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Is Mandatory Retirement Policy Age Discrimination?

If you aren't already aware of the Equal Employment Opportunity Commission's push for PricewaterhouseCoopers to abolish its mandatory partner retirement age policies, you should be, because you might be next. In 2010, the EEOC started sending warning shots over PwC's bow, telling it the firm's mandatory retirement age of 60 for partners was discriminatory and should be abandoned. Much saber-rattling, but no legal action, ensured.

Recently, the EEOC extended its gaze to other big accounting firms, Deloitte and KPMG. The American Institute of Certified Public Accountants wrote a sternly worded letter to the EEOC, asking it to back off because the policies applied only to partners, not employees. The EEOC believes those partners are actually employees. So far, no lawsuits have been filed.

Today, this issue is confined to the accounting world, but experts suggest that financial firms with mandatory partner retirement age policies take notes and be prepared. "If, and only if, the EEOC succeeds, it could create a potential problem," says Ryan Shanks, CEO of Finetooth Consulting, a recruiting and management consulting firm for broker-dealers and financial advisors. "But is it the EEOC's place to dictate [partners'] line of strategy?"

According to federal law, mandatory retirement age policies are illegal if applied to employees. The tricky part is determining who that is.

Because the EEOC believes PwC partners qualify as employees, it has told the firm it believes it is violating the 1967 Age Discrimination in Employment Act. However, PwC pointed out that its mandatory retirement age policy has been in place since the 1960s to allow younger workers to move up the ranks and only applies to partners, which they have never considered "employees." The EEOC declined to comment for this article.

When asked by PwC to clarify its concerns, the EEOC simply recited the six-part test in the U.S. Supreme Court's 2003 decision, Clackamas Gastroenterology v. Wells, which defines who qualifies as an employee in a partnership. The EEOC evaluates the following factors when determining if a person is protected through ADEA: Whether the firm can hire or fire the person or set the rules and regulations of his or her work; whether and to what extent the firm supervises the person's work; whether the person reports to someone higher in the firm; whether and to what extent the person can influence the firm; whether the parties intended the person to be an employee, as expressed in written agreements or contracts and whether the person shares in the firm's profits, losses and liabilities.

There is no bright-line answer to any of these open-ended determinants, so even if a firm believes it passes the partnership test, it may still fall afoul of the EEOC. "The overall key factor [in the six-part test] is control," says Wayne Outten, founder and managing partner of employment law firm Outten & Golden LLP. "Are they distinguishable from someone who is not a partner, and to what degree are they distinguishable?"

On the surface, the difference between partners and employees may seem clear, but in the legal world, the lines are often blurred. For instance, partners can't contract their way out of federal anti-discrimination laws. Even if they sign all the documents indicating they want to waive their rights to the protection of the law, it is meaningless as long as they are receiving employee-like compensation, Outten says. He adds that the Commission will look at the nature of the relationship of the partner to the firm, which means the Clackamas factors are by no means exhaustive.

Succession Planning Denied
If the EEOC does look at broker-dealer partnerships, firms could not only face costly legal liability, but lose their ability to create age-based succession plans. "Too many firms have done a dismal job in taking over the greying job," says Howard Diamond, managing director and COO of Diamond Consultants. A mandatory retirement policy makes it more difficult for a firm to put off a transition or fail to plan for it, he says.

But if the EEOC made it harder for firms to phase out older partners, transitions could be disrupted or not happen at all. And while the pending advisor retirement tsunami seems to make mandatory retirement a distant concern, some partnerships have built entire recruitment and retention programs around them.

While a lawsuit from the EEOC is an obvious concern, advisors should perhaps be more concerned about internal litigation from partners who take a cue from the EEOC and sue their firms for forcing them to take mandatory retirement. "The real danger for a smaller firm is if they discriminate against 'partners' that have rights as an employee," Outten says.

Possible Solutions
There are ways for firms to get around the potential problem of mandatory retirement. One way is to revisit the partnership structure to make sure partners have a sufficient amount of control and skin in the game so as to invalidate their status as an employee. This is still wide open to interpretation by the EEOC, so this strategy isn't fool-proof.

Outten suggests that firms get advice from an employment lawyer on whether it makes sense to maintain the mandatory retirement clause at all. Shanks agrees, adding that partners can also study the demographics of past cases, follow what the EEOC is doing, financially model out proposed ages of retirement and determine how they might affect the firm. Another idea, says Outten, is to tie a mandatory retirement clause to a partner's productivity rather than age. There is no law forbidding employers to let go of employees based on their performance, he adds.

"Retirement is not always determined by advisor age," says Mike Byrnes, founder and president of Byrnes Consulting. "It can be determined by how he or she performs, reviewed annually."

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