Appeal No. UKEAT/0156/08/RN

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
                                                                                                    On 23 July 2008
	   Judgment handed down on 29 July 2008

Before
THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)
MR D J JENKINS OBE
MR S YEBOAH

MR WILLIAM J LOXLEY	APPELLANT

BAE SYSTEMS LAND SYSTEMS (MUNITIONS & ORDNANCE) LTD           RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MRS TRACEY MOSS
(Representative):
Citizens Advice Bureau Specialist Support Unit
The Development Centre
Coxwell Avenue
Wolverhampton Science Park
WOLVERHAMPTON
WV10 9RT	
For the Respondent	MR JAMES LADDIE
(of Counsel)
Instructed by:
Messrs Burges Salmon LLP
Solicitors
Narrow Quay House
Narrow Quay
BRISTOL
BS1 4AH	

SUMMARY

AGE DISCRIMINATION

The claimant was excluded by the terms of a voluntary redundancy scheme because he had reached the age of 60.  There were tapering provisions in place between the ages of 57-60.  When the scheme was originally introduced it was compulsory to retire at 60, but later the retirement age was changed to 65.  The scheme was not amended in the light of that.  The claimant submitted that the scheme directly discriminated against him on grounds of age discrimination.  The ET rejected his claim.
The EAT upheld the appeal and held that there was no adequate analysis of the aims of the scheme nor the issue of proportionality.  The case was remitted to a fresh tribunal. 

THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1.	The claimant submitted that the respondent’s contractual redundancy pay scheme (known as the chapter 11 scheme) was directly discriminatory on grounds of age pursuant to regulation 3(1)(a) of the Employment  Equality (Age) Regulations 2006. It was admitted that the scheme did indeed discriminate in that way, and the only issue before the Tribunal was whether the discrimination against the claimant was justified. 

2.	The contractual scheme in question had been in existence for a long time. It was transferred to the respondent in 1985 following a transfer of an undertaking from the Royal Ordinance, then part of the Ministry of Defence, to the respondent company. The essential details of the scheme are as follows: 
•	For each of the first five years of pensionable service – two weeks pay;
•	For each of the next five years of pensionable service – three weeks pay;
•	For each year of pensionable service after the first ten years – four weeks pay;
•	For each year after attaining age 40 – two weeks pay,
Subject to a maximum of two years’ final pensionable pay.

3.	Benefits under the scheme were only paid to those under sixty at the date of redundancy. 
There was a tapering provision which applied to those who had reached the age of fifty-seven. The payments which would otherwise have been made to those persons were reduced by 1/36th for every month of service over the age of fifty-seven. Accordingly, those over sixty received no enhanced payment under the scheme, and were given only their statutory redundancy payment.

4.  In addition to the redundancy payments, the redundancy package also sometimes consisted of a payment in lieu of notice. This was 26 weeks for those who fell within the terms of the redundancy scheme, but only the statutory notice to those over sixty who were outside it.  However, the total redundancy package for those over sixty was at least £13,842.  The pay in lieu was not automatic; staff could be required to work their notice period.  

5.	The rationale for excluding those over the age of sixty was linked to the fact that they were entitled to take their benefits under the company’s pension scheme at the age of sixty. Until sometime around 1996, staff were required to retire at sixty on a full pension.  Plainly it would have provided employees close to retirement with a windfall if they had been entitled to take the full redundancy payment.  They would have been better off being made redundant than if they had simply worked until retirement.  Hence the original justification for the tapering provisions from the age of fifty-seven.

6.	In 1996 the compulsory retirement age was increased to sixty-five, although until 1 April 2006 employees could still take their pension from the age of sixty without penalty to their accrued benefits.  We observe that one effect of this change was that thereafter it could not necessarily be said that employees denied enhanced redundancy payments after the age of sixty were justifiably being prevented from obtaining a windfall.  That might have been the case for some employees, but others may have wanted to remain until sixty-five and any redundancy payment would not necessarily have exceeded what they would have received had they remained in employment.

