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Default retirement age: some advice for employers

11 February 2011

Last month's announcement that the government intended to push ahead and scrap the default retirement age (DRA) drew a lot of negative comment from business organisations. CBI director-general John Cridland said the guidance for employers on working without the DRA was "too little too late", and that the impact on employers, especially smaller ones, will be considerable. Mr Cridland believes there is not enough clarity for employers on how to deal with difficult questions, particularly on employee performance, which is acute in the physically demanding sectors.

EEF director of policy, Steve Radley, said the government had missed an opportunity to recognise business concerns by pressing ahead with this change. By doing so in such a short period of time (notices of intended retirement date cannot be issued from 6 April 2011 onwards) it is giving employers little or no chance to prepare for the practical impact on their businesses of such an important change to employment legislation. Like Mr Cridland, he believes it is bound to create considerable legal problems and uncertainty for companies, and it is essential that employers are provided with sufficient guidance.

For this week's newsletter, I have invited David Regan (pictured below), a solicitor in the Employment Team at Mundays Solicitors to summarise the implications for employers of the abolition of the DRA, which comes into effect from 1 October 2011. Mr Regan suggests the following alternatives to the DRA:

Speak to the employee ‘off the record’ - Whilst this option is tempting, trying to speak with an employee ‘off the record’ is fraught with difficulty. In brief, simply saying "this conversation is ‘off the record’, or ‘without prejudice’ " does not mean that the employee cannot use the conversation against the employer. Therefore an employee could argue that these discussions are an attempt to force them out on the grounds of their age, and consequently sue for age discrimination.

Speak to the employee ‘on the record’ - The best time to do this is during annual appraisals, or at regular meetings.  Indeed, it may make sense for employers to discuss future plans with all employees at appraisal time, as this will give the employer a better idea of who is looking for advancement, who is happy within their role, who is considering retiring, and plan accordingly.

Keep a close eye on performance - Many employers are concerned that the change in law means that they will be stuck with staff members who cannot perform and who cannot be retired.  This is not the case.  In fact, under the new law, employers will have to keep a closer eye on who is performing well, and manage all employees’ performance equally, regardless of age or length of service.

Set a corporate ‘normal retiring age’ - Contrary to popular belief, employers will still be able to set a ‘normal retiring age’ for employees.  Although this will be age discrimination, this will be justifiable if the decision can be shown to be a proportionate means of achieving a legitimate aim.

But, of course, there are difficulties, as Mr Regan explains:

Succession planning - The most obvious difficulty for employers will be that there is no longer a ready-made timetable for retirement, meaning the path to senior positions could be blocked.  Employers may also feel unable to ask when an employee is intending to retire, leading to ‘shock’ retirements that leave the employer without a proven successor.

Employee Relations - Employers may also find it difficult to start discussions about retirement with employees as detailed above.  Even if they do, many employees may not take kindly to the idea that they should retire if they are not ready to do so.  In addition, under the ‘old’ law, employees have often been allowed to continue to retirement with managers overlooking lapses in judgment or incremental changes in performance which can be attributed to an employee’s age.  Moving forward, employers will be faced with the unpleasant task of performance managing longstanding, cherished employees if they are not up to task rather than allowing them to continue with the knowledge that retirement is just around the corner. 

What is a ‘legitimate aim’? - Cases under the ‘old law’ have found legitimate aims to be workforce planning, enabling recruitment and retention of younger employees, avoiding adverse impact on pensions and benefits, ensuring continued competence, and having an age balanced workforce ensuring job opportunities amongst the generations.  However, employers will need to be careful when implementing a normal retirement age and will need to show that they have balanced the employee’s rights and dignity against the needs of the business.

Flexible Working - In practice some employers may be happy to allow an employee to continue working as long as they choose, and many employees will most likely want to at least reduce their hours, if not finish working completely, as they age.  It is important to note that the abolition of the default retirement age has no effect upon the flexible working law which is currently in place, and employers will not be under a duty to allow older employees to work reduced hours unless they are eligible for flexible working in the usual way. 

Performance Management - In addition to the employee relations issues highlighted above, managers must ensure that performance management processes are implemented fairly across the entire range of employees in order to avoid any accusations of age bias, or trying to force out the older members of staff.  In addition, managers will need to watch for age related disabilities and, if any disability is found, will need to consider whether or not any reasonable adjustments may need to be made in relation to the employee and their employment.

Mr Regan points out that there are two exceptions to the abolition of the default retirement age: it does not affect occupational pension schemes and the setting of a 'normal retirement age' for the purposes of occupational pension schemes. Moreover, employers may withdraw benefits for employees at or over the age of 65 (with the age at which withdrawal will be legal rising in accordance with the state pension age). This exemption deals with a key concern of employers, namely that the rising costs of benefits and insurance for employees over the state pension age could make the provision of these benefits prohibitively expensive.

The abolition of the default retirement age has the potential to have a large impact on businesses, as staff may choose to remain in their position longer, hindering succession planning, and employers and managers will be forced in many cases to invoke disciplinary procedures to manage the performance of longstanding employees, with a subsequent negative effect on morale.  However, where there is clear ongoing dialogue between managers and staff, and all parties are open to sensible communication, there is no reason why employees continuing to work past the current default retirement age should prove to be a problem. Employers are still free to choose to set a retiring age for their business, provided that they are able to justify this.

I am grateful to David Regan for providing this timely advice. If you would like to learn more about his firm's services for employers, click here.

SMES – get exporting!

Last week, the government published a strategy document setting out how trade and investment can drive the UK’s economic recovery. Rebalancing and rebuilding the economy is clearly going to take some time; however, we have to start somewhere and Vince Cable's Trade and Investment White Paper sets out a series of practical first steps, with particular emphasis being placed on supporting small and medium sized enterprises (SMEs) to expand their operations and pursue export markets for their products.

The Forum of Private Business, which has lobbied successive governments hard on these issues, believes the measures outlined in the White Paper show that, at least, the coalition is serious about helping more SMEs to trade internationally. The Forum says many SMEs would like to explore overseas markets but are deterred from doing so by a lack of local knowledge, language barriers and difficulties in accessing reliable and affordable information.

In order to assist companies - and particularly smaller companies - to concentrate more on exports, the White Paper lists four new Export Credit Guarantees Department (ECGD) initiatives designed to provide more support. These include the setting up of a Bond Support Scheme, to help exporters raise tender and contract bonds by sharing risks with banks that issue bonds or counter-indemnities in respect of export contracts. The ECGD will extend its existing short term credit insurance product to cover a broader range of exports, and will launch an Export Working Capital Scheme, to facilitate exporters’ access to working capital finance for specific export contracts by sharing risks with the banks on loans above £1m.

A Foreign Exchange Credit Support Scheme is to be developed to facilitate exporters’ management of their exposure to foreign exchange rate movements, where exporters have taken out another ECGD product, by sharing risks with banks.

In addition, the Department for Business will set up an Export Enterprise Finance Guarantee Scheme to offer export finance for contracts under £1m to SMEs.

The extended insurance will be available directly from ECGD in March. The Bond Support Scheme will be available from participating banks and is expected to be available in March. The other two ECGD measures are expected to be made available from participating banks in April.

Les Hunt


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