Characterising ex-employees as “good” or “bad” leavers under bonus schemes is common in the commercial sector. Traditionally, employees who retire are classified as “good leavers” giving them access to generous financial payments. The difficulty for organisations is that rewarding retirees is, on its face, age discrimination requiring justification.
How do organisations distinguish between “good” and “bad” leavers?
Bonus schemes are fundamentally concerned with reward. So whilst companies use a range of different leaver provisions, in general, they are careful to distinguish between three scenarios:
- Terminations which benefit the company and so the ex-employee is a “good leaver”. An obvious example in this category is dismissal by reason of redundancy.
- Terminations which are detrimental to the company so the ex-employee is a “bad leaver”. Employees who resign and so there is a risk that they may start work for a competitor fall into this category. Similarly, employees who are dismissed for misconduct, negligence or incompetence are “bad leavers” because their actions have adversely affected the company, and without sanction might encourage poor conduct/performance from the remaining employees.
- Terminations where there is no harm to the company and it would be unattractive to penalise the ex-employee. For example, individuals who leave involuntarily due to long-term ill-health would usually be classed as “good leavers”.
Where does retirement fit in?
The historic rationale for deeming retirees as “good leavers” was the widespread use of compulsory retirement ages. As termination was imposed by the employer in those circumstances and would often be the conclusion to a long career, individuals were classed as “good leavers”.
After Seldon v Clarkson, Wright and Jakes  EqLR 579 compulsory retirement is no-longer the norm. That aside, if an organisation does still impose a compulsory retirement age, that practice would need to be capable of objective justification as otherwise the consequent leaver provisions would amount to unlawful direct age discrimination.
The lawfulness of compulsory retirement ages is outside the scope of this article. Here, we consider the more likely scenario which is that retirement is optional but retirees are still classed as “good leavers”. This arrangement would be prima facie indirect age discrimination as in practice most employees will not be a financial position to retire until the later stages of their working life.
The first stage to an objective justification defence is the identification of a legitimate aim that the employer necessarily needs to pursue (Homer v Chief Constable of West Yorkshire Police  EqLR 594). The most obvious candidate for a legitimate aim is the need to encourage loyalty and disincentive competitive activities. No doubt an employer would argue that as the retiree is choosing to end his career with his current employer rather than joining a competitor, the “good” leaver provisions reward and encourage loyalty. The difficulty with this argument is at the proportionality stage of the justification test. There is plainly a less discriminatory means of achieving that aim which is to class as “good leavers” all employees who resign so as to become economically inactive or to work for a non-competing business. This solution avoids considerations of age completely and as such is probably fatal to an employer’s objective justification defence. Accordingly, our view is that if a business simply wishes to encourage loyalty, it should use this means of achieving its aim or risk a finding of indirect age discrimination.
An alternative legitimate aim is the need to create a collegiate atmosphere by encouraging employees to retire voluntarily at the end of their working lives rather than forcing employers to use performance management procedures (Seldon).
Our view is that some employers could objectively justify classifying retiring employees as “good leavers” on the grounds of collegiality provided that there was compelling evidence that there was an inconsistency between a collegiate atmosphere and performance management procedures. It would not be enough to rely on the stereotypical view that older employers should be managed less robustly. There is support for such an approach in Sharma v Lee t/a TMM  EqLR 635 which is a recent first instance decision. In that case, the ET accepted that the claimant had been pressurised into early retirement, but concluded that this was justified as the employer wished to avoid the indignity of disciplinary proceedings for poor performance.
The aim of collegiality has not been traditionally analysed in the context of commercial arrangements such as bonus schemes. However, it is probably the most attractive legitimate aim upon which to base the objective justification of leaver provisions which reward retiring employees. As all discrimination lawyers know, simply identifying a legitimate aim is never sufficient but we consider that with the right evidence, an objective justification defence could be made out on this basis.