The EAT confirmed that applying a cap to payments under a redundancy scheme to ensure that employees close to pension age do not receive a windfall can be justified as a proportionate means of achieving a legitimate aim.

Facts

Kraft operated a voluntary redundancy scheme to which it applied a cap to ensure that redundancy payments would not exceed the amount that the employee would have earned (at their current rate of pay) had they remained in employment until normal retirement age (65). In practice, this meant that Mr Hastie, a long-serving employee close to retirement would receive a redundancy payment that was reduced by £13,600 by application of the cap.

It was agreed that the cap was a provision, criterion or practice (PCP) which disproportionately applied to employees nearing 65 and that unless justified it would constitute unlawful age discrimination. Kraft argued that the cap prevented employees receiving a windfall (i.e. redundancy payment together with ability to draw a pension) and that the scheme was designed to compensate employees for loss of earnings they would have received had they remained in employment. As employees lost the legal right to continue employment at 65, it was justifiable to impose a cap to ensure that the payment did not exceed the sum that the employee would have earned until this time.

Decision

Allowing an appeal from the tribunal finding, the EAT found that the object of the scheme was to compensate employees for loss of earnings they could legitimately expect to have received had their employment continued. It was legitimate for the scheme to incorporate a cap with the aim of preventing excess compensation and the cap used in this scheme was a proportionate means of achieving that aim.  

In reaching its conclusion, the EAT relied on the obiter observations of Patrick Elias in the EAT in Loxley v BAE Systems Land Systems (Munitions and Ordnance) Ltd UKEAT/0156/08. Loxley concerned a redundancy scheme which calculated payments based on age and length of service, but which applied a taper downwards once an employee was nearing retirement age. Whilst the case was remitted to fresh tribunal, the EAT did state obiter that such tapering provisions, which were designed to prevent a windfall, are likely to be justifiable. 

Where does this leave us?

We now have EAT authority that the use of a cap or tapering provisions in redundancy schemes, where the aim of the cap or tapering provision is to prevent the employee receiving a windfall, may be justified.

However, these cases have, of course, been decided on the basis of a default retirement age (DRA) of 65. If the DRA is removed (and the government has pledged do so) it seems unlikely that the same analysis can stand. Employees will have a legal right to continue working beyond 65 and so the argument used in these cases (that the schemes should compensate for loss of earnings that would have been received whilst the employees remained in employment and not beyond) could presumably no longer be effective in supporting a cap or tapering provisions. 

The judgment is available here.

Kraft Foods UK Limited -v- Hastie [2010] UKEAT 0024_10_0607