BAE Systems (Operations) Ltd v McDowell UKEAT/0318/16/RN
Appeal against a ruling that the Respondent had discriminated against employees on the grounds of age by capping redundancy payments for those aged 65 and over because they would be entitled to access occupational pension benefits. Appeal allowed in part.
The Respondent operated a redundancy scheme, which applied a cap such that payments were not available for those aged 65 and over, who had an immediate entitlement to an occupational pension. The cap was applied to the Claimant, who complained that this amounted to direct age discrimination. The Respondent accepted that the cap was discriminatory on grounds of age but argued it was a proportionate means of achieving the legitimate aims of its Severance Framework. The ET disagreed. Whilst accepting that the Respondent had shown that it had legitimate aims, considering the use of the cap against each of those aims, the Employment Tribunal did not accept it had demonstrated that the cap was a reasonably necessary or proportionate means of achieving those aims. Specifically, it did not accept that the Respondent had demonstrated that this was a "windfall" case; as there was no default retirement age, it could not be assumed that redundancy payments to employees in the Claimant's position would constitute a windfall. The Respondent appealed.
The EAT allowed the appeal in part. The ET had not erred in concluding that this was not a "windfall" case (Loxley v BAE Systems applied). It had, however, failed to demonstrate a holistic approach to its assessment of the means adopted to achieve the various legitimate aims in this case.
Appeal No. UKEAT/0318/16/RN
EMPLOYMENT APPEAL TRIBUNAL
FLEETBANK HOUSE, 2-6 SALISBURY SQUARE, LONDON EC4Y 8AE
At the Tribunal
On 22 May 2017
Judgment handed down on 30 June 2017
HER HONOUR JUDGE EADY QC
BAE SYSTEMS (OPERATIONS) LTD (APPELLANT)
Transcript of Proceedings
For the Appellant
MR THOMAS CROXFORD (of Counsel)
Burges Salmon LLP
One Glass Wharf
For the Respondent
MS DEBBIE GRENNAN (of Counsel)
Messrs Nash & Co Solicitors LLP
Age discrimination - justification - Section 13(2) Equality Act 2010
The Respondent operated a redundancy scheme, which applied a cap such that payments were not available for those aged 65 and over, who had an immediate entitlement to an occupational pension. The cap was applied to the Claimant, who complained that this amounted to direct age discrimination. The Respondent accepted that the cap was discriminatory on grounds of age but argued it was a proportionate means of achieving the legitimate aims of its Severance Framework. The Employment Tribunal disagreed. Whilst accepting that the Respondent had shown that it had legitimate aims, considering the use of the cap against each of those aims, the Employment Tribunal did not accept it had demonstrated that the cap was a reasonably necessary or proportionate means of achieving those aims. Specifically, it did not accept that the Respondent had demonstrated that this was a "windfall" case; as there was no default retirement age, it could not be assumed that redundancy payments to employees in the Claimant's position would constitute a windfall. The Respondent appealed.
Held: allowing the appeal in part
The ET had not erred in concluding that this was not a "windfall" case (Loxley v BAE Systems applied). It had, however, failed to demonstrate a holistic approach to its assessment of the means adopted to achieve the various legitimate aims in this case. Although the ET had acknowledged that the aims needed to be viewed as linked and part of the larger whole of the Severance Framework and redundancy scheme, it had then gone on to test the cap (one part of the Severance Framework) against each aim individually. Whilst the ET might have been entitled to criticise the evidential failings of the Respondent's case (and to reject its suggestion that there had been trade union agreement), its conclusion was rendered unsafe by its failure to demonstrate that it had tested whether the cap was justified as part of the broader Severance Framework and in the light of the aims it was designed to achieve, viewed collectively.**HER HONOUR JUDGE EADY QC****Introduction**
- In this Judgment, I refer to the parties as the Claimant and Respondent, as below. The appeal concerns the test for justification of direct age discrimination in the context of an employer's redundancy scheme that capped payments for those aged 65 and over because they would be entitled to access occupational pension benefits.
- The appeal is that of the Respondent, from a Reserved Judgment of the Bristol Employment Tribunal (Employment Judge Christensen, sitting with members Ms Maidment and Mr Singleton, on 11 and 12 January 2016, with a further day in chambers on 15 February; "the ET"), sent to the parties on 23 March 2016. Representation then was as now. By its Judgment, the ET upheld the Claimant's claim of direct age discrimination; specifically concluding that the Respondent had not been able to justify the direct age discrimination arising from its enhanced redundancy scheme, as that had been applied to the Claimant. The Respondent's appeal was permitted to proceed after a hearing before the Honourable Mrs Justice Simler DBE (President), under Rule 3(10) EAT Rules 1993, on the following grounds:
(2) Whether the ET erred by assessing separately each of the aims relied upon rather than considering them together?
(3) Whether it wrongly held that the Respondent needed to justify the cap rather than the scheme as a whole?
(4) Whether the ET erred in how it dealt with the Respondent's alternative case and mischaracterising its submissions?
(5) Whether it erred by dismissing the significance of trade union approval?
(6) Whether it erred by failing to adopt the proper test for proportionality?**The Background**
- The Claimant's claim concerned the application of the Respondent's discretionary enhanced redundancy scheme; the ET summarises the point in issue, as follows:
"6. … This operated a taper/cap which provided that no employee would receive more than 78 weeks pay and would receive no more by way of severance than they would have earned in pay if they had stayed at work until the age of 65. 78 weeks equates to 1.5 years and this meant that any employee aged 63.5 and above was impacted by these provisions. The enhancement would taper from aged 63.5 onwards and reduce to nothing when an employee reached the age of 65."
- The Claimant had worked for the Respondent since 1 February 1988 and was dismissed by reason of redundancy on 31 January 2015. He had turned 65 on 10 January 2015 and therefore received his statutory redundancy entitlements but - by operation of the cap - nothing under the Respondent's enhanced contractual redundancy scheme.
