Recent EEOC Activity Highlights the Importance of Assessing Law Firm Partnership Practices

In the January edition of this publication, Leslie Corwin detailed efforts in recent years by the Equal Employment Opportunity Commission (“EEOC”) to challenge mandatory retirement and other age-based policies applicable to partners in certain professional service firms. 15 L. Firm Partnership & Benefits 11 (Jan. 2010). Since that article, activity by the EEOC in two distinct, but related, areas have combined to highlight even further the need for careful scrutiny by some firms of the policies and practices applied to their most senior partners.

When Is a Partner Not a Partner?

Corwin's January article reviewed the impact of EEEOC v. Sidley Austin, LLP, 315 F.3d 696 (7th Cir. 2002). In that case, the EEOC challenged the firm's demotion of a group of predominantly older partners. As detailed in Corwin's article, the EEOC's challenge was ultimately resolved in 2007 without a full determination on the merits when Sidley Austin agreed to a $27.5 million settlement payment and certain injunctive relief. The settlement, however, left observers without clear guidance regarding the circumstances under which partners in professional services firms will be viewed as “employees” (as opposed to owners and thus “employers”) for purposes of the Age Discrimination in Employment Act (“ADEA”) and other federal fair employment statutes. Even so, on the heels of the Sidley Austin settlement, several large national law firms announced changes to their retirement policies, and the American Bar Association officially declared its preference for more flexible approaches that base retirement decisions on case-by-case analyses.

On Jan. 28 of this year, the EEOC fired the latest shot in what may prove to be an ongoing campaign to challenge mandatory retirement policies of large professional services partnerships. In a suit filed against Kelley Drye & Warren, LLP (“Kelley Drye”) on behalf of a former partner at the firm and claiming to represent a class of similarly situated individuals, the EEOC alleged that the firm's practice of requiring partners to retire at age 70 constituted intentional age discrimination in violation of the ADEA.

The Complaint

According to the EEOC's complaint, Kelley Drye operated under a Partnership Agreement that required all attorneys who reach the age of 70 and wish to continue practicing law to give up any equity interest they may have in the firm, relinquish their authority to manage or significantly influence the firm, and be compensated for their work solely on the basis of an annual “bonus” payment to be determined within the discretion of the firm's executive committee. The EEOC further alleges that Kelley Drye established the practice of paying attorneys who reached 70 significantly less than what is paid to the firm's younger attorneys with similar client connections, billings, and other measures of productivity. Finally, the EEOC claims that the firm retaliated against the partner at issue in the suit by reducing his annual bonus, despite no decrease in his performance, in response to his complaining about the compensation system and filing a complaint with the EEOC.

The agency's action against Kelley Drye appears to be the first of its kind since the much-publicized settlement of EEOC v. Sidley Austin in October 2007. Yet, there are striking similarities between the EEOC's claims against Sidley Austin and Kelley Drye. Both suits were brought under the ADEA, and both suits allege that the law firm in question intentionally discriminated against the plaintiff class on the basis of age by creating a mandatory-retirement policy. Perhaps more importantly, both suits are premised on a challenge to the status of large law firm partners as owners and “employers” for purposes of the equal employment opportunity laws. Both suits are based on the EEOC's contention that a relative lack of actual control over the firm's business renders partners at some firms “employees” for purposes of federal employment statutes, notwithstanding their “partner” titles.

Kelley Drye's Response

For its part, Kelley Drye's answer to the complaint denies the EEOC's claim that its employment practices violated the ADEA. In particular, Kelley Drye asserts a number of defenses, including that its partners fall outside the scope of protection under federal employment statutes because they submit to the firm's partnership agreement, hold themselves out as partners, help elect the firm's executive committee, enjoy access to the firm's privileged and confidential information, and supervise the firm's lawyers and staff. Thus, while the Seventh Circuit's rulings in EEOC v. Sidley Austin avoided resolving the ultimate legal question concerning the status of law firm partners as employers or employees under the ADEA, the EEOC's case against Kelley Drye places the question again squarely in issue.

Pressing a Test Case?

