The EAT has decided in Kraft Foods UK Ltd v Hastie that an upper ceiling on a contractual redundancy payment, which disproportionately affected older workers, did not constitute age discrimination.

Kraft's contractual redundancy scheme entitled employees to 3.5 weeks' actual pay for each year of service, subject to a cap that the redundancy pay could not exceed the salary which they would have earned had they remained in employment until age 65.

The entitlement of Mr Hastie, aged 62, was capped at £76,560.  Without the cap, his entitlement would have been approximately £90,000.

Mr Hastie argued at an Employment Tribunal that the cap amounted to indirect discrimination on the grounds of age, as it would only bite against older workers.  Kraft acknowledged that the cap would disproportionately affect employees nearing retirement but argued that it was necessary to prevent employees in this age category receiving a windfall.

The EAT held that the aim of preventing employees receiving a sunbstantial windfall was a legitimate one.  The purpose of a redundancy payment, it said, is widely understood to be compensation for the loss of expectation of continued employment.  Without the cap in place, the compensation payable could exceed what is necessary to achieve that objective in the case of employees close to retirement.  The cap was justified.

Impact on employers

• This decision follows similar cases and reinforces the comfort for employers that the use of a cap in contractual redundancy schemes, which is commonplace, may be justifiable.

• However, employers whose cap is assessed by reference to a normal retirement age should review their approach following the announcement that the default retirement age will be scrapped from next October – see earlier items in this ebulletin.

• The EAT commented that the cap applied in this case was arguably a more proportionate means than the application of a taper – the other approach commonly used to limit payments in redundancy schemes.  Although this observation is probably not binding, employers who use a taper in redundancy schemes should review its purpose and effect: if it is designed to prevent an undue windfall and achieves this aim proportionately it this still have sufficient justification.

In the current climate many employers may be reviewing their redundancy schemes or establishing schemes in anticipation of coming job cuts.  There is the potential for any scheme rules which are not tightly modelled on the statutory redundancy payment scheme to be discriminatory on the grounds of age and to therefore require objective justification.  Employers who have considered and carefully articulated the aims of the scheme, including any cap or taper, will be better placed if they are put to the test of justifying their policies. 
 

19 August 2010

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