Employment Update

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• Effecting redundancies - perils and pitfalls 
• Age discrimination - where are we now? 
• EMI options - an update 
• Are “no show” clauses enforceable? 
• Stop Press 

Effecting redundancies - perils and pitfalls by Rob Eldridge 

However successful your business, and even without the current economic downturn, the need to effect redundancies will often arise.  Whilst employers recognise that the implementation of a redundancy programme will give rise to liabilities for notice monies and redundancy pay, care must be taken to avoid exposure to additional costs in dealing with claims for unfair dismissal or discrimination.  Employers should, in particular, be alert to the following points:

Internal vacancies 

On arriving at a decision to make a position redundant it sometimes happens that the employee earmarked for redundancy will be invited to attend for interview and compete with other group employees for an internal vacancy.  However, any suitable alternative employment within the employer’s group must be offered to an employee whose job is being made redundant.  Accordingly, to invite that employee go through a competitive process for the alternative position with other non-redundant employees may render any dismissal unfair.  If the job is “suitable” then it must be offered to the potentially redundant employee; it is irrelevant that another employee might be a better candidate.

Selection criteria 

It is good practice to fix on selection criteria that are as objective as possible.  To this end attendance record is a proper criterion that is commonly adopted.  However if a sex discrimination claim is to be avoided it is important that absences due to pregnancy-related illness (and maternity leave itself, of course) are discounted for this purpose.  It may also be prudent to take the same action in relation to disability-related absence.

Enhanced redundancy pay 

Many employers operate an enhanced redundancy pay scheme.  Since the introduction of age discrimination legislation, it is the case that many of these schemes may be said to discriminate against younger employees.  There is a specific statutory exception in relation to schemes that closely mirror the statutory redundancy pay formula.  However, this exception is narrow and in a recent case a formula that provided for employees under the age of 40 to receive three weeks’ pay per year of service and four weeks’ for each year of service over the age of 40 was found to fall outside of the exception, and on the facts was found to be discriminatory.

Bumping 

An employer may consider “bumping” another employee on a redundancy.  That is to say, it may be possible where A’s position has become redundant to give A, B’s position and make B redundant.  Although such a step is not common, there may be circumstances where the employer should at least consider this option.  For example, it may be appropriate where a senior employee’s post is to disappear but the incumbent could take over a more junior role.  If the employer fails to even give the idea any consideration then it is possible that an employment tribunal could thereby find the dismissal unfair.

Any redundancy programme should give consideration to these points if exposure to liabilities for unfair dismissal and/or discrimination is to be minimised.

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Age discrimination - where are we now? by Lizzie Mead 

It has now been almost two years since the Employment (Equality) Age Regulations 2006 (the “Age Regulations”) came into force. After an initial rush of claims being lodged at the tribunal only a small proportion made it through to a full hearing and the past few months has brought the first flush of decisions from the tribunals. This article brings together a small selection of these decisions in order to provide some useful practice points for employers.

Recruitment

Earlier this year in the case of Rainbow v Milton Keynes Council a tribunal found that advertising for a teacher “in the first five years of their career” was indirect discrimination. In this case, the criterion potentially placed older workers at a disadvantage and did in fact place the claimant (age 61) at a disadvantage. The council argued that its decision was justified on the basis that someone more junior had been carrying out the role and they wished to recruit someone at a similar salary level but the tribunal ruled that cost alone was not sufficient basis to justify the discrimination in the circumstances. It stated that if cost is put forward as a justification for an otherwise discriminatory practice the evidence should clearly demonstrate that an employer was more or less compelled to take the discriminatory decision.

Similarly, in the case of McCoy v McGregor and Sons Limited, the Northern Ireland tribunal found McGregor guilty of direct discrimination for the advertisement it placed and its failure to appoint the claimant. McGregor had advertised for a sales representative with “youthful enthusiasm” and the claimant (age 58) applied for the role. The claimant was repeatedly asked whether he had the necessary ‘drive and enthusiasm’ to be successful yet McGregor appointed two younger applicants whose drive and enthusiasm had not been questioned. The tribunal concluded that the claimant had been directly discriminated against on grounds of age.

