Indirectly discriminate LTIP rules?

by Michael Nadin – Employment law specialist

Background

Mr Fasano was employed by Reckitt Benckiser Health Ltd (RB Health). He was eligible to participate in a long term incentive plan (LTIP).  The case related to an award of shares under the LTIP in December 2016.

Vesting of the award was conditional on the financial performance of a holding company, Reckitt Benckiser Group Plc (RB Group) between 1 January 2017 and 31 December 2019.

It was agreed by the parties that Mr Fasano would retire on 30 June 2019 and would be categorised as a “good leaver”.

An award made to an employee who left their employing company before the award vested would lapse unless the employee was a “good leaver”.

Unfortunately, the financial performance of RB Group’s shares in 2018 and 2019 meant that awards for the December 2016 shares were not going to vest for anyone.

In response to this, on 18 September 2019, the rules were changed by RB Group’s Remuneration Committee so that 50% of the awards would vest regardless of the performance of RB Group’s shares, subject to the following conditions:

1. To benefit from the changed criteria, a participant had to be an employee on 18 September 2019 (the day the change came into effect). The company believed that “exclusion of former employees (being good leavers) was appropriate, given the purpose of the waiver/change was to support employee retention”.
2. Awards would no longer be treated as vesting on 31 December 2019, so that (subject to the good leaver provisions) to receive an award an employee would also have to remain in employment until May 2020 (then described as the “normal vesting date”).

Because Mr Fasano was no longer employed on 18 September 2019 he did not benefit from the changes.

Mr Fasano brought claims against RB Health and RB Group, arguing that being deprived of his award under the 2017 LTIP (which would have been worth about £1.2 million) was indirect age discrimination.

Tribunal decision

At first instance the employment tribunal dismissed the claim on the basis that although potentially discriminatory the rules were a proportionate means of achieving the legitimate aim of retaining staff and was therefore justified.

Mr Fasano appealed against the tribunal’s finding

The Employment Appeal Tribunal (EAT) dismissed the appeal but disagreed with the how the tribunal had reached its decision.

The EAT held that the requirement that LTIP participants had to be employed on 18 September 2019 could not contribute to retention of staff. Only people employed at that date were candidates for retention, so the requirement added nothing to the achievement of the aim.

The only real justification for the PCP was to avoid unnecessary payments to those who could not be retained (and, in doing so, to save money) and this had not been part of RB Group’s defence.

RB Group was not acting as agent for RB Health

Mr Fasano was employed by RB Health, but it was RB Group, acting through its remuneration committee, that operated the LTIP and decided on the September 2019 changes.

To bring a discrimination claim against RB Health as his former employer, Mr Fasano needed the tribunal to find that RB Group was acting as agent for RB Health when carrying out its functions under the LTIP and applying the relevant PCP to Mr Fasano. The EAT found that RB Health had no control over RB Group’s actions or decisions in relation to the LTIP.

Mr Fasano had a contractual entitlement to participate in the LTIP and although the decisions of RB Group in relation to the LTIP had some effect on the legal relationship between him and RB Health this did not make RB Group the agent of RB Health.

RB Group was not acting on behalf of RB Health when it was making the changes to the LTIP rules and imposing the PCP.

Comment

This case seems to have exposed a gap in discrimination law.  It is common for share schemes to be operated by a parent company on behalf of all subsidiaries. The ruling effectively means that discrimination by a parent company against a subsidiaries’ employees, in relation to the terms of a share scheme or the exercise of its discretion under the scheme, may not be unlawful under the Equality Act 2010.

This is because the parent is not the “employer”, nor is it acting as the employer’s “agent”.  We will have to wait and see whether the issue is taken to the Court of Appeal, however ultimately, it would be down to parliament to close the gap in the Equality Act.