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Stephen Ross

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Is there any life in LIFO?

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‘Last in first out’ was a simple but crude formula well-used by businesses when needing to make redundancies. Stephen Ross explains why it fell out of favour and whether there’s room for LIFO now.

‘Last in first out’ or ‘LIFO’ used to be a popular method of making selections for redundancy. It was a simple formula that could be objectively applied by an employer, giving a clear result. It avoided the need for complex selection matrixes, which might lead to claims of discrimination on the grounds of sex or disability, for example where attendance records were used. However, over the years, LIFO gradually became somewhat discredited as a means of making selections for redundancy. Most employers would now agree that on its own, it is a crude measure and is unlikely to leave them with the workforce or the skills they need to carry a business through a difficult trading period or a period of change. But as the Court of Appeal has now confirmed, length of service may still have a part to play in a redundancy selection matrix.

The Employment Equality (Age) Regulations 2006 (the ‘Age Regulations’) came into effect on 1 October 2006, making age discrimination unlawful. However, claims of direct and indirect age discrimination can be defended if employers can show that there is an ‘objective justification’ for the treatment complained of. Since the introduction of the Age Regulations, concerns arose that the inclusion of a length of service criterion in making redundancy selections could be indirectly discriminatory on grounds of age as younger workers are less likely to have served the company for a long time. The Court of Appeal has recently tested the application of the Age Regulations in this context in the case of Rolls-Royce Plc v Unite the Union.

Rolls-Royce and its recognised union, Unite, entered into collective agreements relating to the redeployment and redundancy of employees at two factories. These agreements were made before the Age Regulations came into force. While Unite was opposed to compulsory redundancies, the agreement recorded the union’s recognition that, in order to “enable peaceable restructuring, and a fair selection of affected employees without disruption to the business”, an assessment matrix may be used in the redundancy process. The agreements provided that redundancy selection would involve a points scoring system, under which employees would be assessed under categories including versatility and expertise. Length of service was one of the criteria to be used in this process, with points being awarded per year of service.

A dispute arose between Rolls-Royce and Unite as to whether this length of service element complied with the Age Regulations. Unusually it was the company, Rolls-Royce, which was concerned about the lawfulness of the criterion, suggesting that it favoured workers with longer service, while the union, Unite, argued to the contrary. The parties used a procedure in the High Court to ask the Court to make a declaration on the lawfulness of the criterion. Unite also argued before the High Court that the policy provided an employee benefit and that it was objectively justifiable, as it promoted loyalty and enabled the business to retain the expertise of the older workers.

The High Court sided with Unite, a decision upheld on appeal. Although the Court of Appeal considered a length of service criterion to be indirectly discriminatory when used in making redundancy selections, when viewed objectively it achieved the legitimate aim of rewarding loyalty, and achieving a stable workforce by applying a fair process in redundancy selections. As this criterion was not the sole determinative factor in making redundancy selections, but part of a wider selection matrix, the Court considered its use to be proportionate.

The Court also considered the argument that the length of service criterion amounted to a benefit. The Age Regulations provide that benefits offered on the basis of length of service will not be discriminatory if it reasonably appears to the employer that the benefit scheme fulfils a business need. The Court held that a length of service criterion did amount to such a benefit in that it fulfils the business need of maintaining a loyal and stable workforce.

Comment
In the current climate unemployment is continuing to rise despite some signs of economic recovery and many employers are still considering redundancies. As such employers want to have as much flexibility as possible over which staff are retained and which are let go. The Rolls Royce decision means that employers may now use length of service as a criterion in redundancy selection with a degree of confidence. There is still some life in ‘LIFO’. However, they should take note of the comments in the case to the effect that length of service should not be the only factor or the main factor in making a decision as to whom to select. Indeed the judge in the High Court made the point that his decision might have been different had the policy operated on a simple ‘last in, first out’ basis. Many employers will also welcome this confirmation that they can reward loyalty through use of a length of service criterion, provided they do so in a proportionate way.
 

Stephen Ross is a solicitor in the employment team at international law firm Withers LLP

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