Mandatory retirement ages have been the subject of much conversation in the past few weeks, most notably in the recent EY leadership race.
Partnerships and members’ agreements often contain provisions to remove partners upon reaching a certain age. However, even where there is no specified age limit, professional services businesses may occasionally face difficult conversations about succession and retirement.
This article aims to discuss the challenges that firms should look out for, whether or not they have a mandatory retirement age in place.
What is the law on enforced retirement?
Age is a protected characteristic under the Equality Act 2010, which protects employees, partners, LLP members and others from unlawful discrimination. Requiring a partner to retire at a fixed retirement age – whether that is 55, 60, 65 or older – is direct age discrimination.
However, unlike other forms of direct discrimination, that alone does not necessarily make it unlawful. A firm can lawfully operate a mandatory retirement age if it can establish that it is “a proportionate means of achieving a legitimate aim”. Case law has elaborated on this test.
In Seldon v Clarkson Wright and Jakes, a former partner challenged a mandatory retirement age of 65. The Supreme Court found in favour of the firm, finding that the firm’s approach was proportionate.
Thiscase clarified that the legitimate aims, which firms must rely on to justify a compulsory retirement age, must be based on “social policy objectives”.This means that the reasons for retirement should benefit the workforce as a whole, rather than just Workforce planning and facilitating career advancement for younger workers are examples of aims which employment tribunals have found can, in some circumstances, legitimately justify the mandatory retirement of older workers. However, this is specific to the facts and circumstances of the firm in question.
The Court held that, although the aim of improving the recruitment of young people in order to achieve a balanced and diverse workforce is in principle a legitimate aim, it may not be proportionate to impose a mandatory retirement age where there is in fact no problem with recruiting younger workers.
Documenting the rationale for a fixed retirement age
When deciding an age discrimination claim on its particular facts, the employment tribunal is required to weigh up the aim against the discriminatory effect that retirement has on partners who reach retirement age. A range of factors will be relevant, such as whether there are feasible alternatives to mandatory retirement, how the retirement age has been applied, and why the firm has opted for the age limit in question.
For this reason, where a firm’s partnership or LLP agreement includes a fixed retirement age, this should be revisited frequently. What may once have had a sound rationale may cease to be appropriate, for example in light of:
the changing age profile of the business as a whole;
how the firm has grown, in terms of revenue, headcount and structure;
changes to working patterns generally across the sector;
whether there have been any exceptions or extensions agreed to the retirement age in particular circumstances; and
how easy succession planning would be in the absence of enforced retirement.
We recommend to revisit these considerations periodically, every three to five years, and also when the partnership or LLP agreement is reviewed and/or amended. Where feasible, the firm’s management should obtain reliable statistics to show the firm is achieving a social policy aim. This is especially important now, asunemployment amongst people over 50 has become a concern since a significant proportion of economically inactive individuals were those who took early retirement during the pandemic. Statistics published by the Department for Work and Pensions recently show that the employment rate for 50 to 64-year-olds is not yet back to pre-pandemic levels.
Another important factor in the analysis will be whether the firm can demonstrate that it has considered the alternatives to a mandatory retirement age. If viable alternatives exist, a court or tribunal may rule that the retirement age was disproportionate and therefore unlawful.
For example, in Ewart v University of Oxford, the claimant, an academic, had presented statistical evidence to the tribunal which demonstrated that the University’s compulsory retirement age had only a very small effect on the recruitment of younger academics. This led the tribunal to find that the University’s legitimate aims could be achieved in ways other than the retirement age. A further claim against the University, Field-Johnson and others, made a similar finding. In another case against the University (Pitcher) it was found that the University’s compulsory retirement age was justified and therefore lawful.
What are the other options?
Although there are a number of firms which have removed mandatory retirement ages from their partnership or LLP agreements, they remain common. Of course, not having a mandatory retirement age does not mean that a firm is not at risk of age discrimination claims.
What are the options for a firm’s constitutional arrangements when it wants to take a proactive approach to succession planning? The key options are:
The “hard stop”: The partnership agreement simply contains a clause which automatically retires a partner at a given point in time, which is typically the end of the accounting period in which he or she turns 65 (or other applicable retirement age). This is the most straightforward approach but, for the reasons discussed above, one which carries a degree of risk.