- The Respondent's enhanced redundancy scheme operated within its Severance Framework, which had been introduced in 2001 to provide a consistent framework following a merger with another company. As the ET records, over a 15 year period, the Respondent had identified about 30,000 potential redundancies under multiple redundancy programmes; approximately 75% of those made redundant had volunteered under the enhanced redundancy scheme, which allowed the Respondent to minimise industrial action and Tribunal claims.
- In 2009, the Severance Framework was reviewed by the Respondent's Employee Relations Managers Forum ("ERMF"). This followed the decision of the EAT in Loxley v BAE Systems, a case involving another part of the Respondent's group operations. In Loxley, the Claimant had successfully appealed the ET's decision, albeit that the EAT rejected his argument that preventing a windfall (a justification relied on for capping severance payments for employees approaching age 65) could not be a legitimate feature of an enhanced redundancy scheme. The Respondent's ERMF review proposed that the practice of capping enhanced redundancy payments should be adopted as a general expectation so redundant employees would not receive more in redundancy pay than they would have earned in basic salary if they had worked until their normal retirement date.
- In 2011, the default retirement age was abolished. That meant employees could no longer be compulsorily retired and were protected from being unfairly dismissed on what would previously have been treated as normal retirement age. At the same time, the previous statutory redundancy tapering and cap provisions were abolished.
- At this stage, the Respondent further reviewed the tapering and cap provisions in its Severance Framework, amending the language of the scheme so that the general expectation would be referable to "normal pension retirement age (where their pension scheme stipulates such an age)"; it was considered that any age discriminatory impact of this provision would be justified. The ET observed that the Respondent's review had noted:
"The normal pension retirement age is currently age 65 for the vast majority of employees within the group. Where the employee is not a member of a Company pension scheme, the cap will apply to the age of 65 … the cap will also apply to the age of 65 for employees who are members of the Company's Defined Contribution Retirement plan for which no pension retirement age is applicable."
The review documentation thus made clear that the age of 65 was critical even for employees who were not part of the Respondent's pension scheme or who were members of the new Defined Contribution scheme, in which there was no applicable retirement age: "Age 65 is the date by which the capping provisions will continue to operate".
- The review referred to the basis for the enhanced redundancy scheme as including a wish to reward loyalty and to compensate for loss of employment; the aim of the cap was to ensure that "finite funds" were allocated in a fair and equitable way. It was further considered that there was less of a need to compensate employees who had access to their pension than a need to avoid a windfall; the Respondent did not want to drive behaviours in which employees were reluctant to retire as they wanted to hold out for a redundancy situation. It concluded that:
"… providing for an employee to receive a payment equal to the salary they would have received if they had worked up to their pension retirement age is a fair and equitable approach."
- As the ET records, although his pension scheme provided that normal pension retirement age was 65, the Claimant had expected to take advantage of the changes in the law and anticipated he would retire in August 2016, some 19 months after his pension retirement age. When it became apparent, during the redundancy process in 2014, that he would be subject to the cap operated under the Respondent's Severance Framework, the Claimant raised a grievance, complaining this was discriminatory. The grievance was not upheld; the Respondent asserting that the severance calculation was a proportionate means of achieving a legitimate aim, namely to ensure that the funds available for redundancy payment - which were not unbounded - were allocated across the workforce in a fair and equitable manner, recognising that individuals who were close to the age at which they could draw their pensions were cushioned against the loss of employment while others were not.
- It was common ground before the ET (as it is on this appeal) that the severance pay taper and cap had an age discriminatory impact; the issue was whether it was objectively justified. The ET first noted that the burden of proof was on the Respondent; it then turned to the question whether the Respondent had established that the measures it had adopted corresponded to a real need, were appropriate with a view to achieving the objectives pursued and were reasonably necessary to that end. The ET did not consider it had. Although allowing that the aims identified by the Respondent were legitimate, in that they properly formed part of the aims of a redundancy scheme, the ET was not satisfied that the particular terms of the Severance Framework of which the Claimant complained were a proportionate means of achieving those aims: they were not reasonably necessary to achieve those aims. More specifically, the ET did not accept that the cap itself could be argued to constitute a legitimate aim, being tainted by age discrimination as it was inherently linked to the age at which historically employers had been able to require their employees to retire. Although there had been a review of the Severance Framework in 2012, the changes the Respondent had purported to make were essentially of language not substance: the pension retirement age would be 65 even for those in schemes that did not provide a pension retirement age.
- The ET turned to consider the Respondent's argument that it was legitimate to seek to ensure that finite funds available for redundancy payments were allocated across the workforce in a fair and equitable manner, taking account of the fact that younger employees would not be able to avail themselves of pension income and seeking to avoid certain employees receiving what could legitimately be regarded as a "windfall" payment. Accepting the Respondent's finances were not unbounded, the ET observed there was no evidence as to what those bounds might be so that it could understand in what sense the funds were finite and how that might impact upon the decision to maintain the cap to ensure younger employees could continue to benefit from the enhancement (indeed, when responding to the Claimant's grievance, the Respondent had said there was no fixed budget for the redundancy programme). As for the "windfall" argument, the ET allowed this might constitute a legitimate aim but observed:
"81. … The respondent's enhanced redundancy scheme might produce a windfall in a number of ways. It might create a windfall by compensating an employee, say in their 40s, who had worked for the employer for 20 years and yet who finds alternative employment immediately after being made redundant. The respondent's scheme might also create a windfall by compensating an employee aged 62 and who then chooses to immediately draw an unreduced pension.
82. The respondent's Severance Framework does not seek to limit the possibility of a windfall occurring in these two situations. The focus of the windfall argument is exclusive to a situation in which an employee is between the ages of 63.5 and 65 or above the age of 65. The enhanced payment tapers between those ages to nil."