The EEOC's challenge to Kelley Drye's retirement policy appears calculated, at least in part, to press a test case and generate legal precedent on the status of partners in large professional services firms as “employees” for employment law purposes. In fact, the EEOC is pursuing the suit even though Kelley Drye amended its policy in February, eliminating mandatory retirement and instead subjecting all partners to the same standard performance metrics regardless of age.

The EEOC's actions seem to indicate that it will become more aggressive in enforcing the ADEA in the professional services context, notwithstanding its public denials of any intent to target law firms specifically. After initiating the action against Kelley Drye, the EEOC's senior trial attorney on the case, Jeffrey Burstein, said that there is not an initiative at the EEOC to go after law firms in particular, but he also claimed that the EEOC brought the suit against Kelley Drye because “there very well may be similar practices by other firms in different guises.” Additionally, the EEOC's then-Acting Chairman Stuart Ishimaru punctuated the filing of the lawsuit against Kelley Drye by proclaiming, “This lawsuit should serve as a wake-up call for law firms to examine their own practices to ensure they comport with federal law.” These statements signal, at a minimum, that the EEOC is continuing to look at the issue of age discrimination in professional service organizations, including large law firms, and it is intensifying its effort to enforce the ADEA in that setting.

Current Retirement Policies

Whether or not the EEOC pursues challenges to the status of law firm partners beyond Kelley Drye, economic considerations may nevertheless drive some firms to reconsider current retirement policies independent of concern over potential legal claims. As members of the “Baby Boom” generation age and assess the impact of the recent economy on their retirement savings, many senior partners are finding they wish to continue practicing well beyond traditional retirement age at precisely the same time as their firms face increasing competition for a limited pool of new legal talent. Moreover, as many firms continue to move away from lockstep compensation structures and more toward merit-based models, the notion of mandatory retirement for an otherwise productive partner may be increasingly out of place. Indeed, evolving trends in legal practice and firm management may drive firms to rethink their approach to partner retirements as much, if not more than, the prospect of age discrimination claims.

What Constitutes a 'Reasonable Factor Other Than Age'?

Less than one month after filing its suit against Kelley Drye, the EEOC took action in a second, facially unrelated area that nevertheless also has the potential to impact how law firms manage themselves. On Feb. 18 the agency published proposed regulations to clarify what constitutes a “Reasonable Factor Other Than Age” (“RFOA”) under the ADEA. These regulations would potentially impact how law firms and other employers respond to allegations that their employment practices have a disparate impact ' even if unintended ' on older workers.

The EEOC's February proposed regulations respond to public comments submitted to a previous set of proposed regulations it published nearly two years earlier. In March 2008, the EEOC proposed to amend its regulations in light of the Supreme Court's decision in Smith v. City of Jackson, 544 U.S. 228 (2005). Smith confirmed the availability of the “disparate impact” theory of liability (initially developed under Title VII of the Civil Rights Act) to age discrimination claims under the ADEA, holding that an employee may challenge a facially neutral employment policy on the grounds that it disproportionately impacts older workers, even in the absence of any intent to discriminate. While the ADEA provides that an employer may overcome such claims upon a showing that its conduct is based on a “reasonable factor other than age,” neither the statute nor the Supreme Court's decision in Smith define the precise contours of what constitutes such a “reasonable factor.”

The proposed regulations suggest that the RFOA inquiry involves less scrutiny than Title VII's relatively strict business-necessity test, but more scrutiny than the Equal Pay Act's “any other factor” test. According to the EEOC, its proposed RFOA standard aims to preserve an employer's right to make reasonable business decisions, while guarding against facially neutral employment criteria that arbitrarily limit employment opportunities of older workers. The proposed regulations purport to draw upon the tort-law concept of reasonableness to inform the definition of a “reasonable factor” in the context of the ADEA. Thus, the regulations would identify a reasonable factor as one that is objectively reasonable when viewed from the position of a reasonable employer under similar circumstances; in other words, a reasonable factor is one that would be used by a prudent employer mindful of the ADEA's prohibition of facially neutral employment standards that disproportionately affect the opportunities of older workers. Accordingly, an employer could theoretically establish a RFOA defense by showing that the challenged employment practice is both reasonably designed to further a legitimate business purpose, and administered in a way that reasonably achieves that purpose in light of the facts that were known, or should have been known, to the employer at the time.

