The importance of agreeing on a retirement age

May 11, 2017

Mandatory retirement – also known as enforced retirement – is the set age at which people who hold certain jobs or offices are required by industry custom or by law to leave their employment, or retire. Typically, mandatory retirement is justified by the argument that certain occupations are either too dangerous or that they require high levels of physical and mental competence. Most rely on the notion that a worker’s productivity declines significantly after the age of 65, and thus mandatory retirement is the employer’s way of avoiding reduced productivity. However, many view the practice as a form of age discrimination, since the age at which retirement is mandated is often somewhat arbitrary and not based upon any actual physical evaluation of an individual person.

Some economists are of the view that mandatory retirement can be an important tool for employers to construct wage contracts, which prevent “worker shirking”. Employers can tilt the wage profile of a worker so that it is below marginal productivity early on and above marginal productivity toward the end of the employment relationship. In this way, the employer retains extra profits from the worker early on, which he returns later if the worker has not shirked his duties or responsibilities in the first period (assuming a competitive market).

It is also said that those proceeding on retirement should do so to pave the way for new employment opportunities for the younger generation.

There is no legal requirement that stipulates retirement age but the generally accepted norm is the age of 60 or 65. Some employees choose to work beyond that age while others are amenable to this arrangement. While this may be a good idea at the time, employers and employees must know the repercussions and/or consequences of being employed or of employing beyond the retirement age. This is evident in the electrical industry and I am sure it also exists in other industries.

There are four situations that can apply:

1. An agreed retirement age is in place and the employee reaches this age.

2. There is no retirement age in place and the employer requires the employee to retire.

3. The employee accepts the retirement age of their retirement fund. This is the norm in the electrical industry. The retirement age is 65 and early retirement begins from age 55.

4. The employee reaches retirement age but they have agreed with the employer to will work beyond the retirement age. This is where one should take caution because you will require this person’s employment contract to be terminated at some point. If the contract does not make provision for this beyond the age of 65, the dismissal of the employee at the insistence of the employer will be held to be unfair.

We now discuss each scenario.

Upon reaching the agreed retirement age

This is usually inserted into the contract of employment. In this case, the employer and employee have agreed to a retirement age. When the employee reaches that age, the employer can terminate their employment contract and retire them. This is usually done by giving the employee notice of termination.

No agreed age, employee required to retire

If there is no agreed retirement age in your company, one should be put in place as soon as possible. It is your right to determine a normal retirement age in the absence of an agreed retirement age. This can be done by establishing the norms in the industry or by contacting the Bargaining Council or employers’ organisation. When retirement age is established, you will be required to consult with your employees and to inform them of the introduction of a retirement age. Input from employees is taken and a notice to all employees is then issued to make them aware that a retirement age has been set.

You cannot force an employee to resign if you have allowed them to work beyond the retirement age. Neither can you backdate the retirement age. As an employer, you must agree with your employees on a retirement age or on a voluntary exit package.

Age defined by retirement fund rules

The retirement age stated in our fund rules is age 65. It is a good idea to refer to it in your employment contract. The contract with the employer terminates once the employee reaches 65. Note the importance of knowing the fund rules. For example, did you know that the death benefit cover ceases when a member reaches the age of 65? The funeral cover ceases at age 70.

Problems arise when the employee is allowed to work beyond the retirement age and the employer decides to terminate their employment without putting in place a further contract. This is a recipe for disaster as the employee can a lodge a claim of unfair dismissal.

Working beyond 65

In the case of SA Metal & Machinery (Pty) Ltd vs. Gamaroff, the rules of the pension fund stated that the retirement age was 65. When Mr. Gamaroff, the employee, reached pensionable age, his employer allowed him to continue working for another two years. He was, however, asked to retire when he took two months’ sick leave during this time.

Gamaroff wanted to retire at the age of 70. When the company terminated his services, he referred the dispute to the Labour Court as an unfair dismissal.

The court held that, even though the fund rules stipulated age 65, the employer had allowed Gamaroff to work beyond that age without an agreed-to, alternative retirement age, and that he had been dismissed for operational reasons. The Labour Court, therefore, ruled that Gamaroff be re-instated.

The employer was not satisfied with the decision and appealed. According to the employer, the retirement age was the “normal” 65 but the employee claimed that no age had been set. It was stated that, if there had been an agreed or normal retirement age of 65, the dismissal would have been fair.

The Labour Appeal Court (LAC) noted that, while the employee’s contract did not refer to a retirement age, the mandatory rules of the retirement fund provided the normal retirement age of 65 years for the industry. Gamaroff had contributed to the fund and the company policy and procedural manual, which referred to rules of the fund, were incorporated into his contract of employment.

Gamaroff did not provide evidence to support his claim that he could retire at age 70, or that he was not bound by the fund.

The LAC ruled that there was an agreed age of 65, which meant that the employer did not act unfairly when asking Gamaroff to retire. The employer won the case.

If I were the judge in this matter, I would have upheld the decision of the Labour Court for the following the reasons:

This is not a dispute about an employee reaching the retirement age 65 and the termination of a contract. Instead, it was a case where the employee had reached retirement age, but where the parties had elected to continue his employment relationship. Therein lay the problem. There was no end-date, meaning that it was an indefinite contract.

The simple solution: The employer should have to put in place a fixed-term contract and defined the terms and conditions of that contract.

In my opinion, the issue under dispute was whether the employer defined the terms and conditions clearly after the employee reached the age of 65. Was there a meeting of minds on the terms and conditions? This would include, inter alia, the agreed age, and whether or not the employee was dismissed for operational reasons. I, therefore, submit that there was no contract, that there was no date indicated for termination of the contract and that the employer had created a legitimate expectation that the employment relationship would continue.

In my view, the employee was dismissed for being sick, i.e. on operational.

Please note that nothing prevents an employer from dismissing an employee who is unable to continue to perform effectively in their position, but that such situations should be dealt with as incapacity in terms of schedule 8 of the Labour Relations Act.

The moral of the story

Incorporate the rules of the fund in your employment contracts. Ensure that you know the rules and whether there are any exclusions which apply to members of the fund who are over 65. They may, for instance, not qualify for death benefits and funeral cover. It may be a good idea to make the employee aware of these in the fixed-term contract.

You can allow an employee to continue working beyond retirement age, however, you must enter into a fixed-term contract which dictates the terms and conditions of the employment relationship, and which includes a clause such as “The retirement age in this company is 65 years, but the company recognises the need to retain certain exceptional, skilled and productive staff members beyond normal retirement age. Accordingly, the company will grant an extension by entering into this fixed-term contract for a period of three years, and this contract will terminate on …”

Conclusion

It is apparent that more people wish to work beyond the age of 65 for the simple reason that they cannot afford to retire. A pension fund does not provide enough money for the member to retire and must be supplemented with a retirement annuity fund, for example.

This is food for thought for the younger generation but retirement planning is a topic for another day.

Shantonette Pillay, ECA regional director, KwaZulu-Natal