- It further considered it relevant that earlier cases such as Loxley had been determined before the default retirement age had been abolished and were thus premised upon a landscape in which an employee had no entitlement to continue working after age 65, so their putative future earnings could be calculated with certainty; that landscape no longer existed. Specifically, since 2011 there could be no assumptions made regarding the age to which someone might continue to work and, therefore, as to what their lost earning opportunity might be if they were made redundant; there was no tangible evidence or statistics available (whether within the Respondent's workforce or generally) applicable to the time at which the Claimant was made redundant such as to satisfy the ET it was safe to assume that after the abolition of the default retirement age, people tended to continue to retire and draw their pension at 65.
- Acknowledging that in Loxley it had been said that objective justification should be considered after examining the nature of both the pension scheme and the enhanced redundancy scheme, the ET noted that the pension scheme to which the Claimant belonged referred to a normal pension retirement age of 65. That said, it was also a scheme to which changes had been made in 2005/2006, such that employees had been advised that if they retired at 65 their pension would be smaller than previously anticipated and thus they would need to work for longer to build up the same pension provision. The Respondent had provided no figures that would assist in determining at what stage employees under the scheme were 'normally' retiring after 2011. The ET considered it likely that the Claimant's situation was not untypical, in that there would be a proportion of workers who were deciding to work on beyond 65. Although the Claimant had a pension available to him, the ET did not consider that was a sufficient answer when balanced against the discrimination he suffered: as had been recognised in Ingeniorforeningen I Danmark, acting on behalf of Ole Anderson v Region Syddanmark Case C-499/08, the fact of being able to draw an old-age pension at the date a worker was made redundant was not a complete answer when denying that worker a severance payment as that would prejudice those employees who wished to continue to earn and contribute to their pension. In the Claimant's case, the enhancement he would have received had the cap not existed was very close to the earnings he would otherwise have received if he had been able to continue working (as planned) until August 2016. This would be a common feature for any employee made redundant between 63.5 and 65, who had made plans to work on beyond 65 and draw their pension at a later date. It illustrated the difficulty in continuing to make assumptions about employees' retirement plans in terms of an enhanced redundancy scheme since 2011:
"91. … If the cap were removed this would create a windfall for some but that is not a windfall of necessity as it had been prior to 2011. …"
- The ET further considered the Respondent's reliance on what it accepted was a legitimate aim, that a redundancy scheme should have a simple and consistent system, such that an employee could see with certainty what their entitlement would be (something that would assist in achieving another aim of the Framework, to encourage volunteers). Given that the cap could simply be removed (on the basis that it was discriminatory), the ET did not accept that this was a proportionate means of achieving the aim in question. As for encouraging volunteers, the ET did not see the maintenance of the cap as consistent with that aim as it only served as a disincentive for those aged 65 and above (as the taper did for those aged between 63.5 and 65); although allowing the Respondent might have an understandable aim of seeking to maximise volunteers from shorter serving employees (which would keep redundancy costs down), the ET was unable to see how the cap assisted in this regard.
- When considering proportionality, the ET had regard to the Respondent's argument that it was relevant the cap had never been the subject of dissent in its consultations with the trade unions. The ET did not, however, consider this particularly significant, not least as the Respondent had itself identified the discriminatory impact of the provision in its own review but had explored no other, less discriminatory measures of achieving its aims. As for weighing the reasonable needs of the undertaking against the discriminatory effect of the measure, given the paucity of evidence to justify the measures taken by the Respondent: the ET did not consider the balance tipped in favour of the employer in this case; the Respondent had failed to satisfy it that its reasonable needs outweighed the discrimination suffered by the Claimant.
- The Claimant's claim was one of direct age discrimination. Age is identified as a protected characteristic by section 4 of the Equality Act 2010 ("EqA"); by section 5 it is allowed that age can refer to a particular age group. The Claimant's case was advanced on the basis that he fell within an age group of those aged 63.5 and over, and he compared himself to people in an age group under age 63.5.
- Direct discrimination is defined by section 13(1) of the EqA as follows:
"A person (A) discriminates against another (B) if, because of a protected characteristic, A treats B less favourably than A treats or would treat others."
- By section 13(2), it is specifically provided that in age discrimination cases:
"… A does not discriminate against B if A can show A's treatment of B to be a proportionate means of achieving a legitimate aim."
- In MacCulloch v Imperial Chemical Industries plc  ICR 1334, the EAT (Elias P, as he then was, presiding) summarised the legal principles on justification, as follows:
"10. … (1) The burden of proof is on the respondent to establish justification: see British Airways plc v Starmer  IRLR 862, para 31. (2) The classic test was set out in Bilka-Kaufhaus GmbH v Weber Von Hartz (Case 170/84)  ICR 110, in the context of indirect sex discrimination. The Court of Justice, at para 36, said that the court or tribunal must be satisfied that the measures must "correspond to a real need … are appropriate with a view to achieving the objectives pursued and are necessary to that end". This involves the application of the proportionality principle … It has subsequently been emphasised that the reference to "necessary" means "reasonably necessary": see Rainey v Greater Glasgow Health Board  ICR 129, 142-143, per Lord Keith of Kinkel. (3) The principle of proportionality requires an objective balance to be struck between the discriminatory effect of the measure and the needs of the undertaking. The more serious the disparate adverse impact, the more cogent must be the justification for it: Hardy & Hansons plc v Lax  ICR 1565, per Pill LJ, at paras 19-34, Thomas LJ, at paras 54-55 and Gage LJ, at para 60. (4) It is for the employment tribunal to weigh the reasonable needs of the undertaking against the discriminatory effect of the employer's measure and to make its own assessment of whether the former outweigh the latter. There is no "range of reasonable response" test in this context: Hardy & Hansons plc v Lax."
