The impact on Equity Plans of EU Discrimination Law

Size: px

Start display at page:

Download "The impact on Equity Plans of EU Discrimination Law"

Wendy Lynch
5 years ago
Views:

Brief introduction to European Union discrimination laws. 2.

1 The impact on Equity Plans of EU Discrimination Law Thursday, 19 June 2008, 11:40 12:30, Breakout Session 2 Juan Bonilla and Francisco Conde 1 Summary 1. Brief introduction to European Union discrimination laws. 2. Application of discrimination laws to eligibility criteria. 3. Application of discrimination laws to vesting/exercise conditions. 4. Country by country analysis. 5. Conclusions: how to deal with the different rules and practices.

2 1. Brief introduction to European Union discrimination laws Brief introduction to European Union discrimination laws Treaty of Amsterdam: Article 13 Council Directive 1997/81/EC concerning the framework agreement on part-time work Council Directive 1999/70/EC concerning the framework agreement on fixed-term work Council Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation ( Equal Treatment Framework Directive ) European Union Rome Convention (1980) Avoid discrimination based on sex, racial or ethnic origin, religion or belief, disability, age or sexual orientation.

3 Ruling from the European Court of Justice (ECJ) Palacios de la Villa v Cortefiel Servicios SA (October 16, 2007) Mr. Palacios brought a claim for age discrimination after he was compulsorily retired at the age of 65. The Spanish Court made a reference to the ECJ, to analise requirements on discrimination based on age. First case of the ECJ dealing with a potential objective justification for age discrimination. Ruling from the European Court of Justice (ECJ) Palacios de la Villa v Cortefiel Servicios SA 1. Is compulsory retirement within the scope of age discrimination? The ECJ held that national legislation providing for compulsory retirement age must be regarded as directly imposing less favourable treatment for workers who have reached that age as compared with all other persons in the labour force. 2. Can the differences of treatment be justified on certain grounds to avoid being discriminatory? Differences of treatment on grounds of age will not constitute discrimination if, within the context of national law, they are objectively and reasonably justified by a legitimate aim, including legitimate employment policy, labour market and vocational training objectives, and if the means of achieving that aim are appropriate and necessary.

4 Ruling from the European Court of Justice (ECJ) Palacios de la Villa v Cortefiel Servicios SA The key point in terms of age discrimination is to make a case by case analysis to decide whether any practice put in place is reasonably justified, that is, if it is appropriate and necessary to achieve a legitimate aim. The same principles would apply to a potential age discrimination in equity based awards. 2. Application of discrimination laws to eligibility criteria - Full time vs. part time employees - Permanent employment vs fixed term / temporary employment - Employees vs independent contractors - Exclusion of workers over a certain age - Exclusion of workers under a certain length of service

5 Eligibility: Full time vs. Part time employees Can a Plan exclude from the eligibility criteria those employees working for the Company on a part-time basis? Under EU laws, part-time employees must be eligible to awards in proportion to the number of hours worked as compared with a full time employee Eligibility: Permanent employees vs. Fixed-term/Temporary employees Can a Plan exclude from the eligibility criteria those employees working for the Company on under a fixed-term contract of employment or hired through a temporary work agency? - Under EU laws, fixed-term and temporary employees may be excluded from the eligibility criteria if the Plan is structured as a long term incentive plan, and the employee is not aimed to carry out services for a long term period. -- However, if the fixed-term or temporary employees claim to be permanent employees of the Company (e.g. because the work carried out was of a permanent nature), then they can also claim eligibility to the awards.

6 Eligibility: Employees vs. Independent Contractors Can a Plan be designed to cover only employees and not independent contractors? - Under EU laws, independent contractors cannot claim employee based benefits, including equity based awards, even if the direct employees of the Company are granted such awards. - However, if the independent contractors claim to be permanent employees of the Company (e.g. because they were dependent and subordinated from the Company, who acted as the employer), then they can also claim eligibility to the awards. Eligibility: Exclusion of employees over a certain age (i.e. over 60) Can a Plan exclude from the eligibility criteria those employees over a certain age (i.e. over 60)? Under EU laws, this would fall within the EU discrimination unless there is a clear and strong objective justification (i.e. mandatory retirement at a similar age than the age excluded by the Plan). If mandatory retirement is not allowed on a certain member state, the exclusion of eligibility would be difficult to defend.

7 Eligibility: Exclusion of employees who are under a certain length of service (e.g. 2 years) Can a Plan exclude from the eligibility criteria those employees (presumably young employees) under a certain level of length of service (i.e. need to have 2 years of length of service to be entitled to equity based awards)? Under EU laws, this would fall within the EU discrimination as indirect discrimination. To justify the exclusion, there must be a clear and strong objective justification, such as the promotion of new employment. This sort of justification must be evidenced as a matter of practice. Examples of eligibility criteria (1): Eligibility conditions to participate in the Plan are: You must be a Regular Status Employee (not temporary, fixedterm or contractor, regardless of whether you are deemed to be an employee under common law or for tax related purposes). You must be specifically identified as an eligible participant (e.g. not eligible for overtime payments). You must be hired on or before January 1 of the fiscal year. Eligible employees hired after the start of the fiscal year but no later than [March 31] of the current fiscal year will have pro-rated eligibility.