Although this option is inflexible, one of its merits is the fact that it was expressly agreed by each partner in the partnership agreement and does not involve any discretion on the part of the firm’s management at the time of retirement. The exercise of discretion, particularly under partnership and LLP agreements, is often prone to challenge both under contract law and the Equality Act.
Automatic retirement age subject to agreed extensions:This is a common approach for many professional services firms headquartered in the UK. This enables the firm’s management to consider, on a case-by-case basis, whether the retirement of a partner reaching the normal retirement age should be delayed. However, this means there is a discretion under the agreement which is capable of being challenged by any partner who is unhappy with a decision not to extend.
Pro-active performance management without a compulsory retirement age: This is another common approach, particularly for firms that divide their profits in accordance with a “lockstep”, which rewards length of service as an equity partner. In a “pure” lockstep model with no compulsory retirement age specified in the agreement, there is a risk that the more senior members of the firm take a disproportionately high share of the profits without having the same output as the more junior partners.
In this scenario it will be more important for management to frequently communicate with more senior partners about their career progression and plans in order to identify any training or development needs and discuss future work requirements, succession and resourcing.
Linking profit share to performance: This approach has more favour in firms headquartered outside of the UK. Although it is becoming more popular in domestic firms as well. There is no compulsory retirement age, and the prospect of underutilisation or other performance is dealt with via changes to the partner’s share of profits. This could take a number of forms, such as:
a pure formula-based mechanism (colloquially referred to as “eat what you kill”) where the partner’s share of profits is determined by financial metrics such as personal billings and new client originations;
a “managed lockstep” system whereby a partner’s position on the lockstep is reduced by a decision of the firm’s management (typically a remuneration committee) in the face of declining performance; or
a discretionary system, which is often favoured by US firms, where a decision is taken each year as to the share of each partner’s profits, with due regard to financial and other performance data over (for example) the previous three years.
However, this approach arguably does not adequately take into account the other benefits which experienced partners bring to the business aside from client work, such as training, knowhow, supervision and management responsibilities.
Other legal risks
Open and honest conversations are important in any business when it comes to the prospect of retirement, but perhaps more so in professional services firms where client relationships are highly personalised.
Firms should consider whether to incorporate discussions around succession into their partner appraisal processes, so as to elicit information regarding a partner’s goals and plans in both the short and long terms. High-level discussions around where a partner sees him or herself in the next few years, and his or her contribution to the business, are unlikely to amount to age discrimination.
There is nevertheless a risk of crossing the line into unlawful age discrimination or harassment. In Hutchinson v Asda Stores Ltdthe Employment Tribunal found that repeated suggestions that were made to the claimant, who was aged 73 and showing clear symptoms of dementia, that she might want to consider retirement was found to constitute direct age discrimination. The suggestion regarding retirement would not have been raised with a younger employee showing mental impairment in similar circumstances. The company should instead have sought medical advice on how her condition should be managed. In addition, the fact that the suggestion of retirement was repeated more than once after being rejected by the claimant, amounted to harassment on the basis of age.
Firms should be careful not to make stereotypical assumptions about the intentions of their older partners, particularly in the context of an ageing workforce where older workers may be more reluctant to retire or feel entitled to retain their jobs. In Imperial College Healthcare NHS Trust v Matarthe claimant, an NHS locum consultant, brought a successful claim for discrimination after resigning in circumstances where a younger consultant in a similar position was supported and encouraged to seek specialist registration. The claimant was in his late 50s and planned to retire at 60. Rather than being encouraged to seek specialist registration, early retirement was explored for him. It was found that the assumption that he would not be interested in or willing to join the specialist register was based on his age.
These cases demonstrate the difficulties which firms face when seeking to ensure adequate succession planning within the partnership and the importance of having open and frank discussions without adopting any unjustified or stereotypical assumptions based on age.
Please get in touch if you require assistance with compulsory retirement ages or succession planning.
Need more information about the above people and legal expertise? Talk to one of our lawyers: +44 (0)20 7628 2000
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