Good to go? Leaver provisions and the abolition of the DRA

Most employers will be aware of the abolition of the default retirement age of 65 but may not have appreciated one of the consequences in a corporate context.

The DRA is being abolished with effect from 6 April 2011 (save in certain circumstances where notice of an intended retirement has been issued on or before 5 April 2011). This means that employers will have to show objective justification for dismissing employees at any age set for retirement (regardless of whether they decide to keep a fixed company retirement age or retire people on a case by case basis).

Where employees subscribe for shares in their employer company as part of an incentivisation, they are commonly subject to the requirement to offer their shares for sale on cessation of their employment for any reason.

The articles of association often also include so-called "good/bad leaver" provisions which provide for employees to offer their shares at a lower price if their employment terminates in circumstances where they are at fault (for example gross misconduct, fair dismissal, or voluntary resignation before a certain period has elapsed).

Conversely, a good leaver will usually be an employee whose employment terminates as a result of death, permanent incapacity or "retirement at normal retirement age" - indeed this is the wording used in the BVCA standard articles.

If an employer abolishes its company retirement age in light of the legislative change, this raises two issues.

Firstly, reference to "retirement" is arguably meaningless - it will usually take the form of a voluntary resignation by an employee.

Reference to a normal retirement age will also give rise to difficulties where there is no longer a company retirement age. The parties will be able to fall back on a common law definition of normal retirement age, however if there is no custom and practice with regard to the age at which employees in a particular role retire, this will be unlikely to assist. It could mean that an employee will never fall within the definition of good leaver, or conversely one might envisage an employee purporting to resign at 50 and claiming to be a good leaver.

One solution might be to refer to a good leaver as someone who voluntarily resigns at the age of 65 or over. This would give the employer some certainty if it is intended that the employee will only realise the full value of their shares if they remain in employment until that age, albeit that any age-related provision of this nature will inevitably give rise to a risk of an age discrimination claim. Alternatively the company could remove reference in the good leaver definition to cessation of employment at a certain age, and rely on the usual discretion for the board to decide that someone is a good leaver regardless of the circumstances of their departure.

Any company that has incentivised its employees through the issue of shares and has put in place good/bad leaver provisions would be advised to review their articles of association if they are planning to remove an existing company retirement age.