- The EAT in MacCulloch, also cited a lengthy passage from Hardy & Hansons v Lax relating to the respective roles of the ET and the EAT, specifically identifying the critical evaluation required by the ET, which is to be demonstrated in its reasoning:
"33. … In considering whether the employment tribunal has adequately performed its duty, appellate courts must keep in mind … the respect due to the conclusions of the fact finding tribunal and the importance of not overturning a sound decision because there are imperfections in presentation. Equally, the statutory task is such that, just as the employment tribunal must conduct a critical evaluation of the scheme in question, so must the appellate court consider critically whether the employment tribunal has understood and applied the evidence and has assessed fairly the employer's attempts at justification.
34. The power and duty of the employment tribunal to pass judgment on the employer's attempt at justification must be accompanied by a power and duty in the appellate courts to scrutinise carefully the manner in which its decision has been reached. …"
- In [Seldon v Clarkson Wright & Jakes ]() ICR 716, the Supreme Court had the opportunity to clarify the approach to justification in a case of direct age discrimination, observing that this was not identical to the approach to be taken in justifying indirect discrimination in that a distinction had to be drawn between social policy objectives of a public interest nature, which could justify direct age discrimination, and purely individual reasons particular to the employer's situation, which generally could not. Specifically, in Seldon, it was held that the objectives of inter-generational fairness and preserving the dignity of older workers (by avoiding unseemly debates about capacity) were both capable of being legitimate aims, depending on the circumstances of the employment concerned and provided the means chosen were appropriate and necessary. The Supreme Court also made clear that where it was justified to have a general rule, the treatment resulting from it would usually be justified - the focus was on the rule, not on the individual circumstances of the person complaining about the application of that rule (and see Lockwood v Department of Work and Pensions and Anor .
- In Loxley v BAE Systems  ICR 1348 EAT (Elias P again presiding), the contractual redundancy scheme in issue included - in common with the scheme in the present case - a taper and cap on benefits:
"3. Benefits under the scheme were only paid to those under 60 at the date of redundancy. There was a tapering provision which applied to those who had reached the age of 57. The payments which would otherwise have been made to those persons were reduced by 1/36th for every month of service over the age of 57. …"
- The EAT recorded the employer's explanation for the taper and cap, as follows:
"5. The rationale for excluding those over the age of 60 was linked to the fact that they were entitled to take their benefits under the company's pension scheme at the age of 60. … it would have provided employees close to retirement with a windfall if they had been entitled to take the full redundancy payment. …"
- As the EAT recognised in Loxley, however, the position changed in 1996, when the compulsory retirement age was increased to 65:
"6. … thereafter it could not necessarily be said that employees denied enhanced redundancy payments after the age of 60 were justifiably being prevented from obtaining a windfall. That might have been the case for some employees, but others may have wanted to remain until 65 and any redundancy payment would not necessarily have exceeded what they would have received had they remained in employment."
- Mr Loxley - who was 61 and thus denied benefits under the redundancy scheme - complained that the ET had ignored this development, failing to assess his loss as including the money he would have earned had he worked to age 65. Before the EAT, counsel for the employer conceded:
"32. … it was not strictly accurate to say that [Mr Loxley] … would have received a windfall if he were to be given a redundancy payment. However, … it was plainly a legitimate aim for the employers to distribute the necessarily limited financial pot available to meet redundancies so as to ensure an equitable distribution of remuneration amongst the workforce. In doing that, the employers were fully entitled to have regard to the fact that employees over the age of 60 would be entitled to take an immediate pension payment. … The tribunal did not in terms refer to this reason for the exclusion, but that was because everyone understood that this was the position. Their reference to "windfall" was intended to be a loose shorthand to include this reason for the exclusion also."
- This provides the context for the EAT's decision in Loxley. It rejected the general submission advanced for Mr Loxley, that preventing a windfall could not be a legitimate feature of the scheme:
"37. … if the position still were that retirement automatically took place at the age of 60 then an employer would in our view manifestly be justified in having a rule which prevented the employee being better off as a consequence of receiving redundancy pay than he would have been if working until retirement age. That is what the tapering provisions originally achieved until the extension of retirement age in 1996. This is a legitimate means of securing the aims of the scheme. …"
- That said, the EAT acknowledged that the fact that Mr Loxley would have been able to continue working meant this was not a "windfall" case:
"38. However, we do not accept that the basis on which Mr Laddie [for the employer] sought to justify the scheme, namely that it is fair to exclude employees in receipt of a pension, can fairly be described as giving effect to the "windfall" principle. …"
- That did not mean, however, that the taper and cap could not be justified:
"39. We recognise that there are many employers who adopt redundancy schemes of this kind. We do not say for one moment that it may not be justified to exclude those who are entitled to immediate benefits from their pension fund from the scope of a redundancy fund. Moreover, in such circumstances tapering provisions of a kind adopted in this case will, we suspect, be very readily justified. They would be necessary to ensure equity as between those close to retirement and those in retirement receiving pensions. However, it is not in our view inevitably and in all cases justified for those entitled to an immediate receipt of a pension to be excluded from the redundancy scheme. Ultimately, it must depend upon the nature of both schemes.
40. There can surely be no doubt that the fact that an employee is entitled to immediate pension benefits will always be a highly relevant factor which an employer can properly consider when determining what redundancy rights, if any, the employee ought to receive. No doubt in some, perhaps many, cases it will justify excluding such an employee from the redundancy scheme altogether.
41. To answer that question the tribunal had to ask whether the treatment of the claimant - in this case his exclusion from the scheme - achieves a legitimate objective and is proportional to any disadvantage which he suffers. It may be that his pension entitlement, even if taken earlier than he would otherwise have wished, is far more valuable than any redundancy entitlement. Neither we nor, it seems, the tribunal are in a position to assess that in this case. They appear to have had a lot of financial information about the various benefits, but they have not analysed that information in their judgment."
