Terry W. Conner 2013-01-26 04:11:58
REGARDLESS OF ITS ENTITY STRUCTURE,1 SOONER OR LATER ALMOST EVERY LAW FIRM CONFRONTS THE MYRIAD ISSUES SURROUNDING PARTNER OR SHAREHOLDER RETIREMENT. Retirement may mean the lawyer’s full retirement from the practice of law, or a significant change in the partner’s status with the firm, such as moving from a position as equity partner to income partner2 or of counsel. In either case, the lawyer’s retirement can involve issues regarding maintenance and transition of clients for whom the retiring lawyer is responsible, transition of the lawyer’s leadership and administrative duties at the firm, financial security of the lawyer, structure and compensation for any continuing service relationship with the firm, and (last but certainly not least) friendship and fairness. A number of recent trends have complicated the retirement drama. These include the swell of baby boomers approaching retirement, lengthening life expectancies for retiring lawyers, post-2008-meltdown concerns regarding the certainty of retirement income, flattened revenue and income growth at many law firms, rising healthcare costs, and increasing levels of contention and litigation regarding mandatory retirement policies. This article addresses the current commentary and contention regarding partner mandatory retirement policies, and then offers insights into certain components of law firm retirement policies, which will be relevant whether or not retirement occurs as a result of a mandatory retirement policy. Given the wide range of law firm sizes, compositions, goals, and experiences, the article shoots for what to consider, rather than what to do. MANDATORY RETIREMENT POLICIES STIR DEBATE During the past decade, the debate regarding law firm mandatory retirement policies has increased substantially. This results from the trends noted above, more publicized surveys of lawyer sentiment regarding retirement policies, bar association pronouncements, and claims against law firms enforcing mandatory retirement policies. Regarding lawyer sentiment, in 2005, the legal industry consultant Altman Weil polled managing partners and executive committee members in U.S. law firms having 50 or more lawyers. The survey reported that approximately half of responding law firms had mandatory retirement policies, with the most popular mandatory retirement ages being 65 and 70, although a number chose age 75. Of those surveyed, however, only 38 percent of respondents agreed with their firms’ mandatory retirement policies. More recently, Altman Weil opined that the profession will move away from mandatory retirement, including as a result of expectations of lawyers and the profession, age discrimination issues, and competitive pressures. Also, both the New York State Bar Association and the American Bar Association have urged abandonment of mandatory retirement policies.3 The ABA House of Delegates recommended that law firms evaluate partners purely on the basis of individual performance, rather than on the basis of age. In this hypercompetitive legal marketplace, some firms are using their lack of a mandatory retirement policy as a tool to recruit more senior partners from other law firms having mandatory retirement policies. Regarding partner age discrimination claims, a basic issue is whether the partner is deemed an employee, because federal and state anti-discrimination laws usually protect only employees.4 In its 2003 decision in Clackamas Gastroenterology Assoc., P.C. v. Wells,5 considering the status of shareholders in a medical practice for purposes of the Americans With Disabilities Act, the U.S. Supreme Court described the principal factors to be considered in determining whether someone is an employee or an employer: (1) whether the organization can hire or fire the individual or set rules for the individual’s work; (2) the extent to which the organization supervises the individual’s work; (3) whether the individual reports to someone higher in the organization; (4) the extent to which the individual can influence the organization; (5) whether the organization and individual intend that the individual be an employee, as expressed in agreements; and (6) whether the individual shares in the profits, losses, and liabilities of the organization. Returning to law firm mandatory retirement policies; law firms took notice when, in 2007, a federal judge approved a $27.5 million consent decree between the law firm of Sidley Austin Brown & Wood and the Equal Employment Opportunity Commission. The EEOC had sued Sidley Austin for violation of the Age Discrimination and Employment Act, following the firm’s demotion to of counsel of 32 partners allegedly on the basis of their age.6 In the consent decree, Sidley Austin agreed that the affected partners were employees and that it would no longer implement age-based retirement policies. Before the settlement, the 7th Circuit held that the EEOC had alleged facts sufficient to show that the Sidley Austin partners may qualify as employees protected by the Act.7 More recently, the EEOC and Kelley Drye & Warren settled an age discrimination case8 involving a partner who was required to depart equity partner status at age 70. The consent decree prohibits the firm from basing actions affecting an attorney’s status, current compensation, or ownership on the attorney’s age; requires firm partners to attend training on anti-discrimination compliance; and requires the firm to pay the complaining attorney $574,000 in back pay. According to an AmLaw Daily article, following the Kelley Drye settlement, a senior trial lawyer with the EEOC’s New York office said the agency would consider bringing cases against other law firms with or without a complaint from a partner being filed first. The president of the New York State Bar Association commented favorably on the settlement, stating that, “The retirement policies of law firms should be governed by flexibility and consideration of the needs of the firm and the individual partner.”9 The Sidley Austin and Kelley Drye cases were settled before a judicial decision. Some other law firm cases have held, based upon the facts