy to see if there is objective justification, e.g. commercial need to reward the performance and keep loyalty of most senior executives, and whether policy is proportionate.  However, employers will need to show that loyalty cannot be equally achieved through less discriminatory means.
Excluding employees from participation until they have completed a period of qualifying service may indirectly discriminate against younger employees.	A qualifying service requirement of not more than five years is exempt under the Regulations.  Alternatively, review policy to see if there is objective justification (see above).
Grant Levels
Grants not made to employees within six months of anticipated retirement date ("ARD") (in accordance with ABI’s previous guidelines) may directly discriminate against older employees.	Could consider on a case by case basis whether there is objective justification based on retiring employee’s ability/inability to contribute to performance targets but difficult to establish, particularly if vesting level of awards triggered on early retirement is pro-rated.  Alternatively, remove prohibition.  Note that although the ABI recommends shareholders’ approval be obtained in respect of substantive/exceptional changes to practices, not just plan rules, plan rules can be amended without shareholder approval where the reason for the amendment is to comply with Regulations.
Remuneration committees of listed companies determining size and other terms of grants to employee within three years of ARD having regard to ability to contribute towards achievement of performance conditions (in accordance with ABI’s guidelines) may directly discriminate against older employees.	Compliance with ABI guidelines does not amount to defence to claim of age discrimination.  Consider on a case by case basis whether there is objective justification based on retiring employee’s ability/inability to contribute to performance targets.  See above regarding changes to practices.
Leaver Provisions
Plan rules permitting employees to exercise options or awards early on retirement at or after normal retirement age ("NRA") (whereas options and awards granted to younger employees lapse on retiring or leaving) may directly discriminate against younger employees.	May be legitimate aim (e.g. to reward and motivate loyalty) but query whether proportionate means of achieving that aim.  Consider adjusting so that those retiring before NRA entitled to exercise proportion of their options or awards.
Requirement that performance targets be satisfied for early exercise of options and awards by retirees, whereas performance targets not required to be satisfied for exercises by non-retiree good leavers, (in accordance with ABI’s guidelines) may directly discriminate against older employees.	Compliance with ABI guidelines does not amount to defence to claim of age discrimination. Apply performance targets for all categories of good leavers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employers should note that although awards made before 1 October 2006 will not generally give rise to any liability under the Regulations, if they exercise any degree of discretion in respect of such awards their actions may give rise to claims under the Regulations.

Action Plan

Employers should:

1. undertake a review of the age-related provisions in their share schemes and the policies used to exercise their discretions under the schemes to ascertain whether they are potentially discriminatory.
2. consider whether potentially discriminatory provisions are required by other legislation;
3. consider whether potentially discriminatory provisions can be objectively justified and, if so, keep a written record of any objective justification in board and remuneration committee minutes;
4. where age-related provisions are potentially discriminatory and are not required by other legislation or objectively justifiable, consider whether to:

a. remove references to retirement and any conditions or rights based on age and instead rely on a very wide residual discretion e.g. regarding participation and accelerated vesting rights for good leavers; or

b. do nothing and, if employees assert claims, use any existing discretion on an ad hoc basis to avoid claims.

As well as undertaking reviews of their employee share schemes, companies should also ensure that all other employee benefits, as well as employment contracts, policies and handbooks are "age-proof".  For further information on how to conduct such a review please contact Ann Bevitt (abevitt@mofo.com) or Suzanne Horne (shorne@mofo.com).

 

---

Footnotes

1: SI 2006/1031.