Building further on the tort-law theory of reasonableness, the proposed regulations offer a non-exhaustive list of factors that would be relevant to determining whether an employment practice is reasonable for purposes of the ADEA. Factors to be considered would include: 1) whether the practice and its implementation are common business practices; 2) the extent to which the factor is related to the employer's stated business goal; 3) the extent to which the employer took steps to define the factor accurately and fairly; 4) the extent to which the employer took steps to assess the adverse impact on older workers; 5) the severity of the harm, in degree and number, to individuals within the protected age group, and the extent to which the employer took preventative or corrective steps to minimize the severity of the harm, in light of the burden of undertaking such steps; and 6) whether other options were available and the reasons the employer selected the option it did.

Significant Questions for Law Firm Management

The last of these proposed considerations in particular raises significant questions for employers. In a footnote, the proposed regulations suggest that the factor does not automatically require an employer to adopt the practice that has the “least severe impact” on older employees; rather, the availability of employment practices with a less severe impact is only one factor relevant to the reasonableness inquiry. One might interpret this language to suggest that the reasonableness test is not intended to be as strict as the business-necessity inquiry applicable to claims under Title VII, but the footnote goes on to quote the Second Restatement of Torts: “If the actor can advance or protect his interest as adequately by other conduct which involves less risk of harm to others, the risk contained in his conduct is clearly unreasonable.” This passage from the Restatement seemingly suggests a much higher standard ' if any “other conduct ' involves less risk,” then the chosen “conduct is clearly unreasonable.” Accordingly, despite the EEOC's suggestions to the contrary, the proposed regulations could potentially be read to create a reasonableness standard for RFOAs that is functionally similar to the business-necessity test applicable under Title VII.

The effect of applying a business-necessity-like standard to employer practices challenged under the ADEA could be substantial. The age status of an individual worker obviously changes over time, unlike most other protected characteristics such as race, religion, or sex. Moreover, older age typically correlates with many other differences in workplace status, from greater seniority and total compensation costs to differences in skill sets, experience, and abilities. Employment decisions made on the basis of these types of factors, to the extent they correlate with age, will often disproportionately impact older workers. If the employer is then held to a standard by which it must demonstrate that it could not “advance or protect [its] interests adequately by other conduct” with less impact on older employees, previously accepted employment practices may newly be subject to legal challenge under a disparate impact age discrimination theory.

When coupled with the EEOC's continuing challenge to the status of partners in certain professional services firms, the proposed RFOA regulations raise potentially significant questions for law firm management. If “partners” are in some instances nevertheless protected as employees under the ADEA, they will have standing to assert not only intentional discrimination claims similar to those in the Sidley Austin and Kelley Drye cases, but also unintentional discrimination claims based on a disparate impact theory. And if the firm is then held to a standard by which it must demonstrate that there was no practical alternative to the challenged policy, this may be a challenging burden to meet. Take, for example, a compensation system that relies on various performance metrics to set compensation levels for its partners. If the application of those metrics produce a pattern of results that appears to disfavor the firm's most senior attorneys, the firm could be subject to a legal challenge alleging a disparate impact theory of age discrimination. Whether the firm would be able to demonstrate that no alternative set of metrics could have served its needs with a reduced impact on its senior partners may turn ' at least in part ' on whether the firm has analyzed and “validated” its compensation program in a way that many firms historically have not done. Thus, in combination, these events may signal a greater need for some firms to examine both their partnership structure and the potential age “adverse impact” of their policies and practices.

Conclusion

Given the confluence of various factors ' the changing nature of how large professional services firms are organized and managed, the aging professional workforce, the trend toward longer legal careers, and the efforts by many to rebuild retirement savings depleted by the recent economic downturn ' questions surrounding the treatment of law firms' most senior partners are likely to continue. The combined impact of the EEOC's recent legal challenge targeting Kelley Drye and its proposed regulations narrowing the ADEA's RFOA defense suggest that prudent law firms should consider both the structure of their partnership arrangements and the policies applicable to their partners, with particular awareness of how those arrangements and policies impact their most senior attorneys.

Karl Nelson, a member of this newsletter's Board of Editors, is a partner with Gibson, Dunn & Crutcher LLP in the firm's Dallas office. Andrew LeGrand, Jr. is an associate in the same office.