8 Examples of eligibility criteria (2): Eligibility: unless determined otherwise by the Remuneration Committee, an Employee who is employed with the Company or an Affiliate Company for the first day of the fiscal year and who is regularly scheduled to work at least 30 hours per week is eligible to participate in the Plan. Examples of eligibility criteria (3): Subject to the terms and conditions of the Plan, the Committee shall determine and designate from time to time the directors (including non-employee directors), officers and other employees of the Company, consultants, independent contractors and agents of the Company who shall receive incentives under the Plan. All employees of the Company are eligible to receive incentives under the Plan.

9 3. Application of discrimination laws to vesting/exercise conditions - More favourable treatment for employees over a certain age (i.e. 55 years) - More favourable treatment for employees with certain length of service (i.e. 15 years of service) - Impact on authorised leaves of absence Vesting/exercise conditions: More favourable treatment for employees over a certain age (e.g. 55 or 60 years) Can a Plan provide for a positive action, providing more favourable vesting conditions for employees over a certain age (e.g. 55 or 60 years) than for younger employees? In the event of a special separation or retirement of an employee at the age of at least 55 years, the stock options should be exercisable for the full exercise period of ten years. For any other employee a five year exercise period will be granted upon in the event of a special separation or retirement.

10 Vesting/exercise conditions: More favourable treatment for employees with a certain length of service (15 years) Can a Plan provide for a positive action, providing more favourable vesting conditions for employees having more than a certain length of service (e.g. 15 years of service within the Company or the Group) than for shorter term employees? If the employment with the Company of an RSU holder who has completed 15 or more years of employment with the Company or the Group is terminated, the RSU will continue to become vested following the ordinary vesting requirements. Vesting/exercise conditions: Recent trends link vesting conditions to age and length of service There is a recent trend, specially in US stock based awards, to provide for more favourable treatment for employees of at least a certain age (e.g. over 55) and/or with a certain level of length of service (e.g. at least years of service within the company or the group). Under EU laws, this would fall within the EU discrimination as direct discrimination (age) or indirect discrimination (length of service). To justify the exclusion, there must be an objective justification, to be found in each member state of the European Union where employees are being offered equity based awards. Even though there is still some uncertainty and lack of sufficient case law, national laws of the member states would tend to suggest that the justification does not need to be as strong as with other examples of discrimination since national laws already have in place systems where age or length of service may help to qualify for certain statutory benefits.

11 Example of vesting/exercise conditions: more favourable benefits depending on age/length of service Retirement eligibility rules follow the Rule of 65. You meet the Rule of 65 if your age plus years of service equal 65, with a 10-year minimum vesting service requirement and no minimum age requirement. If you retire under the Rule of 65 and do not subsequently work for a named competitor, your restricted stock and option awards will continue to vest according to the schedule, and you will have the full term to exercise options. Example of vesting/exercise conditions: more favourable benefits depending on age/length of service If an Option holder leaves the Company (other than by reason of death or disability) before the third anniversary of grant date general vesting condition-, at age 50 or older and has completed at least 15 years of employment with the Company, the Option will continue to become exercisable for one year after the date on which employment ends and expire on the fifth anniversary of the date employment ends. If an Option holder leaves the Company (other than by reason of death or disability) on or after the third anniversary of grant date general vesting condition-, at age 50 or older and has completed at least 15 years of employment with the Company, the Option will expire on the fifth anniversary of the date employment ends.

12 Vesting/exercise conditions: Impact on leaves of absence Can a Plan discontinue vesting if the employee is on an authorised leave of absence? - Maternity based benefits: difficulty to discontinue vesting of previous awards. -Other leaves of absence (voluntary basis): possibility to discontinue vesting, recovering the life cycle of the Plan upon expiration of the authorised leave and return to work. Example of vesting/exercise conditions: impact on authorised leaves of absence An Awardee shall not cease to be an employee in the case of any leave of absence approved by the company. An option shall continue to vest during any authorized leave of absence and such option may be exercised to the extent vested during such leave, unless otherwise terminated with its term.

13 4. Country by country analysis FRANCE 1. Applicable law: Considering that discrimination laws are deemed to be of public order, the choice of a foreign law would probably not be accepted. 2. Applicability of (Age) Discrimination Regulation: L1131-1, L (previously L122-45): Aucune personne ne peut être écartée ( ) de mesures d intéressement ou de distribution d actions ( ) en raison ( ) de son âge. Toute disposition ou tout acte pris à l égard d un salarié en méconnaissance des dispositions du présent chapitre est nul. Les différences de traitement fondées sur l âge ne constituent pas une discrimination lorsqu elles sont objectivement et raisonnablement justifiées par un objectif légitime, notamment de politique de l emploi, et lorsque les moyens de réaliser cer objectif sont appropriés et nécessaires. 3. Justification: Special fixed-term contracts for employees over 50. Deductions on social taxed for hiring of employees over 50. Possibility for pre-retirement.