7.	A further relevant change occurred from April 2006.  There was a modification to the operation of the pension scheme itself.  In order to alleviate financial pressure on the pension fund, it was agreed that pension age would increase by a series of increments over a three year period so that the age at which pensions could be claimed would be raised to sixty-five. However, any employee could still take his or her pension in respect of service prior to 1 April 2006 on an unreduced basis from the age of sixty. It was only in respect of service after that date that there was a 4 per cent reduction per annum applied to the pension available.
 
8.	This caused a reconsideration of the Chapter 11 terms.  It was thought that the tapering provisions, excluding those over sixty altogether, might need amending. There was extensive negotiation between the unions and the employers in an open and transparent manner, in which various possible agreements were costed and considered. 

9.	The modification ultimately agreed between the employers and the unions in December 2006 was this: any employee over fifty-seven who was made redundant would have the choice of receiving either the tapered payment or the benefits conferred by a discretionary scheme offered to other BAE staff.  This alternative scheme provided for a payment of three weeks’ pay for each year of service up to a maximum of seventy-eight weeks’ final salary. The agreement spelt out in terms that it would not apply to the redundancies effected in accordance with the rationalisation process announced in November 2006.

10.	The claimant was one of those who volunteered for redundancy as part of that process under what was termed the company’s “mutually agreed release” provisions (MAR).  He was aged sixty-one and therefore had no entitlement under the chapter 11 scheme.  Accordingly, he received only the statutory redundancy payment, together with his notice pay. Had he been fifty-seven instead of sixty-one, he would have received two years’ contractual redundancy pay based on his pensionable salary, and six months’ pay in lieu of notice.

11.	The claimant raised a grievance with the company concerning the calculation of his MAR terms, alleging that they discriminated against him on age grounds. If the relevant age for the tapering provisions had increased in the same way as the pension age had been, then he would have received a total payment of over £69,000.00.

12.	The effect of the change to the pension rules was, in the claimant’s case, extremely small.  It resulted in a reduction of £8.65 in his annual pension and almost £26.00 in his lump sum payment.  

13.	 He presented his claim to the Employment Tribunal for direct age discrimination. We are told that there are many other claims of a similar nature that have been stayed pending the ultimate determination of this case.

14.	It may be that the claimant’s real grievance was that he was not afforded the benefits of the 2006 Agreement.  However, whatever the fairness or otherwise of that (and the unions did agree to it) that is not and could not be the basis of his age discrimination case.  He must show that he was discriminated against by reference to younger workers made redundant under the same set of rules.  The comparison with how other employees may be treated in the future does not provide any basis for an age discrimination claim.  For redundancies covered by the new Agreement employees his age will also benefit.   The only potential relevance of the Agreement is that it provides an example of how the employer’s objectives may have been achieved by less discriminatory means.

The legislation.
15.	We summarise the basic principles applicable in this case by drawing upon the material set out in the judgment of the EAT in MacCulloch v ICI plc EAT/0119/08,                                      which, as we understand it, both parties accept is an accurate summary of the relevant principles.

16.	The material domestic provisions relating to age discrimination are found in the 2006 Regulations.  These are designed to give effect to the EU framework Directive on equal treatment in occupation and employment (Council Directive No. 2000/78/EEC).  This renders unlawful, amongst other matters, age discrimination with respect to pay.  Regulation 3 provides as follows:	 
(1)		For the purposes of these Regulations, a person (“A”) discriminates against another person (“B”) if -
(a)	on grounds of B’s age, A treats B less favourably than he treats or would treat other persons, or
(b)	A applies to B a provision, criterion or practice which he applies or would apply equally to persons not of the same age group as B, but – 
(i)	which puts or would put persons of the same age group as B at a particular disadvantage when compared with other persons, and
(ii)	which puts B at that disadvantage,
and A cannot show the treatment or, as the case may be, provision, criterion or practice to be a proportionate means of achieving a legitimate aim.
(2) 		A comparison of B’s case with that of another person under paragraph (1) must be such that the relevant circumstances in the one case are the same, or not materially different, in the other.
(3)		In this regulation –
(a) “age group” means a group of persons defined by reference to age, whether by reference to a particular age or a range of ages; and
(b) the reference in paragraph (1)(a) to B’s age includes B’s apparent age.”

