Mandatory Retirement in Law Firms and Other Partnerships

Unlike the bona fide occupational exception to the ADEA, the permissibility of mandatory retirement ages for partners in law firms, accounting firms, medical practices, and other professional settings depends upon the position that partners are not employees for the purposes of federal anti-discrimination law. The distinction between “partner” and “employee” is not one that can be ascertained merely by the labels given to individuals. A more important consideration is whether the entity treats partners as employees, and functions more like a corporation. The Supreme Court noted in a case involving the application of a different federal anti-discrimination law to four physicians in a medical practice: “Today there are partnerships that include hundreds of members, some of whom may well qualify as 'employees' because control is concentrated in a small number of managing partners.” Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440, 446 (2003) (internal citations omitted).

The recent Kelley Drye case revisits issues surrounding law firm partnership explored in EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002). In Sidley, the firm, opposing a subpoena from the EEOC, argued that 32 demoted partners were “employers” within the meaning of anti-discrimination law because: 1) their income was based on a share of the firm's profits; 2) they made capital contributions to the firm; 3) they were liable for the firm's debts; and 4) they had some administrative or managerial responsibilities. Id. at 699. While granting the firm most of the relief it sought, Judge Richard Posner viewed the firm's attempts to characterize itself as a partnership skeptically. Judge Posner pointed out that most of the aspects of partnership on which the firm rested its argument were no different from those of many corporations whose executives were considered employees under anti-discrimination law. Looking under the hood at the firm's governance structure, he pointed out that all of the power of the 500-partner firm resided in a 36-member unelected committee. Id. at 702-03. He likewise was unimpressed by the one factor that truly seemed to distinguish the firm from corporations ' law firm partners' potential liability. Viewed in light of the relative powerlessness of the 32 demoted partners, the potential assessment of debt was of no help to the contention that these partners were employers.

The argument for treating the partners as employers hinged on the assumption that they did not need the protection of anti-discrimination laws because they had recourse under partnership law. Id. at 704. As Judge Posner articulated, the reasons for exempting partnerships from anti-discrimination laws are: partnership law gives partners effective remedies against their fellow partners; partnership relations would be poisoned if partners could sue each other for unlawful discrimination; and the relationship among partners is so intimate that they should be allowed to discriminate. Id. at 702. The Sidley case ultimately resolved with the entry of a consent decree whereby the firm paid $27.5 million to the former partners. The consent decree included an injunction barring the law firm from any “formal or informal policy or practice” requiring retirement as a partner once an individual reached a certain age and a provision that “Sidley agrees that each person for whom the EEOC has sought relief in this matter was an employee” for the purposes of the ADEA.

EEOC v. Kelley Drye: Post-Recession ADEA Enforcement

In 2010, the EEOC filed a lawsuit against Kelley Drye, alleging that the firm discriminated against Eugene T. D'Ablemont and similarly situated attorneys by allowing their continued practice at the firm only on the condition that they give up their ownership interest and be compensated through discretionary bonuses. In pursuing this case, the EEOC announced its intention to enforce the ADEA in law firms. The EEOC's acting chairman at the time the suit was filed, Stuart J. Ishimaru, stated, “This lawsuit should serve as a wake-up call for law firms to examine their own practices to ensure they comport with federal law.”

The case ultimately resolved with the entry of a consent decree in April 2012. Notably, unlike in the Sidley case, Kelley Drye denied and continued to deny in the consent decree that its partners were “employees” for purposes of the ADEA. The firm had already amended its partnership agreement shortly after the filing of the suit to eliminate the status of “Life Partner,” the role occupied by partners at the firm once they turned 70. A permanent injunction was entered, preventing the firm from:

• Involuntarily terminating, expelling, retiring, reducing the compensation of, or making other adverse changes to an individual's status with the firm because of age;
• Maintaining any formal or informal compensation policy or practice that provides for compensation for attorneys being involuntarily reduced based on their age;
• Maintaining any formal or informal policy or practice requiring involuntary retirement of a partner or requiring relinquishment of an attorney's partnership status as a condition of continued employment once the partner has reached a certain age;
• Requiring attorneys to cease their service involuntarily on any committee of the firm or any practice group because of age; and
• Taking any action, or maintaining any policy or practice, with the purpose of retaliating against any person because the person has made any formal or informal complaint about, or has taken any action to oppose, any of the conduct alleged by EEOC in this case to violate the ADEA, or any conduct that is prohibited by the decree.