In the January edition of this publication, Leslie Corwin detailed efforts in recent years by the Equal Employment Opportunity Commission (“EEOC”) to challenge mandatory retirement and other age-based policies applicable to partners in certain professional service firms. 15 L. Firm Partnership & Benefits 11 (Jan. 2010). Since that article, activity by the EEOC in two distinct, but related, areas have combined to highlight even further the need for careful scrutiny by some firms of the policies and practices applied to their most senior partners.

When Is a Partner Not a Partner?

Corwin's January article reviewed the impact of EEEOC v. Sidley Austin, LLP, 315 F.3d 696 (7th Cir. 2002) . In that case, the EEOC challenged the firm's demotion of a group of predominantly older partners. As detailed in Corwin's article, the EEOC's challenge was ultimately resolved in 2007 without a full determination on the merits when Sidley Austin agreed to a $27.5 million settlement payment and certain injunctive relief. The settlement, however, left observers without clear guidance regarding the circumstances under which partners in professional services firms will be viewed as “employees” (as opposed to owners and thus “employers”) for purposes of the Age Discrimination in Employment Act (“ADEA”) and other federal fair employment statutes. Even so, on the heels of the Sidley Austin settlement, several large national law firms announced changes to their retirement policies, and the American Bar Association officially declared its preference for more flexible approaches that base retirement decisions on case-by-case analyses.

On Jan. 28 of this year, the EEOC fired the latest shot in what may prove to be an ongoing campaign to challenge mandatory retirement policies of large professional services partnerships. In a suit filed against Kelley Drye & Warren, LLP (“Kelley Drye”) on behalf of a former partner at the firm and claiming to represent a class of similarly situated individuals, the EEOC alleged that the firm's practice of requiring partners to retire at age 70 constituted intentional age discrimination in violation of the ADEA.

The Complaint

According to the EEOC's complaint, Kelley Drye operated under a Partnership Agreement that required all attorneys who reach the age of 70 and wish to continue practicing law to give up any equity interest they may have in the firm, relinquish their authority to manage or significantly influence the firm, and be compensated for their work solely on the basis of an annual “bonus” payment to be determined within the discretion of the firm's executive committee. The EEOC further alleges that Kelley Drye established the practice of paying attorneys who reached 70 significantly less than what is paid to the firm's younger attorneys with similar client connections, billings, and other measures of productivity. Finally, the EEOC claims that the firm retaliated against the partner at issue in the suit by reducing his annual bonus, despite no decrease in his performance, in response to his complaining about the compensation system and filing a complaint with the EEOC.

The agency's action against Kelley Drye appears to be the first of its kind since the much-publicized settlement of EEOC v. Sidley Austin in October 2007. Yet, there are striking similarities between the EEOC's claims against Sidley Austin and Kelley Drye. Both suits were brought under the ADEA, and both suits allege that the law firm in question intentionally discriminated against the plaintiff class on the basis of age by creating a mandatory-retirement policy. Perhaps more importantly, both suits are premised on a challenge to the status of large law firm partners as owners and “employers” for purposes of the equal employment opportunity laws. Both suits are based on the EEOC's contention that a relative lack of actual control over the firm's business renders partners at some firms “employees” for purposes of federal employment statutes, notwithstanding their “partner” titles.

Kelley Drye's Response

For its part, Kelley Drye's answer to the complaint denies the EEOC's claim that its employment practices violated the ADEA. In particular, Kelley Drye asserts a number of defenses, including that its partners fall outside the scope of protection under federal employment statutes because they submit to the firm's partnership agreement, hold themselves out as partners, help elect the firm's executive committee, enjoy access to the firm's privileged and confidential information, and supervise the firm's lawyers and staff. Thus, while the Seventh Circuit's rulings in EEOC v. Sidley Austin avoided resolving the ultimate legal question concerning the status of law firm partners as employers or employees under the ADEA, the EEOC's case against Kelley Drye places the question again squarely in issue.

Pressing a Test Case?

The EEOC's challenge to Kelley Drye's retirement policy appears calculated, at least in part, to press a test case and generate legal precedent on the status of partners in large professional services firms as “employees” for employment law purposes. In fact, the EEOC is pursuing the suit even though Kelley Drye amended its policy in February, eliminating mandatory retirement and instead subjecting all partners to the same standard performance metrics regardless of age.