- In Loxley, the EAT further acknowledged that the fact that an agreement is made with the trade unions is potentially a relevant consideration when determining whether treatment is proportionate (and see the decision of the Court of Justice in Paliacos de la Villa v Cortefiel Servicios SA (Case C-411/05)  ECR I-8531):
"42. … Plainly the imprimatur of the trade union does not render an otherwise unlawful scheme lawful, but any tribunal will rightly attach some significance to the fact that the collective parties have agreed a scheme which they consider to be fair."
- The "windfall" justification was also relied on by the employer in [Kraft Foods UK Ltd v Hast]()ie  ICR 1355 EAT (Underhill P, as he then was, presiding), in which care was taken to properly understand what was meant in this context:
(a) … The windfall point is - simply - that if you are providing a scheme designed to compensate employees for their lost earnings it must be legitimate to incorporate provisions which prevent it paying out more than the amount of those earnings …
(b) As for pension entitlement, if the point of the cap is to see that employees are not over-compensated for lost earnings (ie salary), it is simply irrelevant whether they are entitled, at the moment of redundancy, to receive a pension. The point would be equally good, or bad, whether they were or were not. There might, again, be - depending on the facts - an argument that employees who lost out under the terms of the scheme because of an age-related provision were sufficiently compensated by receiving an immediate pension entitlement: that was, in effect, the argument run by the employers in Loxley … But it is a separate point."
- In Kraft Foods, the EAT concluded that the ET had been wrong to reject the employer's "windfall justification", reasoning:
(1) It is in our view self-evident that the object of the scheme was indeed to compensate employees who took voluntary redundancy under it for the loss of the earnings that they had a legitimate expectation of receiving if their employment had continued. That is the general understanding of the purpose of a redundancy payment. …
(2) It necessarily follows that unless the scheme incorporated a cap it would result in payments which exceeded what was necessary to achieve that object in cases where the employee was close to retirement age. …
(3) That being so, in our view it also necessarily follows both that it is legitimate for a redundancy scheme to incorporate a provision designed to prevent such excess compensation and that the cap in the present case was a proportionate means of achieving that aim: indeed, it does so with precision, and arguably more accurately than by the application of a taper, which is the other means commonly employed."
- In so concluding, the EAT underlined the point it had made earlier (see paragraph 11, cited above), the question whether the employees affected by the cap would be entitled to receive full pensions was irrelevant:
"18. … the windfall argument is entirely independent of any question of entitlement to pension."
- In addressing the objections raised by Mr Hastie, the EAT rejected the suggestion that it might be material that employees who wished to work beyond retirement age were normally permitted to do so, but acknowledged that the position would be different if the employee in question had a legal right to work beyond that age (see paragraph 22).
- In Ingeniorforeningen I Danmark, acting on behalf of Ole Anderson v Region Syddanmark Case C-499/08,  CMLR 1140, the European Court of Justice was concerned with a provision within national legislation that denied severance payments to those employees who were entitled to receive an old-age pension from a scheme to which the employer had participated. The Court allowed that this restriction was not unreasonable given the legitimate objective pursued was to support workers who had been dismissed and were seeking new employment and this helped limit the scope for abuse. It did not, however, accept that the restriction was limited to that which was necessary to obtain the objective in question. Specifically, the restriction applied equally to those who actually received a pension and to those who might be eligible to receive to do so but had chosen to temporarily waive that right so as to continue with their career:
"44. … Thus, in pursuing the legitimate aim of preventing that allowance from being claimed by persons who are not seeking new employment but will receive a replacement income in the form of an occupational old-age pension, the measure at issue actually deprives workers who have been made redundant and who wish to remain in the labour market of entitlement to the severance allowance merely because they could, inter alia because of their age, draw such a pension.
47. Consequently, by not permitting payment of the severance allowance to workers who, although eligible for an old-age pension from their employer, none the less wish to waive their right to such a pension temporarily in order to continue with their career … the Law … unduly prejudices the legitimate interests of workers in such a situation and thus goes beyond what is necessary to attain the social policy aims pursued by that provision.
48. Therefore, the difference of treatment resulting from … the Law … cannot be justified …"**Submissions**
The Respondent's Case
- At the heart of this appeal was the Respondent's contention that it is legitimate for an employer to seek to avoid beneficiaries of a cushion provided as a result of their immediate entitlement to a substantial pension from also benefitting from enhanced redundancy payments.
- Turning to the first ground of appeal, the abolition of the default retirement age had - contrary to what the ET assumed - left the reasoning in Loxley intact. Having wrongly distinguished Loxley, the ET had apparently not considered it needed to give any weight to the wish to avoid a windfall; the fact that the Respondent's windfall argument did not apply perfectly in every possible case did not mean it was not entitled to have regard to the particular windfall it had identified arising from employees' immediate or forthcoming entitlement to pension and the ET was wrong to think the examples it identified at paragraph 81 undermined the Respondent's legitimate aim or that the Claimant's personal ambition to work beyond 65 impacted upon the generality of the position.
- As for the second ground, although purporting to recognise it was unrealistic to analyse each aim relied on separately (see paragraph 75, ET Reasons), that was in fact what the ET had done. Thus, at paragraph 89, the proportionality exercise was conducted in isolation for the windfall argument; at paragraph 94, it was undertaken in respect of the aim of achieving simplicity; at paragraph 95, in relation to the objective of attracting volunteers for redundancy amongst employees with varying lengths of service; at paragraph 98, the ET turned to the inter-generational fairness point (those who were older and entitled to an immediate pension were also likely to have longer service and thus receive higher severance payments, so would be seen to be taking a disproportionate amount of the pot); and at paragraph 100, it considered the issue of effective and equitable allocation of funds. By taking each separately, the ET lost sight of the fact that the aims, taken together, could only be advanced by the maintenance of a taper and cap within the scheme. It was particularly important to analyse the aims in a holistic way in an age discrimination case as different aims might be achieved by different means but any one of the measures thus adopted might be harmful to the achievement of another aim. The flaw in the ET's approach was highlighted at paragraph 94, where the simplicity of the redundancy scheme as a whole was assumed to be best served by removing the taper and cap: the prime justification for the taper and cap was the windfall argument, but the maintenance of simplicity and transparency required that the taper and cap be set in a way that ensured that the scheme as a whole remained simple, transparent and easy to apply, without having to have regard to individual employees' subjective intentions as to retirement date as at the date of application of the scheme (see Lockwood). By divorcing simplicity from windfall, the latter aim was rejected because of potential inconsistencies in application despite the legitimate aim of simplicity meaning the existence of such inconsistencies was justifiable.