17.	The unusual feature of age discrimination when compared with discrimination on other grounds is that it provides that the employer can seek to justify direct age discrimination.  It is not just a provision, criterion or practice giving rise to potential indirect discrimination which can be justified, but treatment which specifically discriminates on grounds of age.  This reflects the provision in Article 6 of the Directive which provides that: 
“Member States may provide that differences of treatment on grounds of age shall not constitute discrimination, if, within the context of national law, they are objectively and reasonably justified by a legitimate aim, including legitimate employment policy, labour market and vocational training objectives, and if the means of achieving that aim are appropriate and necessary.”

18.	It is to be noted that the justification defence in this Article is cast in slightly different terms from the definition of justification with respect to indirect discrimination found in Article 2(2)(b).  Article 6 requires the treatment to be “objectively and reasonably” justified, whereas the formula adopted for indirect discrimination requires simply that it is “objectively justified”.

19.	  The parties’ attention was drawn by the Employment Tribunal to the fact that one of the issues currently before the European Court of Justice in the reference made in the Heyday case (R v Secretary of State for Business Enterprise and Regulatory Reform (ex-parte Incorporated Trustees of the National Council on Ageing) [2007] EWCA 309) is whether the test for justification is different for direct and indirect discrimination. At that stage the claimant said that he was only seeking to argue the case on the grounds that the test was no less rigorous for age than for other forms of discrimination.  

20.	Before us, Mrs Moss, a CAB advisor who represented the claimant with commendable skill, floated the possibility that the test should be more rigorous for direct age discrimination but did not develop any argument to that effect.  Our provisional view is that the addition of the words “and reasonable” adds nothing to the test. As Mr Laddie points out, it is difficult to conceive of a case where treatment can be objectively justified and yet be unreasonable.  

21.	Furthermore, whilst the European jurisprudence has emphasised that protection from age discrimination is one of the fundamental rights in EU jurisprudence (see Mangold v Helm [2006] IRLR 143) there has been no suggestion in any of the ECJ cases on age discrimination, nor indeed the opinions of the Advocates General, that there is any different principle to be applied when considering justification in the context of direct age discrimination.  However, we await the decision of the ECJ for a definitive ruling.

22.	On the assumption that the traditional test of justification applies, the following principles are, we understand, not in dispute:
(1)	The burden of proof is on the respondent to establish justification once a prima facie case of discrimination is established.  This is in accordance with general principles and is reflected in regulation 37.
(2)	The classic test was set out in Bilka-Kaufhas GmbH v Weber Von Hartz (Case 170/84) [1984] IRLR 317 in the context of indirect sex discrimination. The ECJ said that the court or tribunal must be satisfied that the measures must “correspond to a real need … are appropriate with a view to achieving the objectives pursued and are necessary to that end” (para 36).  This involves the application of the proportionality principle, which is the language used in regulation 3 itself.  It has subsequently been emphasised that the reference to “necessary” means “reasonably necessary”: see Rainey v Greater Glasgow Health Board (HL) [1987] ICR 129 per Lord Keith of Kinkel at pp 142-143.    
(3) The principle of proportionality requires an objective balance to be struck between the discriminatory effect of the measure and the needs of the undertaking.  The more serious the disparate adverse impact, the more cogent must be the justification for it: Hardys & Hansons plc v Lax [2005] IRLR 726 per Pill LJ at paras 19-34, Thomas LJ at 54-55 and Gage LJ at 60.
(4) It is for the employment tribunal to weigh the reasonable needs of the undertaking against the discriminatory effect of the employer’s measure and to make its own assessment of whether the former outweigh the latter. There is no ‘range of reasonable response’ test in this context: Hardys & Hansons plc v Lax per Pill LJ para.31. 
(5) In analysing the issue of justification, the Tribunal must carry out a critical examination and reflect that analysis in its reasoning: Hardys and Hansons per Pill LJ at para.33.