The EEOC's actions seem to indicate that it will become more aggressive in enforcing the ADEA in the professional services context, notwithstanding its public denials of any intent to target law firms specifically. After initiating the action against Kelley Drye, the EEOC's senior trial attorney on the case, Jeffrey Burstein, said that there is not an initiative at the EEOC to go after law firms in particular, but he also claimed that the EEOC brought the suit against Kelley Drye because “there very well may be similar practices by other firms in different guises.” Additionally, the EEOC's then-Acting Chairman Stuart Ishimaru punctuated the filing of the lawsuit against Kelley Drye by proclaiming, “This lawsuit should serve as a wake-up call for law firms to examine their own practices to ensure they comport with federal law.” These statements signal, at a minimum, that the EEOC is continuing to look at the issue of age discrimination in professional service organizations, including large law firms, and it is intensifying its effort to enforce the ADEA in that setting.

Current Retirement Policies

Whether or not the EEOC pursues challenges to the status of law firm partners beyond Kelley Drye, economic considerations may nevertheless drive some firms to reconsider current retirement policies independent of concern over potential legal claims. As members of the “Baby Boom” generation age and assess the impact of the recent economy on their retirement savings, many senior partners are finding they wish to continue practicing well beyond traditional retirement age at precisely the same time as their firms face increasing competition for a limited pool of new legal talent. Moreover, as many firms continue to move away from lockstep compensation structures and more toward merit-based models, the notion of mandatory retirement for an otherwise productive partner may be increasingly out of place. Indeed, evolving trends in legal practice and firm management may drive firms to rethink their approach to partner retirements as much, if not more than, the prospect of age discrimination claims.

What Constitutes a 'Reasonable Factor Other Than Age'?

Less than one month after filing its suit against Kelley Drye, the EEOC took action in a second, facially unrelated area that nevertheless also has the potential to impact how law firms manage themselves. On Feb. 18 the agency published proposed regulations to clarify what constitutes a “Reasonable Factor Other Than Age” (“RFOA”) under the ADEA. These regulations would potentially impact how law firms and other employers respond to allegations that their employment practices have a disparate impact ' even if unintended ' on older workers.

The EEOC's February proposed regulations respond to public comments submitted to a previous set of proposed regulations it published nearly two years earlier. In March 2008, the EEOC proposed to amend its regulations in light of the Supreme Court's decision in Smith v. City of Jackson , 544 U.S. 228 (2005). Smith confirmed the availability of the “disparate impact” theory of liability (initially developed under Title VII of the Civil Rights Act) to age discrimination claims under the ADEA, holding that an employee may challenge a facially neutral employment policy on the grounds that it disproportionately impacts older workers, even in the absence of any intent to discriminate. While the ADEA provides that an employer may overcome such claims upon a showing that its conduct is based on a “reasonable factor other than age,” neither the statute nor the Supreme Court's decision in Smith define the precise contours of what constitutes such a “reasonable factor.”

The proposed regulations suggest that the RFOA inquiry involves less scrutiny than Title VII's relatively strict business-necessity test, but more scrutiny than the Equal Pay Act's “any other factor” test. According to the EEOC, its proposed RFOA standard aims to preserve an employer's right to make reasonable business decisions, while guarding against facially neutral employment criteria that arbitrarily limit employment opportunities of older workers. The proposed regulations purport to draw upon the tort-law concept of reasonableness to inform the definition of a “reasonable factor” in the context of the ADEA. Thus, the regulations would identify a reasonable factor as one that is objectively reasonable when viewed from the position of a reasonable employer under similar circumstances; in other words, a reasonable factor is one that would be used by a prudent employer mindful of the ADEA's prohibition of facially neutral employment standards that disproportionately affect the opportunities of older workers. Accordingly, an employer could theoretically establish a RFOA defense by showing that the challenged employment practice is both reasonably designed to further a legitimate business purpose, and administered in a way that reasonably achieves that purpose in light of the facts that were known, or should have been known, to the employer at the time.