- Taking the next two grounds of appeal together: the ET had considered each legitimate aim relied on by the Respondent separately, looking to see whether it was thus able to justify the cap and apparently doing so on the basis that it was relying on the cap itself as a legitimate aim (see the ET at paragraph 74). That was a mischaracterisation of the Respondent's case and suggested an error in the ET's approach. It was nonsensical to consider whether the cap was a legitimate aim (rather than a rule that needed to be justified by reference to such aims). More generally, to look simply at the cap inevitably meant losing sight of the need to have regard to the needs of employees and fairness across the board. The Respondent had only addressed the cap separately in the alternative (the way the case had been put in Hastie), should its primary case not be accepted, but the ET had apparently focussed on that secondary submission, failing to allow that it was possible to justify the scheme as a whole.
- By the next ground, the Respondent contended that the ET had erred by dismissing the significance of trade union approval. Evidence had been adduced before the ET as to the consultation with trade unions; the fact the unions had not raised the taper or cap could not simply be ignored: the evidence showed there was an attempt to renegotiate the scheme and the fact that no suggestions were made about the cap was therefore of relevance (and see Rosenbladt v Oellerking GmbH .
- Finally, the Respondent argued that the ET had erred in its approach to the question of proportionality. It had made no reference to the level of pension and lump sum to which the Claimant had an immediate entitlement, although this had been a significant part of the Respondent's justification for those in the Claimant's position being subject to the taper and cap; leaving this out of the balance meant the ET erred when assessing proportionality.
The Claimant's Case
- For the Claimant, Ms Grennan started with a number of general propositions. First, this was, on its face, a careful and fully reasoned ET Judgment, which showed regard to each aspect of the justification test; there was no error of law. Second, on the facts, the discriminatory aspect of the scheme - the cap - was clearly purely age based: introduced by way of amendment to the original scheme but, as the ET found (see paragraphs 38 and 74 of the Reasons), in reality nothing changed: the crucial age remained 65, regardless whether the employee was a member of the scheme to which the Claimant belonged or not. Third, and again on the facts, 25% of employees were in an anomalous position as if aged between 62 and 63.5 years, they could retire and receive a full pension; the impact of which the Claimant was complaining was thus solely based on age, 63.5 years and above. It was part of the Respondent's case that it would be inequitable to offer both enhanced redundancy terms and pension but that was precisely what it was doing for those aged between 62 and 63.5 years. Fourth, the ET had not minimised or ignored the pension payments that the Claimant and those in his age group would enjoy; it was alive to that point (see expressly at paragraphs 89 and 110). Ultimately it had made a fact-sensitive finding based on the evidence available to it (noting the ET's dissatisfaction with the evidence adduced by the Respondent).
- Turning to the first ground of appeal, the reality was that there was no windfall in this case: there was no retirement age and so no expectation of employees stopping working at any particular age. The windfall arguments in the authorities were premised on the basis that employees were being compensated for the loss of the opportunity to earn remuneration from continued employment (see paragraph 23 Kraft v Hastie) but there was no distinction in the present case between employees in the Claimant's group and those in younger groups. As had been recognised in Kraft and also in Loxley (where the real issue was one of equitable distribution rather than windfall), the issue of windfall was very different from that of entitlement to pension; the ET in the present case had that very much in mind.
- Turning to address the criticism that the ET had failed to consider the scheme as a whole or to consider the issues holistically, that was a mischaracterisation of the position: time and again the ET referred to the scheme as a whole; it was, however, also entitled to see that a key feature of the scheme was the taper and cap and to address the discriminatory impact of that feature. Similarly, the criticism that the ET should have addressed legitimate aims together as a whole, again wrongly characterised its approach. As made apparent at paragraph 75, the ET recognised that the aims were "linked and part of a larger whole", but explained that it needed to go on to consider each legitimate aim individually "to do justice to the arguments before us". As for the complaint that the ET had erred by mischaracterising the Respondent's case, if there was any confusion then it arose from the Respondent's closing submissions, which seemed to suggest that an age-related cap could be justified. In any event, even if the ET did so err, the point went nowhere: if the ET had rejected a case the Respondent had not advanced, that did not impact upon the fact that the ET had dealt with all the other aims relied on by the Respondent and rejected its case on every basis.
- As for the objection to the ET's approach to the trade union consultation point, it was accepted that this could be a relevant matter - albeit that it might allow for stereotypical assumptions (see Loxley) - but, on the evidence, the ET did not find this to be a particularly relevant factor; that was a fact-sensitive conclusion the ET was entitled to reach.
- Finally, on the question of the ET's approach to proportionality and the relevance of the Claimant's pension entitlements, there was nothing to indicate it had failed to appreciate this; the key point was not the Claimant's entitlements but the benefits of the group of which he was a member. The ET had been right to focus on the scheme (albeit aware of the particular benefits the Claimant would receive, having built up his entitlement over many years).
- By its first ground of appeal, the Respondent contends that the ET erred in wrongly distinguishing or failing to apply the EAT reasoning in Loxley v BAE Systems. I disagree.