The Tribunal’s decision.
23.	The Tribunal set out the material facts, setting out in greater detail what we have summarised above.  It emphasised that the agreement reached in December 2006 had been agreed with the trade unions following very full consultation. The Tribunal also rejected a contention by the claimant that he had been subject to some sort of duress when signing the agreement to the terms on offer. In other words, the discrimination about which he complained resulted, as the Tribunal made plain, from the very offer that he himself had accepted. In view of this the Tribunal observed (para 12):
“… He decided to go and there is therefore no detriment because the Claimant received precisely what he agreed to by signing the agreement. It cannot be an act of duress when the Claimant himself said that originally he had wanted to work until 65.”

24.	The Tribunal first considered whether there was a legitimate aim. They held in that respect that the fact that the unions had entered into the agreement went some way to support the contention that the agreement and the scheme adopted in pursuance of it was a legitimate aim. They then added this (para 14):
“Indeed, there appear to be little challenge by the Claimant of the Respondent’s assertion that there was a legitimate aim because the principle of tapering redundancy payments prevents older employees from enjoying a windfall from a redundancy in circumstances where they are shortly to retire and the evidence supports the Respondent’s contentions that the Respondent’s approach had a legitimate aim.”

25.	The Tribunal then looked at the issue of proportionality. They summarised their conclusion on this as follows (para 15):
“As to proportionality the Respondents were at pains to work a number of examples in the negotiations which they had with the trade unions to see how each age group would be affected. The scheme which finally emerged struck a careful balance between employee and employer since some of the other models over-compensated employees with a resulting excessive financial burden to the Respondent. Indeed, the Respondent interestingly submits in paragraph 30 of the document entitled “Respondent’s opening note”, “It is suggested that a scheme proposed by the Claimant if implemented would have resulted in him receiving more for the termination of employment than he had lost. Accordingly the Claimant’s argument does not just fail to satisfy the Respondent’s legitimate aim; it defeats it.”

26.	It is to be noted that the “loss” referred to was not the loss resulting from the termination of the employment itself prior to the age of sixty-five, but simply the very small pension loss resulting from the modification of the pension rules.

27.	In the light of these findings they concluded that there was no age discrimination. 

The grounds of appeal.
28.	Mrs Moss submits that the fundamental approach of the Tribunal was entirely misconceived. They have analysed the whole case on the basis that the exclusion of the claimant from the pension scheme would have been justified but for the modest change in his pension entitlement.  On that basis the Tribunal assessed the windfall in terms of the extent to which any additional redundancy payment would exceed that small loss.  

29.	In substance, the claimant’s real complaint is not the change in the pension provision, which was admittedly minimal, but rather the failure to have regard to the fact that the effect of the change in 1996 was that employees were entitled to remain at work until sixty-five (and any earlier dismissal would now have to be justified under the Regulations).  The Tribunal erred in saying that his loss is simply the detriment he suffers as a result of the change in the pension rules. In fact it is the money he would have earned had he worked up until retirement age, together with the fact that his pension will now be smaller than it would have been had he worked until that age.

30.	Mrs Moss submits that in the circumstances it is quite erroneous for the Tribunal to find that the claimant would have benefited from a windfall had he received the redundancy entitlement. The Tribunal made no attempt at all to identify what that windfall would have been, no doubt because they simply focused on the minimal pension reduction. 

31.	More specifically, the claimant contended that the Tribunal had erred both in its identification of the legitimate aim, and in the way in which it approached the issue of proportionality. As to the former, she submits that there is no business need to prevent an employee gaining a windfall, and further argued that it could not be legitimate to treat as an aim of the scheme an attempt to secure an equitable distribution of funds amongst the workforce. 