Building further on the tort-law theory of reasonableness, the proposed regulations offer a non-exhaustive list of factors that would be relevant to determining whether an employment practice is reasonable for purposes of the ADEA. Factors to be considered would include: 1) whether the practice and its implementation are common business practices; 2) the extent to which the factor is related to the employer's stated business goal; 3) the extent to which the employer took steps to define the factor accurately and fairly; 4) the extent to which the employer took steps to assess the adverse impact on older workers; 5) the severity of the harm, in degree and number, to individuals within the protected age group, and the extent to which the employer took preventative or corrective steps to minimize the severity of the harm, in light of the burden of undertaking such steps; and 6) whether other options were available and the reasons the employer selected the option it did.

Significant Questions for Law Firm Management

The last of these proposed considerations in particular raises significant questions for employers. In a footnote, the proposed regulations suggest that the factor does not automatically require an employer to adopt the practice that has the “least severe impact” on older employees; rather, the availability of employment practices with a less severe impact is only one factor relevant to the reasonableness inquiry. One might interpret this language to suggest that the reasonableness test is not intended to be as strict as the business-necessity inquiry applicable to claims under Title VII, but the footnote goes on to quote the Second Restatement of Torts: “If the actor can advance or protect his interest as adequately by other conduct which involves less risk of harm to others, the risk contained in his conduct is clearly unreasonable.” This passage from the Restatement seemingly suggests a much higher standard ' if any “other conduct ' involves less risk,” then the chosen “conduct is clearly unreasonable.” Accordingly, despite the EEOC's suggestions to the contrary, the proposed regulations could potentially be read to create a reasonableness standard for RFOAs that is functionally similar to the business-necessity test applicable under Title VII.

The effect of applying a business-necessity-like standard to employer practices challenged under the ADEA could be substantial. The age status of an individual worker obviously changes over time, unlike most other protected characteristics such as race, religion, or sex. Moreover, older age typically correlates with many other differences in workplace status, from greater seniority and total compensation costs to differences in skill sets, experience, and abilities. Employment decisions made on the basis of these types of factors, to the extent they correlate with age, will often disproportionately impact older workers. If the employer is then held to a standard by which it must demonstrate that it could not “advance or protect [its] interests adequately by other conduct” with less impact on older employees, previously accepted employment practices may newly be subject to legal challenge under a disparate impact age discrimination theory.

When coupled with the EEOC's continuing challenge to the status of partners in certain professional services firms, the proposed RFOA regulations raise potentially significant questions for law firm management. If “partners” are in some instances nevertheless protected as employees under the ADEA, they will have standing to assert not only intentional discrimination claims similar to those in the Sidley Austin and Kelley Drye cases, but also unintentional discrimination claims based on a disparate impact theory. And if the firm is then held to a standard by which it must demonstrate that there was no practical alternative to the challenged policy, this may be a challenging burden to meet. Take, for example, a compensation system that relies on various performance metrics to set compensation levels for its partners. If the application of those metrics produce a pattern of results that appears to disfavor the firm's most senior attorneys, the firm could be subject to a legal challenge alleging a disparate impact theory of age discrimination. Whether the firm would be able to demonstrate that no alternative set of metrics could have served its needs with a reduced impact on its senior partners may turn ' at least in part ' on whether the firm has analyzed and “validated” its compensation program in a way that many firms historically have not done. Thus, in combination, these events may signal a greater need for some firms to examine both their partnership structure and the potential age “adverse impact” of their policies and practices.

Conclusion

Given the confluence of various factors ' the changing nature of how large professional services firms are organized and managed, the aging professional workforce, the trend toward longer legal careers, and the efforts by many to rebuild retirement savings depleted by the recent economic downturn ' questions surrounding the treatment of law firms' most senior partners are likely to continue. The combined impact of the EEOC's recent legal challenge targeting Kelley Drye and its proposed regulations narrowing the ADEA's RFOA defense suggest that prudent law firms should consider both the structure of their partnership arrangements and the policies applicable to their partners, with particular awareness of how those arrangements and policies impact their most senior attorneys.

Karl Nelson, a member of this newsletter's Board of Editors, is a partner with Gibson, Dunn & Crutcher LLP in the firm's Dallas office. Andrew LeGrand, Jr. is an associate in the same office.