- In Loxley, the EAT allowed that a rule that avoided employees receiving a "windfall" would "manifestly be justified" (see paragraph 37, cited above) but it plainly distinguished (see paragraph 38) between the "windfall" case - when the severance compensation would exceed any possible loss of earnings (compensating an employee for loss of a non-existent earning capacity giving rise to the windfall) - and the more nuanced position of the employee who might have an immediate entitlement to pension benefits but who would also have been able to continue working and would thus suffer a loss of earnings (see also Kraft v Hastie). In the latter case, the EAT considered that a taper and cap might still be "readily justified" - "the fact that an employee is entitled to immediate pension benefits will always be a highly relevant factor" (paragraph 40) - but that would depend upon the nature of the scheme in question and the ET would need to ask whether "the treatment of the claimant - … his exclusion from the scheme - achieves a legitimate objective and is proportional to any disadvantage which he suffers" (paragraph 41).
- Here the Respondent might have been entitled to rely on the "windfall" justification for some employees in the Claimant's position - they might have had no intention of continuing to work beyond the point when they were entitled to draw pension benefits - but the ET was correct to observe it could make no assumptions in this regard: the landscape had changed with the removal of the default retirement age and the Respondent had adduced no evidence to show that it could reach any conclusions as to the age at which employees might chose to retire and draw their pensions. Even allowing that the Respondent was required to make good its justification in relation to the scheme, and not in respect of each individual employee (Seldon; Lockwood), the ET was entitled to reject the "windfall" case in this instance.
- That was not, however, the end of the road for the Respondent's justification defence. It relied on a number of other aims, in particular on the fact that the Claimant was advantaged in a way that others facing redundancy would not be: the potential financial hardships for him were mitigated by the fact that he had an immediate entitlement to his pension. This was not a "windfall" but was a "highly relevant" factor (per Loxley) and was, accordingly, given "careful consideration" by the ET (see paragraph 89 of the Reasons). Having reminded itself of the guidance provided by the ECJ in Region Syddanmark, the ET concluded as follows:
"90. … on the basis of the facts before us and given that we are without any data that will tell us that it [is] safe to assume that employees wish to end their career at age 65, we are not satisfied that this feature - the ability to draw a pension - creates the right balance against the prejudice caused to those who do not wish to retire at that age. This is particularly so given that the respondent has not satisfied us that there is any particular weight that should be given to the finite cost argument nor the argument relating to inter-generational fairness. They rely upon these arguments in a general sense only."
- The ET thus considered both possible bases for justifying a cap as identified in Loxley. It permissibly questioned whether the present case gave rise to any "windfall" but, in any event, went on to consider whether the cap might be justified given the Claimant's immediate entitlement to his pension. On the evidence, it concluded it was not. I return to the ET's reasoning in this regard below but reject the suggestion that it erred in its approach to Loxley.
- The second, third and sixth grounds of appeal raise more general questions as to the ET's approach. There is a considerable degree of overlap between these points and it is useful to consider them together.
- The question for the ET was whether the Respondent had satisfied it that the age discriminatory treatment of the Claimant was a proportionate means of achieving a legitimate aim, where that aim had to be something other than the avoidance of a windfall (a factor I am satisfied the ET legitimately rejected in this case). The Respondent's primary case was that the legitimate aims of the Severance Framework had to be viewed as a whole, the taper and cap were integral to the overall scheme; it did not seek to justify these elements separately save in its alternative case. As for the legitimate aims relied on by the Respondent, these were listed in its closing submissions, as follows:
"29.1. To reduce compulsory redundancies by encouraging volunteers for redundancy;
29.2. To attract volunteers for redundancy amongst employees with varying lengths of service rather than just from long-serving employees - both to avoid the loss of just long-serving employees (to the detriment of the business) and to maximise the number of volunteers for a given cost to the business (shorter-serving employees being granted smaller payments, albeit with a floor of £6,000 which encouraged volunteers from amongst the shortest-serving employees);
29.3. To provide a cushion against the financial effects of redundancy;
29.4. To encourage employees who would not otherwise be leaving the business to volunteer (whilst avoiding the oldest employees delaying retirement in the hope of falling within a redundancy exercise and thereby gaining a windfall (i.e. a payment compensating them for unemployment in a period when they intended to have already retired [sic];
29.5. To allocate the redundancy funds effectively but equitably - minimising the cost to the employer, maximising the number of volunteers and cushioning the loss of employment for those affected;
29.6. To provide a simple system offering consistency between business units;
29.7. To encourage recruitment and retention of staff by maintaining the diversity of experience within the workforce and avoid undue job-blocking."
The Claimant did not challenge the legitimacy of these aims save to the extent that the Respondent was seeking (in its alternative case) to rely on the cap itself as a legitimate aim.
- The treatment of the Claimant that the Respondent was seeking to justify was the denial to him of an enhanced severance payment on redundancy, something that arose from the application of a cap that discriminated on the ground of age. The ET was thus required to critically assess the cap applied by the Respondent as a means of achieving the aims it had identified for the Severance Framework. The cap, however, had to be seen in context; it was part of a broader scheme that the Respondent said it had adopted to meet the aims identified above. I do not understand that the Respondent was suggesting there was a perfect correlation between each aspect of the scheme it had adopted and each individual aim the Severance Framework was intended to achieve. Rather, it was relying on the measures taken under the Framework as together furthering the objectives it had identified; as Mr Croxford put it in oral argument: to the extent there were tensions between the aims it was seeking to achieve, the Respondent contended it needed to adopt the means that best enabled it to meet those objectives.