Additional conditions of the settlement required distribution of the consent decree to each partner and the continued conspicuous display of the “EEO is the Law” poster outlining relevant antidiscrimination measures. Each partner is required to complete a two-hour training on the ADEA as well as other federal anti-discrimination laws. In addition to this training, members of the firm's executive committee will have a one-hour training session with a special emphasis on the ADEA. To compensate D'Ablemont for his services, the firm agreed to pay $574,000 in back pay and 12% of fees collected for designated client matters going forward. The consent decree is effective for three years and requires the firm to provide the EEOC with a written report containing a summary of each complaint of age discrimination every six months. While the consent decree remains in effect, the EEOC may monitor the firm's compliance through inspecting records and interviewing witnesses.

A press release concerning the settlement of the case against Kelley Drye suggests that the EEOC will continue to pursue similar claims against partnerships with mandatory retirement ages. “Our strong enforcement of the Age Discrimination in Employment Act is critical to ensuring that workplaces are free from discrimination,” said EEOC General Counsel P. David Lopez. Jeffrey Burstein, EEOC Trial Attorney in the EEOC's New York District Office, stated, “I urge other law firms to assess their retirement policies.”

Expected Changes to Retirement Ages

EEOC v. Kelly Drye was filed amidst a global recession, during which many law firms chose to de-equitize underperforming partners in an effort to save money. If, as seems likely, additional cases concerning mandatory retirement ages in partnerships are filed, courts will take a hard-nosed look at the ways in which those firms are governed, how partners are compensated, and the partners' stake in the firm when deciding whether they qualify has employees for the purposes of federal anti-discrimination law. As law firms and other professional firms stray from the traditional forms of partnership and move closer to a purely corporate structure, they risk losing the status that insulates them from liability under the ADEA and other anti-discrimination laws. Of course, that is not necessarily a bad thing. Global practices are de rigueur these days for law, finance, accounting, and other professional firms. It is unlikely that firms will forego growth and profits to maintain more traditional aspects of partnership. It remains to be seen how firms with hundreds of partners can operate efficiently without the type of executive committee that Judge Posner viewed as akin to a corporate board.

Finally, by abolishing mandatory retirement, whether voluntarily or in anticipation of litigation, firms will retain some of their most experienced, knowledgeable, and profitable members. Mandatory retirement may have outlived its usefulness as individuals live and work longer, a reality that merits legal recognition and protection.

Rosanna Sattler, a member of this newsletter's Board of Editors, is a partner at Posternak Blankstein & Lund, LLP. Her practice includes business litigation, environmental, employment, and insurance coverage disputes. She may be reached at [email protected]. James E. Kruzer is an associate in the firm's litigation department, where he practices in the areas of business litigation, employment litigation, and professional liability defense. He may be reached at [email protected].

Two months after celebrating his 90th birthday, Supreme Court Justice John Paul Stevens retired in June 2010. Had he worked for one of the many large law firms whose attorneys argue before the Supreme Court, Justice Stevens might have been pushed into retirement decades earlier. A recent settlement between New York-based law firm Kelley Drye & Warren LLP and the U.S. Equal Employment Opportunity Commission (EEOC) compels a second look at mandatory retirement in law firms and other partnerships. Under a consent decree, the firm agreed to end its policy of stripping partners who continued to practice after age 69 of their interest in the firm, reducing their ability to manage the firm's operations, and replacing their payment with a discretionary annual bonus that, in the case of one partner, was characterized as “discriminatorily low.” Faced with aging baby boomers and possible exposure to age discrimination claims, law firms and other partnerships will likely relax fixed requirements based on age, such as mandatory retirement and forced changes in equity participation, compensation, and status, which turn away profitable professionals and risk legal liability.

