Compulsory retirement or performance management for partners?

Peter Garry explains the circumstances in which it is, and is not, permissible to require partners or LLP members to retire at a particular age and the relevance of performance management schemes.

For many years most professional practices in the UK have operated a system of inherently discriminatory compulsory retirement of partners at a fixed age, regardless of ability or performance. This has been based on the assumption that this is legally justified by the need to encourage younger members of the firm by making room for them at the top (the "dead man’s shoes" argument). In addition, it can be beneficial to avoid unseemly debates as to whether or not older partners are still pulling their weight, allowing them to retire with dignity rather than being pushed out of the practice on grounds of under-performance (the "collegiality" argument).

Mr Seldon, a partner in Clarkson, Wright & Jakes, a firm of solicitors, was compulsorily retired following his 65th birthday in accordance with the terms of the firm’s partnership deed. He brought a claim for unlawful direct age discrimination in the Employment Tribunal, which after a series of appeals ended up in the Supreme Court.

The Supreme Court judgment is by no means the end of the development of the law in this area, but it contains a number of pointers which enable partners and LLP members and their practices to form a reasonably clear view as to whether compulsory retirement on the grounds of age is lawful in their particular circumstances.

Guidelines

By way of a general guide, for such provisions to be lawful all of the following factors have to be present:

• the provisions achieve inter-generation fairness or assist partners or members to retire with dignity; and
• there is no other way to achieve these aims; and
• it can be stated clearly why the chosen age is better than other ages for this purpose.

Inter-generational fairness

The basis of this "justifiable aim" is that if partners do not retire there will be no room for younger members of the practice to join the ranks of the partners, and thus it will be difficult to recruit or retain such younger members.

But, in relation to a particular practice one has to examine whether this is really an issue. The concept of handing down the same firm with the same clients and connections from one generation to the next is becoming increasingly anachronistic. Most modern professional practices are aiming for growth and require aspiring partners to demonstrate the ability, or at least the aptitude, for attracting clients and building new businesses within the overall business. In effect, such individuals are required to create new opportunities and "room" for themselves, rather than merely to be handed on a plate existing client relationships and the share of profits that goes with them.

It is madness to require active, seasoned partners to leave the firm at an arbitrary age, taking their knowledge, experience and (non-client) contacts away with them, often to more enlightened firms. The aim of inter-generational fairness cannot be relied upon if there is room for younger partners because they are required to create their own client following.

Retiring with dignity

This "justifiable aim" is based on the belief of lawmakers that it is kinder to require a person to retire before encroaching years prevent him or her from doing the job properly, resulting in embarrassment and the loss of a supportive, collegiate feel to the practice.

But many professional practices already have in place a system of performance management and profit-sharing based on annual or even more frequent assessments of performance. These often involve "no punches pulled" critiques carried out by a remuneration committee, based on performance indicators such as billing levels or anonymous commentary from other partners or members. Such schemes are usually used to allocate profits and, where needed, to "manage out" partners who are perceived not to be pulling their weight.

The climate of anxiety that such schemes often engender in a practice is far from collegiate. That aside, if such a scheme is in place it is much more difficult to justify retirement at a fixed age, as the indignity of ejection for under-performance is already a possible outcome.

No other way to achieve the aims

In practices in which there is no performance management scheme, one way of avoiding a fixed retirement age would be to require all partners, regardless of age, to continue to justify their level of profit share based on a "balanced score card" that takes all relevant factors into account. Despite the fact that performance management schemes are open to abuse and can give rise to indignity and loss of collegiality, if such a scheme is run properly the opposite will be true and the benefits to the practice and all of its partners or members can be considerable.

Why 65?

The case of Mr Seldon has been sent back to the Employment Tribunal for an assessment as to whether choosing age 65 as the retirement age is a proportionate means of achieving the legitimate aims of achieving room at the top or collegiality.

It has not yet been established in a court of law that performance drops off markedly at age 65, or at any other age. If a practice has not applied a great deal of thought to this issue and produced cogent reasons for choosing whatever age it comes up with, it is vulnerable to attack.

Compensation

There is no limit to the compensation that can be awarded if there is a finding of unjustified discrimination. Partners or members who are deprived of a valuable livelihood that they cannot replace in whole or in part may be able to recover very substantial sums based on loss of earnings over multiple years.