Age discrimination and employee share schemes: corporate aspects

United Kingdom

Most companies will need to make some changes to the rules of their executive share schemes to comply with the Employment Equality (Age) Regulations 2006 (the “Regulations”) which come into force on 1 October 2006.

Many employee share schemes currently provide automatic age-related discrimination, including preventing employees who are close to retirement from receiving new awards and/or favouring retiring employees over other leavers by allowing them to receive the full number of shares under their award.  Without amendment, these are unlikely to comply with the Regulations.

The summary position for age discrimination in the context of employee share schemes is that age discrimination after 1 October 2006 will be unlawful unless

  • the discrimination occurred before 1 October 2006; or
  • the discrimination is required to comply with specific legislation (in this case, particularly tax legislation for all-employee share schemes); or
  • the discrimination is objectively justifiable.

Pre-1 October 2006 awards

  • Awards made before 1 October 2006 will not normally give employees grounds for action because the Regulations do not affect anything done before 1 October 2006. In principle, companies therefore have no need to change their scheme rules or awards so that pre-1 October 2006 awards comply retrospectively.
  • However, employers cannot forget about pre-1 October 2006 awards completely.  Although awards made before 1 October 2006 will not automatically have to be changed to comply with the Regulations, employers will have to be careful that they do not commit any new discriminatory act after 1 October 2006 in relation to those awards. An example might be an exercise or failure to exercise discretion.  Many schemes give the company the discretion to treat any leaver as a “good leaver” and favour that employee. If an aggrieved senior employee is leaving in an early retirement scenario and has to forfeit all his shares, he may claim that he is the victim of discrimination on the grounds that someone retiring at retirement age could receive all his shares.  He could allege that the company has the capacity to treat him as a good leaver but has failed to do so because of his age and proximity to retirement.  Any such decision would therefore need to be objectively justifiable (see below) which may be difficult.

Permitted under specific legislation

  • Any age-related rules imposed by tax legislation do not contravene the Regulations. Accordingly, the age-related provisions in Revenue-approved Sharesave and Share Incentive Plans should not be challengeable. However, it is worth noting that we would expect some changes to be made to existing tax legislation in due course to ensure compliance with the spirit of the Regulations, eg removal of the right of exercise for Sharesave participants who reach a specified age, even where they remain in employment. If and when that occurs, changes may have to be made to these scheme rules.
  • Service-related benefits are permitted under the Regulations provided those do not take into account a period of more than 5 years. However, since 5 years is the maximum period permitted under Revenue-approved schemes in any event, and executive schemes rarely have a service period before the award is made, this is unlikely to be a problem in practice.

Objectively justifiable

  • In all other cases, age-related discrimination will have to be objectively justifiable. While recognising loyalty and experience and motivating employees may be objective grounds, there is always uncertainty and employers have the burden of proof in justifying what could be discrimination. Given that all-employee schemes are likely to benefit (for the time being anyway) from protection because of their compliance with existing legislation, the problems in this area are therefore likely to surface only with executive schemes.

Action to be taken

  • We recommend two changes to executive scheme rules to ensure that their provisions in this area are “objectively justifiable” going forward, although companies will still need to take care that there is no age discrimination in the actual operation of their schemes.
  • First, any schemes which still contain a provision preventing employees from receiving awards within six months (or 2 years in the case of older schemes) of normal retirement date should have this provision removed. This was often included to comply with Association of British Insurers’ (“ABI”) guidelines for share schemes, but this provision is now no longer included in their guidelines (to comply with the age discrimination legislation) and so can be removed. Automatically excluding persons who are expected to retire is unlikely to be justifiable because employees have a right to request their employer to work after normal retirement age and so the concept of “normal retirement age” is no longer applicable.
  • Secondly, schemes which allow automatic early receipt of shares for retirement at or after retirement age should be amended so that they provide that early receipt occurs on retirement by agreement with the company at any age.  Most executive schemes will need amendment in this area. Best practice would be only to allow receipt to occur to the extent that performance conditions on any awards had been met on a time-related basis and to be reduced to reflect the fact that the full period (normally 3 years) had not been served before shares could be received. Indeed this is now generally true of all awards where shares can be received by early leavers.
  • Scheme rules can normally be amended by Board resolution to effect these changes. Employee consent is not needed as these changes relate to future awards. Shareholder consent will not normally be needed as most scheme rules contain provisions allowing changes to be made to them even to participants’ advantage in order to comply with legislation. Some scheme rule changes may, however, need Revenue approval, but this should be a formality.

Summary:

  • Nothing needs to be done for pre-1 October 2006 awards (although any post-1 October 2006 discretion in relation to those awards should be exercised so as to comply with the Regulations).
  • All-employee schemes are unlikely to need amendment.
Most executive schemes should be amended by 1 October 2006 in order to ensure that awards made under them after that date are not made with non-compliant provisions.