Partnership: An Exception to the Rule

Congress enacted the Age Discrimination in Employment Act of 1967 (ADEA) with the stated purpose of “promot[ing] employment of older persons based on their ability rather than age; to prohibit arbitrary age discrimination in employment; to help employers and workers find ways of meeting problems arising from the impact of age on employment.” 29 U.S.C. ' 621(b). The ADEA allows employers to discharge or refuse to hire individuals based on their age pursuant to a “bona fide hiring or retirement plan” that is not undertaken to evade the protections of the statute. 29 U.S.C. ' 623(j)(2). The “bona fide occupational requirement” carve-out to the ADEA applies to airline pilots, law enforcement officers, and firefighters.

Unlike the bona fide occupational exception to the ADEA, the permissibility of mandatory retirement ages for partners in law firms, accounting firms, medical practices, and other professional settings depends upon the position that partners are not employees for the purposes of federal anti-discrimination law. The distinction between “partner” and “employee” is not one that can be ascertained merely by the labels given to individuals. A more important consideration is whether the entity treats partners as employees, and functions more like a corporation. The Supreme Court noted in a case involving the application of a different federal anti-discrimination law to four physicians in a medical practice: “Today there are partnerships that include hundreds of members, some of whom may well qualify as 'employees' because control is concentrated in a small number of managing partners.” Clackamas Gastroenterology Associates, P.C. v. Wells , 538 U.S. 440, 446 (2003) (internal citations omitted).

The recent Kelley Drye case revisits issues surrounding law firm partnership explored in EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002). In Sidley, the firm, opposing a subpoena from the EEOC, argued that 32 demoted partners were “employers” within the meaning of anti-discrimination law because: 1) their income was based on a share of the firm's profits; 2) they made capital contributions to the firm; 3) they were liable for the firm's debts; and 4) they had some administrative or managerial responsibilities. Id. at 699. While granting the firm most of the relief it sought, Judge Richard Posner viewed the firm's attempts to characterize itself as a partnership skeptically. Judge Posner pointed out that most of the aspects of partnership on which the firm rested its argument were no different from those of many corporations whose executives were considered employees under anti-discrimination law. Looking under the hood at the firm's governance structure, he pointed out that all of the power of the 500-partner firm resided in a 36-member unelected committee. Id. at 702-03. He likewise was unimpressed by the one factor that truly seemed to distinguish the firm from corporations ' law firm partners' potential liability. Viewed in light of the relative powerlessness of the 32 demoted partners, the potential assessment of debt was of no help to the contention that these partners were employers.

The argument for treating the partners as employers hinged on the assumption that they did not need the protection of anti-discrimination laws because they had recourse under partnership law. Id. at 704. As Judge Posner articulated, the reasons for exempting partnerships from anti-discrimination laws are: partnership law gives partners effective remedies against their fellow partners; partnership relations would be poisoned if partners could sue each other for unlawful discrimination; and the relationship among partners is so intimate that they should be allowed to discriminate. Id. at 702. The Sidley case ultimately resolved with the entry of a consent decree whereby the firm paid $27.5 million to the former partners. The consent decree included an injunction barring the law firm from any “formal or informal policy or practice” requiring retirement as a partner once an individual reached a certain age and a provision that “Sidley agrees that each person for whom the EEOC has sought relief in this matter was an employee” for the purposes of the ADEA.

EEOC v. Kelley Drye: Post-Recession ADEA Enforcement

In 2010, the EEOC filed a lawsuit against Kelley Drye, alleging that the firm discriminated against Eugene T. D'Ablemont and similarly situated attorneys by allowing their continued practice at the firm only on the condition that they give up their ownership interest and be compensated through discretionary bonuses. In pursuing this case, the EEOC announced its intention to enforce the ADEA in law firms. The EEOC's acting chairman at the time the suit was filed, Stuart J. Ishimaru, stated, “This lawsuit should serve as a wake-up call for law firms to examine their own practices to ensure they comport with federal law.”

