From 1 October 2006, age discrimination in the UK in relation to employment generally became unlawful under the Employment Equality (Age) Regulations 2006 ("Regulations"). We look at how this might affect your share plans.
The new legislation will mean that it is unlawful for employers to treat their employees differently on the grounds of age. However, various forms of discrimination are permitted under the Regulations and, in addition, discrimination will not be unlawful if it can be "objectively justified" (although it is far from clear what can be objectively justified).
There are several areas where new regulations will affect share plans:
Some plans contain rules such that employees cannot participate in the plan until they have completed a certain period of service. This could be caught by the definition of indirect discrimination in the Regulations. However, limiting access to a share plan on the grounds of length of service will not be unlawful if it falls within the exemption in the Regulations for service conditions that aim to recognise experience, reward loyalty or encourage motivation. A qualifying service period of not more than five years is also exempt.
Discretionary executive plans may be discriminatory if the majority of executives participating under the plan are older employees. In these circumstances, the policy will need to be objectively justified. To satisfy this test, the discrimination must be for the pursuit of a legitimate aim (e.g. to motivate and retain), and proportionate (that participation in the plan contributes to the stated aims). Companies should record the decisions taken and why they can be objectively justified.
Finally, the ABI (Association of British Insurers) Guidelines no longer contain recommendation that there should be a minimum service period following grant of the award (most recently six months). Companies should therefore remove any restriction preventing awards being made to employees close to retirement and to ensure that they do not make awards on a discriminatory basis in practice.
Exercise provisions -the problem with good old leavers
Some plan rules provide more favourable treatment for employees who retire at or after a specified age. Typically, an employee who voluntarily ceases employment prior to the expiration of a three year period, will generally lose all entitlement to the shares. However, if that employee ceases employment before the third anniversary of the date of grant on the grounds of retirement at a specified retirement age, he will usually be able to retain some or all of his entitlement. Such provisions might easily be challenged under the Regulations.
Some commentators have suggested removing the retirement provisions altogether in these circumstances but this will not be viewed favourably by employees, especially as some of those employees may be senior executives who need to approve the change. Alternatively, the Board or Remuneration Committee might be given discretion to determine vesting on cessation of employment where vesting would not otherwise be allowed. However, if this power is used solely in favour of retiring employees, younger employees may have a claim for unlawful discrimination. Finally, the company may choose to retain the retirement provisions and seek to objectively justify its approach. This may be difficult. Merely rewarding an employee for long service is not likely to be sufficient.
The SAYE (Save As You Earn) and Share Incentive Plan ("SIP") legislation requires retiring employees to be treated favourably by being able to receive shares. The Regulations say that "no act done in order to comply with a requirement of any statutory provision" is unlawful. Therefore positive discrimination under SAYE and SIPs would seem to be lawful. However, there is still a risk of a discrimination claim if the age specified in the plan is more than the lowest age permitted by the new legislation.
Note that there is no equivalent mandatory requirement for CSOPs or other unapproved arrangements. In these circumstances, companies will need to ensure that the "objective justification" defence is satisfied.
Amending Plan rules
If amendments are required, companies should consult the rules of their share plans to see whether shareholder approval is required. HMRC (HM Revenue & Customs) approval may also be required for amendments to approved plans. Care will also need to be taken when addressing the affect of amendments to options granted prior to the date of the amendments.
Employers should review all share plans together with any grant or exercise policies to determine whether any age discrimination issues arise.
Any "objective justifications" must be recorded with a detailed explanation.
If amendments to the plan rules are necessary, consider the procedure/approvals and whether employee consent is required.