Good Leavers, Bad Leavers And Age Discrimination

Profession:Barlow Lyde & Gilbert

Article by Robert Hill and Nick Dent

Employee share schemes Frequently discriminate, either directly or indirectly, on the grounds of age. Here we consider the impact of the new age Discrimination legislation on good leaver/bad leaver clauses and alternative approaches employers could adopt.

Share schemes usually incorporate the concept of the 'good leaver' and the 'bad leaver'. Good leavers may be allowed to retain unexercised options and exercise them immediately. The concept also extends to owner/managed companies where the articles of association or shareholders agreement may provide that a good leaver is given a more favourable price for the transfer of shares compared with a bad leaver.

There must be clear definition of the criteria of a good leaver and frequently this will include an employee or director who "retires at or after normal retirement age". The individual who retires before normal retirement age is a bad leaver and treated less favourably. On the face of it, this looks like discrimination on the grounds of age. But does it fall foul of the new legislation? Age discrimination occurs if:

(a) a person treats another person less favourably than he would treat other persons on the grounds of age. For example, only employees aged 40 or more are entitled to share options. This is direct discrimination; or

(b) a person applies a provision, criterion or practice which applies to persons of different ages, but which puts persons of a particular age at a disadvantage. For example, employees must have 10 years' service in order to qualify for share options. Younger employees are unlikely to have the necessary service to qualify for the share options. This is indirect discrimination.

The legislation protects both employees and directors.

A default normal retirement age of 65 has also been introduced. An earlier normal retirement age can still be used, but only if it can be objectively justified, which will be difficult to do in most cases.

There are two key defences for current purposes:

1. Objective justification

This is where the treatment or provision/criterion/practice is a proportionate means of achieving a legitimate aim. Unlike other forms of discrimination, it is possible objectively to justify both indirect and_direct discrimination.

The burden of proof is on the employer. The ACAS guidance on the regulations states that mere assertion will not be sufficient objectively to justify an otherwise discriminatory practice and...

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