The case ultimately resolved with the entry of a consent decree in April 2012. Notably, unlike in the Sidley case, Kelley Drye denied and continued to deny in the consent decree that its partners were “employees” for purposes of the ADEA. The firm had already amended its partnership agreement shortly after the filing of the suit to eliminate the status of “Life Partner,” the role occupied by partners at the firm once they turned 70. A permanent injunction was entered, preventing the firm from:

• Involuntarily terminating, expelling, retiring, reducing the compensation of, or making other adverse changes to an individual's status with the firm because of age;
• Maintaining any formal or informal compensation policy or practice that provides for compensation for attorneys being involuntarily reduced based on their age;
• Maintaining any formal or informal policy or practice requiring involuntary retirement of a partner or requiring relinquishment of an attorney's partnership status as a condition of continued employment once the partner has reached a certain age;
• Requiring attorneys to cease their service involuntarily on any committee of the firm or any practice group because of age; and
• Taking any action, or maintaining any policy or practice, with the purpose of retaliating against any person because the person has made any formal or informal complaint about, or has taken any action to oppose, any of the conduct alleged by EEOC in this case to violate the ADEA, or any conduct that is prohibited by the decree.

Additional conditions of the settlement required distribution of the consent decree to each partner and the continued conspicuous display of the “EEO is the Law” poster outlining relevant antidiscrimination measures. Each partner is required to complete a two-hour training on the ADEA as well as other federal anti-discrimination laws. In addition to this training, members of the firm's executive committee will have a one-hour training session with a special emphasis on the ADEA. To compensate D'Ablemont for his services, the firm agreed to pay $574,000 in back pay and 12% of fees collected for designated client matters going forward. The consent decree is effective for three years and requires the firm to provide the EEOC with a written report containing a summary of each complaint of age discrimination every six months. While the consent decree remains in effect, the EEOC may monitor the firm's compliance through inspecting records and interviewing witnesses.

A press release concerning the settlement of the case against Kelley Drye suggests that the EEOC will continue to pursue similar claims against partnerships with mandatory retirement ages. “Our strong enforcement of the Age Discrimination in Employment Act is critical to ensuring that workplaces are free from discrimination,” said EEOC General Counsel P. David Lopez. Jeffrey Burstein, EEOC Trial Attorney in the EEOC's New York District Office, stated, “I urge other law firms to assess their retirement policies.”

Expected Changes to Retirement Ages

EEOC v. Kelly Drye was filed amidst a global recession, during which many law firms chose to de-equitize underperforming partners in an effort to save money. If, as seems likely, additional cases concerning mandatory retirement ages in partnerships are filed, courts will take a hard-nosed look at the ways in which those firms are governed, how partners are compensated, and the partners' stake in the firm when deciding whether they qualify has employees for the purposes of federal anti-discrimination law. As law firms and other professional firms stray from the traditional forms of partnership and move closer to a purely corporate structure, they risk losing the status that insulates them from liability under the ADEA and other anti-discrimination laws. Of course, that is not necessarily a bad thing. Global practices are de rigueur these days for law, finance, accounting, and other professional firms. It is unlikely that firms will forego growth and profits to maintain more traditional aspects of partnership. It remains to be seen how firms with hundreds of partners can operate efficiently without the type of executive committee that Judge Posner viewed as akin to a corporate board.

Finally, by abolishing mandatory retirement, whether voluntarily or in anticipation of litigation, firms will retain some of their most experienced, knowledgeable, and profitable members. Mandatory retirement may have outlived its usefulness as individuals live and work longer, a reality that merits legal recognition and protection.

Rosanna Sattler, a member of this newsletter's Board of Editors, is a partner at Posternak Blankstein & Lund, LLP. Her practice includes business litigation, environmental, employment, and insurance coverage disputes. She may be reached at [email protected]. James E. Kruzer is an associate in the firm's litigation department, where he practices in the areas of business litigation, employment litigation, and professional liability defense. He may be reached at [email protected].