Discrimination in employee share schemes

9th February 2012

The Court of Appeal recently considered whether an employer had acted in a discriminatory way in allocating share options. The decision provides useful guidance to employers.

In the case of Hosso v European Credit Management Ltd, the applicant’s employer operated a discretionary share option scheme for the benefit of employees generally. The scheme was not, however, mentioned in any employee’s contract of employment or in any other relevant literature, such as a staff handbook. Share options were granted to the applicant, but she discovered that an equivalent male employee had been granted options over a larger number of shares. The applicant brought claims under both the Equal Pay Act 1970 and the Sex Discrimination Act 1975, although, in the event, her latter claim was out of time.

The case went as far as the Court of Appeal, which held that, because there was no contractual term in relation to which the applicant was able to claim she had experienced less favourable treatment than an equivalent male employee, her claim could not be within the scope of the Equal Pay Act 1970.

The relevant legislation is now contained in the Equality Act 2010, which replaces both the Equal Pay Act 1970 and the Sex Discrimination Act 1975. However, the principles in this case are likely to continue to be relevant under the new legislation.

The key point for companies operating share option schemes is that, to limit the risk of equal pay claims by employees on grounds of discrimination, the awards must be entirely discretionary. Similar principles are also likely to apply to claims on grounds of sex discrimination. Although an incentive scheme can be mentioned in a contract of employment or staff handbook, this should be limited to matters such as eligibility in order to minimise the risk of a discrimination claim, and there should be no reference which might be interpreted as conferring an entitlement on participants. For example, wording such as “All employees at Grade 5 level and above are entitled to be granted options over shares with a value of x% of salary each year” should be avoided if the risk of discrimination claims is to be reduced.