Provision of benefits

Employers can take comfort from the decision in Swann v GHL Insurance services UK Limited that provision of an age related flexible benefits package is not necessarily discriminatory. GHL provided a fund to each employee allowing them a choice of benefits from an offering including dental insurance, gym membership, travel insurance and private medical insurance (“PMI”). Premiums under the PMI scheme were calculated by reference to age, gender tables and an individual’s claims history. In reality this meant that PMI premiums tended to be more expensive for older employees. The tribunal concluded that as the calculation of the fund was age neutral (i.e. a percentage of salary) and there was no obligation on employees to purchase any specific element of the package, there was no discrimination. Helpfully, the tribunal went on to state that, even if the relevant act was the age related element of the PMI package, the provision of the flexible benefits package was a proportionate way to achieve a legitimate aim and any discrimination would be justified.

Appraisals

In J McGee v Wescot Credit Services Limited and others the tribunal concluded that Mr McGee (age 62) was subjected to harassment after his age was raised by his manager at his performance review meeting when it had no relevance. The claimant’s line manager had often made comments to him about his age and the level of salary including “tell me how I can justify your wage” and noted in a performance review that “Ambition is not a motivation for Joe (due to age)’’.

Useful tips

• Don’t use maximum or minimum years of experience in advertisements.
  
  
• Be aware that age tainted language in advertisements or during interviews may result in inferences being drawn that age has been taken into account.
  
  
• Be aware that it will be very difficult to use cost alone to justify discriminatory treatment.
  
  
• Consider a survey of employees when reviewing benefit schemes as it provides useful evidence to support justification.
  
  
• Train managers to recruit and promote on merit and avoid making discriminatory assumptions based on age during employment.

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EMI options - an update by David Dennison 

The Enterprise Management Incentive (EMI) is a tax advantaged share option plan introduced by the Government in 2000.  It allows companies which have gross assets of less than £30 million and are carrying on a qualifying trade in the UK to grant tax approved options.  Most activities will constitute a qualifying trade but there are exceptions relating to leasing, financial activities, property development, legal or accountancy services, receipt of royalties or licences, farming or market gardening, hotels, nursing or residential homes and woodlands. 

When introduced, employees could hold unexercised EMI options over shares with a market value (as at the date of grant) of up to £100,000.  Following this year’s Finance Act, this limit has now been increased to £120,000.

The tax advantages of EMI can be substantial.  In normal circumstances, on exercise of an unapproved option, an optionholder will be charged to income tax and national insurance contributions on the option gain i.e. the difference between the option exercise price and the market value of the shares at the date of exercise of the option.  This tax charge arises irrespective of whether the shares are sold or not.  In the case of EMI, there will generally be no income tax or national insurance charge on exercise but instead, on sale of the shares, there will be a capital gains tax charge.  Capital gains tax is taxed at the rate of 18% whereas the marginal income tax rate is currently 40% and where the optionholder is required to bear both employer’s and employee’s national insurance contributions, the overall tax rate for the optionholder can reach almost 49%.

This year’s Finance Act has, however, introduced a limitation on the availability of EMI.  With effect from 21 July 2008, only companies or groups with fewer than 250 full-time equivalent employees will be able to grant EMI options.  In addition, from the same date, companies whose trade consists to a substantial extent of shipbuilding or coal or steel production can no longer grant EMI options.

Where a company is not part of a group, it must have fewer than 250 employees at the date of grant of an EMI option.  Where there is a group structure, the parent company and all of its qualifying subsidiaries must together have fewer than 250 employees.  The legislation specifically provides that directors are to be included in calculating the number of employees but those on maternity or paternity leave and those who are students on vocational training are to be excluded.  Part-time employees are added on a just and reasonable proportional basis.  According to HMRC’s guidance, a full-time employee is someone whose standard working week, excluding lunch breaks and overtime, is at least 35 hours per week. 

HMRC’s guidance gives examples of how to calculate full-time equivalents.  For example, someone working 21 hours a week would count as 60% of a full-time employee and someone working one week on and one week off would count as 50%.

Options granted prior to 21 July 2008 are not affected by this new limit on employees.  However, the company will not be able to grant any more EMI options if it has more than 250 full-time equivalent employees.