- In thus carrying out the assessment required of it, the ET was entitled to critically scrutinise the evidential foundation for the Respondent's justification defence (so, it was entirely permissible to observe that there was no evidence as to the sums available for redundancies and to highlight the anomalous category of employee (around 25% of the workforce) for which there was a special arrangement such that if they were made redundant between the ages of 62 and 63.5, they could both take an unreduced pension and a full severance package, but there was no proper basis for it to separate out parts of the scheme to be tested in isolation against each aim relied on by the Respondent. Indeed, that the ET had to adopt a holistic approach in this regard has been common ground on the appeal and was acknowledged by the ET itself (see paragraph 75 of the Reasons). Having thus accepted the need to view the aims relied on by the Respondent as "linked and part of a larger whole", however, the ET then went on to analyse each separately. In so doing, it is apparent that the ET gave careful thought to the use of the cap in the light of each of the objectives relied on, critically scrutinising the available evidence. The question raised by these grounds of the appeal is, however, whether it did so having regard to the Severance Framework, and the objectives it was intending to achieve, as a whole.
- Before seeking to tackle that question head-on, it is useful at this stage to also bring in the fourth ground of appeal - the suggestion that the ET mischaracterised the Respondent's case by focusing on the alternative argument (whether the cap could be justified) and, further, that it wrongly understood the Respondent to be arguing that the cap itself was a legitimate aim.
- Certainly this is how the ET characterised the Respondent's case at paragraph 74 of its Reasons, apparently taking this from the Respondent's closing submissions. If, however, that was how the ET understood the Respondent's case, it was wrong: the Respondent never sought to rely on the cap as a legitimate aim and its closing submissions did not suggest that it did. The most that could be taken from the closing submissions was that, if required to separately justify the cap, the Respondent considered it could do so on the basis of the particular aims it then set out. If the ET had simply determined the Respondent's case on this basis it would, indeed, have been in error.
- As the Claimant points out, however, the ET did not stop at paragraph 74 but then went on to consider each of the legitimate aims relied on by the Respondent as justification for the Severance Framework as a whole. The Claimant submits that any erroneous characterisation of the Respondent's case at paragraph 74 fell by the wayside as the ET then continued to consider the justification defence more fully. If that is correct then I would agree that paragraph 74 can effectively be passed over as an unfortunate aberration. The question is, however, whether this misunderstanding of the Respondent's case tainted the ET's approach to justification more generally. That brings me back to the outstanding issue raised by appeal grounds 2, 3 and 6.
- Returning to that point, the difficulty that I consider arises with the ET's Judgment is that it fails to demonstrate the holistic approach it had acknowledged it had to adopt.
- The error is in part disclosed at a relatively early stage in the reasoning, where the ET observes as follows:
"73. We are satisfied that each of the aims argued for by the respondent … are legitimate aims in the sense that they properly form part of the aims of a redundancy scheme but we are not satisfied that the particular terms of the Severance Framework complained of by the claimant are a proportionate means of achieving these. We have not been satisfied that they are reasonably necessary to achieve those aims."
The Respondent was not saying that the cap taken alone was the means by which it was seeking to achieve each of the aims thus identified; it was asking the ET to see this aspect of the Severance Framework as one of a number of measures adopted to achieve its different aims. Although the ET then considered the cap against each individual aim with conspicuous care, I am unable to see that it then stepped back and viewed this aspect of the Severance Framework in the context of the scheme as a whole and as against those aims taken collectively.
- The question then arises as to whether this is fatal to the ET's conclusion in this case. After all, it plainly did scrutinise the way in which the cap operated, as seen against each aim, in some detail and made a number of entirely fair criticisms of the weak evidential foundation for the Respondent's case. Somewhat reluctantly, however, I have reached the conclusion that the ET's decision is rendered unsafe by the failure to demonstrate the holistic assessment it had acknowledged was required.
- The Respondent's case was predicated on what it was contending was a need to find the best way of achieving a number of different (but equally legitimate) aims within the context of the Severance Framework. It was arguing that the use of the cap needed to be judged against the broader context. That is an approach commended in Loxley: in allowing that taking account of the cushion provided by an immediate pension entitlement might be justified (although that was not inevitably so), it was observed that it would "depend upon the nature of both schemes" (that is, both the redundancy and the pension schemes relevant to the case). A not dissimilar point was made in the Ole Anderson case: accepting that it might not be unreasonable, in a severance payment scheme, to have regard to the benefit provided by a pension, the ECJ made clear it would depend on the context (in that case the restriction went further than was necessary given the particular nature of the pension scheme).
- The ET thus had to consider the cap in this case, in the context of the Severance Framework as a whole, as against the various objectives it was intended to achieve. It might legitimately have taken the view that the Respondent had not demonstrated that it had struck a proportionate balance, given the discriminatory impact of the cap - perhaps concluding that some other, less discriminatory means of achieving the balance (taking into account the different aims in question) had been open to the Respondent. It had, however, to demonstrate that it had judged the cap in context, not simply as against each aim taken individually but in the light of finding some way of best achieving all of the aims identified.
- In saying this, I do not think that the Respondent is right to criticise the ET for failing to have regard to the specific pension benefits that the Claimant was able to access (the focus of the proportionality argument under the sixth ground of appeal). On this point I agree with Ms Grennan: there is nothing to suggest that the ET lost sight of the cushion available to him in this respect or that it failed to take it into account. There may be a question as to whether the ET needed to demonstrate that it had considered the operation of the cap in the context of both the redundancy and the pension schemes (the Loxley point) but that is part of the broader issue arising from its failure to adopt a holistic approach to its assessment.
- On that basis I therefore allow the appeal. In the circumstances it is strictly unnecessary for me to deal with the fifth ground of appeal - the suggestion that the ET had erred by dismissing the significance of trade union approval. Had it been necessary for me to do so, however, I would have rejected this ground. I do not accept that the ET disregarded the point - it allowed that it might be relevant but did not accept that the evidence showed that there was trade union "approval" in this case. Having been taken to the evidence in question, I cannot see that the ET did other than reach a permissible conclusion in this respect; the Respondent's argument in this regard failed on the facts.
- In the light of my Judgment allowing the appeal, within 14 days of the handing down of the Judgment, the parties should exchange and lodge with the EAT written submissions on disposal and any other consequential applications.
Published: 13/07/2017 14:16