The Danish Parliament's ("Folketinget") decision to take away the possibility of senior employees' automatic retirement at their 70th birthday creates completely new challenges for your company's senior employee policy. Therefore, it is important to evaluate your employment terms, performance requirements and pay policy as well as how you handle insufficient performance.
Just as legislators in other Western European countries, the Danish government and Folketinget have realised that the increasing life expectancy results in a need for people to retire from the labour market at an older age than is the case today. Over the last approximately 10 years this has caused a gradual increase in the age determined for obligatory retirement in individual employment contracts.
However, the latest amendment of December 2014 completely takes away the possibility for making agreements in advance in respect of a fixed retirement date in individual employment contracts. Once this amendment has entered into force on 1 January 2016, this automatic process, which has been the key to many companies' termination of employment of senior employees, will disappear. In other words: It will be necessary to rethink your senior employee policy.
Your primary areas of focus
Kromann Reumert recommends that your senior employee policy be rethought with special focus on the following three areas:
1) Focus on individual performance requirements
You should focus even more on whether the employee's performance is still equivalent to his/her pay package.
2) Evaluate your pay policy
You should consider how your future pay policy is to be drawn up and communicated. If pay development in employment contracts is based on levels of performance - rather than on, e.g., seniority - it should be communicated that this reflects the employee's actual market value and, thus, is not discriminatory on grounds of age, neither one way or the other.
3) Improve handling of poor performance
You should focus more on constructive dialogue with the senior employees concerning the areas in which he or she no longer performs on a level corresponding to that of the younger colleagues.
Does your company need a new senior employee policy?
Since the future will provide no automatic possibility for phasing out senior employees based on their age only, your company should consider which terms to offer your senior employees. Many companies have already adopted senior employee policies, however these have often been prepared with the existing rules as a basis, meaning that the employees' automatic retirement date has been agreed in advance.
Thus, it is now necessary to consider how to draw up your company's future senior employee policy and if there is any need to adjust your practice in respect of e.g. contracts, pay structure and handling of employees' insufficient performance.
In connection with the first set of rules regarding retirement age from 2004, a general prohibition against discrimination on grounds of age was adopted. Since then, case law has developed to the effect that violation of this prohibition may result in very considerable compensations to employees.
The prohibition covers not only discrimination directly based on an employee's age but also the so-called indirect discrimination. It can be difficult to delimit exactly if indirect discrimination on grounds of age has taken place. Therefore, your company should be aware of whether your senior employee policy - and your handling of senior employees in general - may resemble indirect discrimination which is contrary to the prohibition against discrimination on grounds of age.
More focus on individual performance requirements
Generally, each individual employer determines the performance requirements to be imposed on the company's employees. In companies handling knowledge-intensive tasks it seems natural that newly educated, young employees are given the not very demanding routine tasks while complex and demanding tasks are placed with more experienced employees.
For some employees, this will change over time, meaning that it will become more and and more difficult to adapt to developments in different areas - e.g. within IT. This means that it may be questioned whether the employee's performance is still equivalent to his/her pay package.
If your company maintains unchanged performance requirements - or even finds it necessary to implement specific requirements to e.g. supplementary training - you should be aware that this might constitute illegal indirect discrimination on grounds of age. In this connection, significance will be attached to e.g. whether the areas in which the senior employee is left behind are central to his/her position. For example, it will be significant whether the employee is a member of the IT staff or a receptionist.
Evaluate your company's pay policy
Many companies have applied a pay structure implying that the younger employees are paid less than the more experienced employees. Hence, a young employee will receive significant pay raises over a number of years until the time when the employee is considered to have "reached the top". Then, the pay is maintained on a level which is only subject to index adjustment during the following years.
In principle, such pay structure implies a latent risk that younger employees may succeed in claiming that this constitutes illegal discrimination against them on grounds of age. However, in most cases the pay structure will be legitimate as is reflects the development of the employee's actual market value as a result of increased experience. Especially in respect of knowledge-intensive positions, this point of view can explain significant pay raises over many years.
However, this pay structure requires the employees to retire at a time when they are still "on top" of their performance curve. With the removal of the fixed retirement date this structure is becoming increasingly problematic since the performance of some - not all, obviously - employees will start to decline due to age at some point in time.
An age-based pay development where pay is increased during the earlier years, then remains constant for some years and, finally, is reduced if the employee's performance declines due to age will probably reflect the actual development in market value for a large number of employees. However, such very formalised structure will undoubtedly be contrary to the prohibition against discrimination on grounds of age.
On the contrary, there will be no problem in performance-based pay reductions being agreed or notified individually when the employee no longer performs at the same level as at the time when the employee performed at his/her highest level.
It may be difficult to discuss this with a senior employee, who may even have been assessed as one of the company's best performing employees through many years. However, without the possibility for agreeing on a retirement date, performance meetings and attached pay adjustments may be expected to become a common - and eventually also necessary - element in the employee policy of most companies.
Improved handling of senior employees' poor performance
Poor performance among senior employees should be handled in the exact same way as when a young employee fails to produce a satisfactory performance. A significant part of the dismissal cases in which a dismissed, senior employee claims compensation due to discrimination on grounds of age originates from lacking communication from the management. The employee has not been properly informed of the performance requirements, that a satisfactory performance is not produced (any longer), and that failure to improve this may result in a notice of dismissal.
In some of the cases regarding discrimination on grounds of age dismissals have taken place as part of general reductions or restructuring. Normally during collective dismissals, an employer is awarded considerable discretion when assessing which specific employees to be dismissed. The legislative prohibition against discrimination on grounds of age has caused, however, that in cases regarding dismissal of senior employees a rather thorough investigation is carried out to determine if dismissal of a specific senior employee was made on fair grounds.
In these cases it will be detrimental to the interests of the employer if, prior to the notice of dismissal, there were no conversations with the senior employee regarding the areas in which the senior employee no longer has sufficient knowledge or no longer performs on a level corresponding to that of his/her colleagues.
Therefore, it is important that a manager makes his/her employees aware of their insufficient performance in a clear and adequate manner. Failure to do this constitutes a misguided consideration for the senior employee, who cannot completely follow the development in his/her position.
What can and should your company do now?
Kromann Reumert expects that the amendment to take away the possibility for agreeing on a retirement date in employment contracts during the next years will result in a considerable number of cases regarding discrimination on grounds of age. In these, the employers who specifically addressed the changed terms - and clearly communicated these to their employees - will be less exposed to law suits.
As a company you should therefore consider a number of changes to your senior employee policy and practice in general, including e.g.:
- Adjust employment letters in which the illegal term is deleted.
- Make this adjustment well in advance as the amendment will take effect from 1 January 2016. This may be done through a brief, one-side letter constituting an addendum to the employment contract.
- Evaluate your senior employee policies (if you have any) and your general practice in respect for senior employees.
- Make a strategy for how the changes to the organisation's senior employee policy is best communicated to your employees.
- Draw up a strategy for how to base employment contracts more on performance level.
- Be more proactive in respect of communicating performance requirements and any changes to the individual employee's performance - regardless of whether due to age or other circumstances.
Kromann Reumert's advice
Kromann Reumert assists in preparing addenda to employment contracts regarding cancellation of provision on automatic retirement date, sparring in connection with reassessment of performance requirements and pay policies, and preparation of senior employee policies etc.