Is share scheme discriminatory?

This Q&A first featured in the Financial Times on 23 April 2011

Question:
I run a successful commercial and residential real estate business in London which has grown rapidly over the last few years. The directors and I have recently decided to offer employees a share scheme to raise money for the business and incentivise staff. We only want the share scheme to be open to employees who have been with us for more than five years and who have achieved a certain position, however, concerns have been raised that this could be discriminatory with regard to other employees. Can you advise?

Answer:
Such schemes can incentivise eligible staff, particularly if tax favourable treatment is available. But care must be taken to ensure that entry criteria do not operate in a discriminatory way, risking discrimination claims, for which compensation for loss of earnings is uncapped and an “injury to feelings” award available.

The length of service and seniority criteria in your proposed scheme could open it up to such risk, the likely complainants being women or younger workers.

Such criteria can operate to the disadvantage of women (because women have entered the labour market more recently than men and are subject to more frequent interruptions to their careers due to family responsibilities). If challenged by a female employee excluded from the scheme, you will need to be able to justify your criteria, on the basis that rewarding experience is a legitimate objective. This may be strenuously challenged on the basis that five years is disproportionate.

Younger employees could also claim for indirect discrimination on grounds of age.

You may wish to reduce the required length of service. The new Equality Act 2010 contains a specific defence where a particular benefit is awarded for service of five years or less. If above five years, the defence only applies if it reasonably appears that the way in which you use length of service will fulfil a “business need”.

Finally, some of the available tax favoured schemes must be available to all employees. Opening the scheme only to certain employees may restrict the choices available.