14 United Kingdom 1. Applicable law: General rule: acceptable unless the provisions in the equity award contravene English public policy ( Duarte v Black & Decker ). It is likely that discrimination laws may be seen as part of the English public policy. Jurisdiction: it is unlikely that an English court may give effect to a foreign jurisdiction provision contained in an ancillary agreement (i.e. bonus, or equity award agreement) which is deemed to form part of the contract of employment ( Samego Turner and Ors v J&H Marsh & McLennan ). 2. Applicability of (Age) Discrimination Regulation: Linking the exercise period to age (direct discrimination) and length of service (indirect discrimination) would generally require justification on objective reasons and reasonableness of the difference in treatment. 3. Justification: Need to evaluate the reasonableness of the difference in treatment (pension cases). Qualifying threshold for redundancies under UK law accepted by the ECJ ( EOC v Sec. of State for Employment ). First cases on Age Discrimination (mainly devoted to compulsory retirement ages) are stayed at the moment waiting for further decisions from the ECJ. What would have happened in connection with the Rule of 45 in Ridway v JP Morgan? SPAIN 1. Applicable law: Spanish law usually does not recognise choice of law provisions / foreign jurisdiction in the employment context ( Microsoft case ). 2. Applicability of (Age) Discrimination Regulation: Linking the exercise period to age (direct discrimination) and length of service (indirect discrimination) would generally require justification on objective reasons. 3. Justification: 55 is a qualifying threshold for certain legal benefits (collective redundancies). Length of service is normally used by collective agreements as qualifying thresholds for certain benefits (special bonus for length of service, additional retirement benefits). Some collective agreements even provide for two-salary scales based on length of service, which have been deemed as acceptable by the courts (the reason being the promotion of new employment). Pre-retirement at a certain age (55-57) is usually accepted and negotiated by the companies. Early retirement is allowed for employees over Compulsory retirement has been accepted by the ECJ ( Palacios v Cortefiel ). What is the major risk as a matter or practice in Spain?

15 GERMANY 1. Applicable law: German law usually recognise choice of law provisions Unless an implicit stock option grant with the local entity can be assumed (therefore linking the stock option plan with the employment contract with the subsidiary). 2. Applicability of (Age) Discrimination Regulation: Linking the exercise period to age (direct discrimination) and length of service (indirect discrimination) would generally require justification on objective reasons. 3. Justification: Attaining a certain age and length of service is usually recognised as a sufficient reason for termination in collective agreements. German law provides for a preferred status for partial retirement at the age of 55. No case law so far, but risk can be identified as medium. ITALY 1. Applicable law: Considering that discrimination laws are deemed to be of public order, the choice of a foreign law would not generally be accepted. 2. Applicability of (Age) Discrimination Regulation: General principle of non-discrimination. Different economic treatment of employees is allowed to the extent that such different treatment is justified on the basis of lawful and fair reasons (such as company seniority or accrued experience). 3. Justification: Potential early retirement (60 years for men and 55 years for women). Possibility to agree a bonus based on length of service ( premi di anzianità ). Length of service ( anzianitá ) is also a criteria for selection of employees in the event of a collective redundancy ( licenziamienti collettivi ).

16 PORTUGAL 1. Applicable law: Portuguesse law usually recognise choice of law provisions, provided that the public order rules are respected. Considering that discrimination laws are deemed to be of public order, the choice of a foreign law would not be accepted. 2. Applicability of (Age) Discrimination Regulation: Difference in treatment based on age is acceptable if it is grounded by objective and legitimate reasons 3. Justification: Legal treatment: employees under 55 may request anticipated retirement, or enter into pre-retirement with the employers. They can also obtain certain additional unemployment benefits. No case law so far, but risk can be identified as medium/acceptable. 5. Conclusions: how to deal with the different rules and practices

17 Conclusions: how to deal with the different rules and practices 1. U.S. Employers would have difficulty in enforcing a US governing law clause to avoid the application of EU discrimination laws. 2. Age discrimination laws within the EU apply to both young and old employees. 3. Companies must pay close attention to the eligibility criteria when offering equity based awards in the EU. 4. Recent trend to allow more favourable conditions based on age or length of service must be carefully reviewed to avoid potential discrimination claims. 5. An objective justification must be sought in each member state of the European Union where equity based awards are to be granted. The measure adopted must be reasonable and serve a legitimate aim. 6. The promotion of new-young employment may serve as an indicia of justification but may not necessarily be sufficient depending on the general practice of the company. 7. New legislation has been and is still being passed in each member state, requiring further consideration by the courts. QUESTIONS? Thank you for your participation in GEO! 34

18 Juan Bonilla Partner - Magister Juris, Oxford Paseo de Gracia Barcelona Spain T + (34) juan.bonilla@cuatrecasas.com Francisco Conde Partner Velázquez Madrid Spain T + (34) francisco.conde@cuatrecasas.com

European Employment Law Briefing

Covington & Burling llp Brussels London New York San Francisco Washington EU Employment Group European Employment Law Briefing 4 February 2008 In this issue CASES: In the European Court of Justice: National