32.  Mr Laddie conceded that it was not strictly accurate to say that this claimant would have received a windfall if he were to be given a redundancy payment.  However, he submitted that it was plainly a legitimate aim for the employers to distribute the necessarily limited financial pot available to meet redundancies so as to ensure an equitable distribution of remuneration amongst the work force.  In doing that, the employers were fully entitled to have regard to the fact that employees over the age of sixty would be entitled to take an immediate pension payment. The modification of the agreement made in 2006 was designed to deal with the adverse effect on those employees resulting from the change in the pension rules. However, he submits that all parties, including the trade unions, always accepted that the scheme should exclude those who would in any event receive compensation following redundancy from the pension fund.   The Tribunal did not in terms refer to this reason for the exclusion, but that was because everyone understood that this was the position.  Their reference to “windfall” was intended to be a loose shorthand to include this reason for the exclusion also.

33.	Mrs Moss also challenges the Tribunal’s approach to the issue of proportionality. She submits in particular that there is simply no evidence of the careful balancing assessment that is needed before a tribunal can properly conclude that the principle of proportionality is satisfied. 

34.	It is clear from reading paragraph 15 of the judgment that the Tribunal simply did not engage with the principal argument advanced by the claimant. They have provided some explanation why the new agreement was not extended to this claimant and others like him to deal with their pension losses. However, they have not grappled with the question whether it was proportionate to exclude the claimant from any redundancy payment altogether because of his entitlement to a pension. For example, nowhere in the decision is there any assessment of what his pension would be, or how that related to the redundancy payments.

35.	Mr Laddie accepts that the reasoning on proportionality is somewhat sparse.  He also accepts that in paragraph 15 the Tribunal only had in mind the minor pension loss.  He contends that nonetheless there is enough to sustain this decision. Everyone, including the Tribunal, understood that the reason for the claimant’s exclusion was because he had access to pension payments and therefore did not need to be cushioned from the effects of dismissal in the way in which other workers, not able to take a pension, needed to be.   He emphasised that the December 2006 agreement had been reached with the trade unions and that in the circumstances the Tribunal was entitled to find that the justification was established.

Conclusions.
36.	We are persuaded that the Tribunal’s analysis here is defective. In fairness to the Tribunal, we suspect the arguments addressed to them were not those which were identified before us. They seem to have analysed the whole issue on the premise that the claimant’s case was that the age discrimination resulted solely from the change in the pension entitlement.   

37.	We reject the claimant’s submission that preventing a windfall cannot be a legitimate feature of the scheme.  One of the purposes of a redundancy scheme of this nature is to cushion workers from the effects of losing their income. This is not required, or at least not to the same extent, where pensions are paid.  Indeed, if the position still were that retirement automatically took place at the age of sixty then an employer would in our view manifestly be justified in having a rule which prevented the employee being better off as a consequence of receiving redundancy pay than he would have been if working until retirement age.  That is what the tapering provisions originally achieved until the extension of retirement age in 1996.  This is a legitimate means of securing the aims of the scheme. Similarly, it is legitimate to seek to ensure that the aims are achieved in an equitable and fair way. Whether these are better described as aims or as proper means of achieving the aims is perhaps a matter of semantics.
	
38.	However, we do not accept that the basis on which Mr Laddie sought to justify the scheme, namely that it is fair to exclude employees in receipt of a pension, can fairly be described as giving effect to the “windfall” principle.  Perhaps more importantly, it is not clear that this is how the Tribunal understood the case.

39.	We recognise that there are many employers who adopt redundancy schemes of this kind. We do not say for one moment that it may not be justified to exclude those who are entitled to immediate benefits from their pension fund from the scope of a redundancy fund. Moreover, in such circumstances tapering provisions of a kind adopted in this case will, we suspect, be very readily justified. They would be necessary to ensure equity as between those close to retirement and those in retirement receiving pensions. However, it is not in our view inevitably and in all cases justified for those entitled to an immediate receipt of a pension to be excluded from the redundancy scheme.  Ultimately, it must depend upon the nature of both schemes. 