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Are “no show” clauses enforceable? by Fiona Clark 

A “no-show” clause in an employment contract is a provision requiring an individual to make a specified payment to his prospective employer if he does not start employment in accordance with his contract.  No-show clauses are enforceable provided the clause does not constitute a penalty.

In the recent case of Tullett Prebon Group Limited v El-Hajjali, the Court considered a no-show clause in Mr Hajjali’s contract of employment with Tullett Prebon Group (“Tullett”).  Mr Hajjali had decided not to take up employment with Tullett, who then brought proceedings under the clause, which provided that Mr Hajjali would pay a lump sum (just under £300,000) in the event of breach.  Mr Hajjali resisted the claim on the basis that the clause was a penalty and therefore unenforceable. 

The Court rejected Mr Hajjali’s arguments and upheld the clause.  In making its decision, the Court gave some useful guidance on the issues to be considered when deciding whether or not such a clause is a penalty or a genuine pre-estimate of loss.  A number of these are explained below:

• A “no-show” clause will only be a penalty if its primary purpose is to deter the other party from breaching the contract.  This may be indicated if the amount of the payment is “extravagant and unconscionable” in relation to the greatest loss which could conceivably be proved arising from the breach of contract. 
  
  The parties have a “generous margin” when determining the amount of the payment.  It is not fatal to the enforceability of the clause that the actual damages are less than the stipulated payment.  An employer can set its estimate of loss on a worst case scenario. 
  
  It is for an employee to prove that the clause is a penalty. This will be difficult to do especially if the employer has specifically considered the figure to be paid and has some contemporaneous evidence of this.
  
  
• In this case, Tullett had two pieces of evidence supporting the stipulated sum.  First, a document (the “BIP”) detailing the profit it expected to make if Mr Hajjali joined (just over £2million).  Second, there had been discussions indicating that Tullett had set the figure lower than it might normally have done, specifically to avoid the clause being a penalty.
  
  Although the BIP did not contain an estimate of the loss Tullett would suffer if Mr Hajjali left, it was clearly relevant in determining whether the stipulated sum was “extravagant and unconscionable”.  In this case, since the BIP indicated that profit would be in excess of £2million, it was virtually impossible for Mr Hajjali to succeed in proving that the stipulated sum of £300,000 was extravagant.  Further, the Court decided that it was irrelevant that the BIP had not been agreed with Mr Hajjali. 
  
  
• Mr Hajjali argued that Tullett had failed to mitigate its loss properly.  This argument was rejected by the Court which held that Tullett’s search for a replacement in the UK (rather than throughout Europe) had been reasonable.  Further, it accepted that the challenge was in securing a replacement in an industry where long notice periods or fixed term contracts are common.  

Practical tips

• Produce contemporaneous evidence of the rationale for the stipulated sum.  Over-optimistic predictions will not be fatal provided they were genuinely made at the time.  A document like the BIP is helpful.
  
  
• Require employees to obtain legal advice on the scope and impact of the “no-show” clause and document this fact.
  
  
• In the event of breach, ensure that appropriate efforts have been made to mitigate loss and document these.
  
  
• Where the employee secures improvements to his contract terms, this should be documented.

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Stop Press

• With effect from 1 October 2008, the national minimum wage increased as follows:
  
  - workers aged 22 and over - £5.73 per hour;
  - workers aged 18-21 - £4.77 per hour; and
  - workers aged 16 and 17 £3.53 per hour
  
  
• Women whose expected week of childbirth begins on or after 5 October 2008 will have the right to the same terms and conditions during additional maternity leave as they currently enjoy during ordinary maternity leave.
  
  
• With effect from 27 October, agency workers on contracts of less than 3 months are entitled to statutory sick pay.
  
  
• On 1 November 2008, Tier 2 (skilled migrants with job offers) and Tier 5 (those travelling temporarily to the UK mainly for non-economic reasons) of the points-based immigration system came into force.

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Contacts

Rob Eldridge
rob.eldridge@blplaw.com

Lizze Mead
lizze.mead@blplaw.com

David Dennison
david.dennison@blplaw.com

Fiona Clark
fiona.clark@blplaw.com

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