presented, that the affected partners were not employees for purposes of the Act.10 Whether or not a partner in a law firm is an employee, of course, depends upon the nature of the partnership interest, relevant governing documents, and how the law firm is managed and operated. Therefore, law firms that continue to maintain mandatory retirement policies or that may take adverse employment actions with respect to older partners should carefully evaluate their partnership agreements, management practices, and operating procedures to determine whether those factors would materially support a position of owner not employee status under existing court authority. MAJOR COMPONENTS OF RETIREMENT POLICIES Despite the contention and litigation, many law firms continue to require mandatory retirement. In 2010, a major professional liability insurance company analyzed more than 80 partnership agreements obtained from insured firms in its underwriting process and found that approximately 65 percent had mandatory retirement provisions, with retirement age ranging from 65 to 72, and 43 percent permitted a partner to defer retirement past the mandated age, subject to approval of a governing body. Surprisingly, some did not address retirement at all. Basic goals of most mandatory retirement policies include providing client management, economic, and leadership opportunities for younger partners, and certainty regarding retirement timing. A firm may eschew mandatory retirement, but adopt criteria for maintaining equity partner status, which accounts for differences in individual partner performance but necessitates individual partner evaluation, not just for older partners, but all partners. Whether or not a law firm has a mandatory retirement policy, the firm, in accordance with its governance system and with good internal communication and support, should adopt a policy governing partner retirement from the firm. Typically, the fundamental expectations regarding retirement (e.g., any mandatory retirement requirement and retirement payment obligations) are included in the firm’s partnership agreement, but certain retirement-related topics may be embodied in a separate policy statement. Most retirement policies will address one or more of the following components: 1. Normal retirement age, for the purpose of entitlement to certain retirement benefits. 2. Early retirement age, for the purpose of entitlement to retirement benefits. 3. If age-based mandatory retirement is adopted, then whether at mandatory retirement age the partner is no longer entitled to be an equity partner or must retire from the firm altogether, and whether a governing body can waive the requirement. 4. If age-based mandatory retirement is not adopted, then what standards does the firm apply in determining whether a partner may continue as a partner? 5. Whether a partner may continue in law firm management after a certain age. 6. The timing of return of an equity partner’s capital.11 7. Continuation of certain benefits, such as health insurance and life insurance. 8. Post-retirement payment obligations, if any, of the law firm. 9. The title and role of a partner continuing to work for the firm, following retirement. 10. Non-competition agreements in exchange for retirement benefits.12 11. Pre-retirement transition and succession planning. In facilitating partner retirement, arguably the most important policy-related subjects are: (1) having a recognized procedure for discussing and planning the partner’s retirement; (2) if the partner may continue working for the firm after retirement, then the characteristics of continued employment; (3) providing appropriate post-retirement payments to the retiring partner; and (4) if the firm does not have a mandatory age-based retirement policy, then the performance standards required of its equity partners. PRE-RETIREMENT PLANNING FOR SUCCESSION AND RETIREMENT Regardless of a firm’s formal retirement policy, the firm and a partner, in the zone of retirement, should have a candid discussion regarding future transition of the lawyer’s principal client relationships to other lawyers within the firm; transition of practice group and firm leadership responsibilities; expectations regarding the partner’s work commitment; and, if the equity partner continues to work for the firm in a different position, then the title, benefits, responsibilities, and perquisites of the new position.13 These discussions often include representatives of the firm and the partner’s practice group, and perhaps a retirement planning committee, and may be memorialized in a multiyear transition plan. The law firm’s compensation system will be relevant in at least three retirement-transition respects: (1) by rewarding the institutionalization, rather than individual-partner ownership, of client relationships, the transition of client relationships of the retiring partner is facilitated; (2) reasonably compensating a partner approaching retirement for accomplishing the necessary transition, which necessarily will reduce the partner’s billable productivity and client-related contributions (typically principal factors in determining a partner’s compensation); and (3) providing guidelines for setting the post-retirement compensation of the partner, if the partner will continue working for the firm in some capacity. POST-RETIREMENT PAYMENT OBLIGATIONS Some partnership agreements require the firm to make post-retirement payments to the retiring partner. For example, payment obligations may be tied to the retiring partner’s compensation history at the firm or a percentage of the firm’s accounts receivable and work in process. In smaller firms, a significant partner’s retirement may result in the purchase by the remaining partners of the retiring partner’s share of firm equity and goodwill.14 Unfunded contractual payment obligations burden the remaining partners in the law firm.15 To alleviate these burdens, many law firms have eliminated or limited unfunded obligations and adopted funded retirement plans16 to permit their partners to have good retirement assets and income. The structure of retirement plans affects not only retirement