40.	There can surely be no doubt that the fact that an employee is entitled to immediate pension benefits will always be a highly relevant factor which an employer can properly consider when determining what redundancy rights, if any, the employee ought to receive. No doubt in some, perhaps many, cases it will justify excluding such an employee from the redundancy scheme altogether 

41.	To answer that question the Tribunal had to ask whether the treatment of the claimant ‑ in this case his exclusion from the scheme - achieves a legitimate objective and is proportional to any disadvantage which he suffers. It may be that his pension entitlement, even if taken earlier than he would otherwise have wished, is far more valuable than any redundancy entitlement.  Neither we nor, it seems, the Tribunal are in a position to assess that in this case. They appear to have had a lot of financial information about the various benefits, but they have not analysed that information in their judgment.

42.	We should add that we fully recognise, as Mr Laddie has emphasised in his submissions, that the fact that an agreement is made with the trade unions is potentially a relevant consideration when determining whether treatment is proportionate.  The decision of the ECJ in the case of Paliacos de la Villa v Cortefiel Services SA [2007] IRLR 989 strongly supports that proposition.  The Court recognised that one of the considerations that could properly weigh in the assessment of whether compulsory retirement was justified was that the rules in question had been collectively agreed: see paragraph 53.  (Another factor, which in principle lends support to the justification argument in this case, was that the retirement occurred at the point when the employees were entitled to take a pension: see paragraph 73.)  Plainly the imprimatur of the trade union does not render an otherwise unlawful scheme lawful, but any tribunal will rightly attach some significance to the fact that the collective parties have agreed a scheme which they consider to be fair. 

43.	There is, however, always the risk that the parties will have been influenced, consciously or unconsciously, by traditional assumptions relating to age.  Hence the reason why any justification relied upon by the employer, even when the treatment under consideration is supported by the union, must be subject to critical appraisal.

Additional grounds.
44.	There were a few additional grounds which were advanced but which we reject.  First, it is submitted that the Tribunal erred in saying the claimant suffered no detriment. That is a reference to the Tribunal’s observations which we have set out above at paragraph 23. 

45.	In our judgment, there is nothing in this point.  It is plain that the Tribunal was not saying that there is no detriment in the sense that there was no discrimination which needed to be justified. They were looking at that issue in the context of the allegation that the claimant had suffered duress. Had the Tribunal concluded that because the claimant had agreed to leave early on these terms then there could be no age discrimination, we would entirely agree that this would have been unlawful.  A person cannot contract out of his discrimination rights. That is not what the Tribunal did. Had they done so, they would not have bothered to engage with the issue of justification at all.

46.	It was also alleged that the Tribunal erred in law in failing to separate out the two distinct elements of the redundancy package, namely the redundancy payment, which was tapered, and notice pay, which was not.  

47.	We reject that argument. It is true that the two elements were not separately considered, but it is also clear that nobody ever suggested that they should be.  Nor did the ET1 give any hint that the claimant considered that the two elements of the package might have to be treated differently.  In these circumstances it cannot possibly said to be an error of law for the Tribunal to fail to deal with the point on its own initiative.  It is for the parties to bring their arguments before the Tribunal, not for the Tribunal to go in search of them.
  
Disposal.
48.	In our judgment, this decision is flawed.  The matter will have to be heard again.  We have no doubt that in the circumstances it should be a fresh Tribunal.  Any arguments which seek to differentiate between the notice and redundancy elements in the redundancy package should be identified and argued before the Tribunal.
 
49.	We are told that there are a number of cases stayed in Manchester.  It would be sensible, we would have thought, for this case to be considered along with those, with a lead case being selected.  However, it is for the Employment Tribunal to determine the best way of conducting future proceedings.