planning but also partner retention. STANDARDS FOR CONTINUING AS AN EQUITY PARTNER Naturally, law firm partners contribute in many different ways, and a partner’s contributions will vary from year to year based on a variety of economic, client, and in some cases, personal factors. Also, exceptional contributions in one area, such as business development and client management, may help offset below-norm performance in another area, such as personal productivity and collections. Therefore, it is challenging to articulate precisely what it takes to be and remain an equity partner in a law firm. Nevertheless, the firm can, based upon its structure, economics, compensation philosophy, partnership admission standards, and culture, provide equity partnership continuation guidelines, including in such areas as business development, management of client relationships and projects, personal productivity and collections, supervised team productivity and collections, leadership in firm, practice and bar matters, and overall commitment level. This article cannot begin to suggest a particular retirement-policy path for any law firm. But regardless of whether the firm has a mandatory retirement policy, assuring the smooth transition from equity partner to another status is an important goal that deserves real discussion and attention. NOTES 1. In Texas, law firms are typically formed as limited liability partnerships or professional corporations but also may be sole proprietorships, general partnerships, or professional limited liabilities companies. In referring to law firm governing documents, this article will refer simply to “partnership agreements.” 2. Typically, an income or non-equity partner does not share in the profits and losses of a law firm or contribute equity capital into the law firm. The partnership agreement may describe other differences between equity and income partners, including as to voting rights, admission to the partnership class, and expulsion from the class. 3. See Report and Recommendations on Mandatory Retirement Practices in the Profession, New York State Bar Association on Age Discrimination in the Profession, January 2007; and American Bar Association Recommendation of the House of Delegates, Aug. 13-14, 2007. 4. The EEOC’s compliance manual states “that in most circumstances, individuals who are partners . . . will not qualify as employees,” but that “an individual’s title does not determine whether the individual is a partner . . . as opposed to an employee.” EEOC Compliance Manual § 2-III (2000). See also 29 U.S.C. § 630(f) defining “employee,” but without much guidance. Note: this article does not address nuances under state anti-discrimination statutes, but typically most states interpret their laws consistent with federal counterparts. 5. 538 U.S. 440 (2003). 6. See EEOC v. Sidley Austin Brown & Wood, L.L.P., No. 05-CV-0208 (N.D. Ill. 2005). 29 U.S.C. § 623(a)(1) provides that it is unlawful for an employer to fail or refuse to hire or discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s age of 40 years or older. 7. See EEOC v. Sidley Austin Brown & Wood, L.L.P., 315 F.3d 696 (7th Cir. 2002). 8. See EEOC v. Kelly Drye & Warren, L.L.P., No. 10-CV-0655 (S.D.N.Y. 2010) 9. New York State Bar Association News Release, April 16, 2012. 10. See, e.g., Weir v. Holland & Knight, L.L.P., 201 WL 6973240 (N.Y. Sup. Ct. 2011) (partner had voting rights, control over work environment, and some management involvement, and could be terminated only by a partnership vote; the decision also discusses partner reporting responsibilities, sharing of profits and losses, and management decision making); Solon v. Kaplan, 398 F.3d 629 (7th Cir. 2005). 11. In an informal survey of about 50 managing partners at a recent law firm conference, a majority of managing partners indicated that their firms return a retiring partner’s capital within a year. 12. The enforceability of such restrictive covenants will vary based on applicable state law. Rule 5.06 of the Texas Disciplinary Rules of Professional Conduct (the Texas Rules) prohibits agreements that restrict the rights of a lawyer to practice after termination of the partnership relationship, except for agreements concerning benefits upon retirement. 13. To help ease the transition to, e.g., of counsel status, and retain the benefits of the lawyer’s considerable experience and relationships, the firm may include the of counsel in partners meetings, strategy sessions, and business development planning activities that would benefit from the lawyer’s continuing participation. 14. Rule 1.17 of The Model Rules of Professional Conduct permits the sale of a law practice to the law firm or its remaining lawyers, subject to certain conditions. The Texas Rules do not address the subject. See also Cotterman, Valuation of a Law Firm and a Practice, Altman Weil Report to Legal Management (February 2008). 15. These burdens recently were described in a March 5, 2012, Wall Street Journal article titled, “Next Pension Clash: Law firms.” 16. It is (far) beyond the scope of this article and the author’s acumen to wade into partner retirement plans, but we would briefly note the following. Retirement plans may be unqualified or qualified for federal tax purposes, and may be funded either by the partner’s own contributions or by contributions made to the retirement plan by the firm. Recently, as a result of legal changes in funding rules, heightened volatility in equity markets, persistent abnormally low interest rates, and increased life expectancies, traditional defined benefit pension plans have given way to cash balance plans, which provide greater flexibility regarding contributions and benefits, while reducing the firm’s exposure for underfunding of the pension plan. TERRY CONNER is a managing partner and member of the board of directors for Haynes and Boone, L.L.P. He is an active member of numerous other committees within the firm, and has more than 30 years of experience practicing in the area of business transactions, including commercial loans, loan restructures, and technology transactions.
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