The new age discrimination law means firms wishing to make older partners retire will have to justify their actions. Cameron Timmis examines the implications


Over the past few weeks, law firms across the country have been bombarding their clients with advice about the new age discrimination law, which came into force on 1 October. Eversheds even found itself at the top of the news agenda the other week with its survey uncovering widespread confusion about the provisions among companies. But what some law firms may not realise is that the legislation could have its most far-reaching impact not on clients, but on the firms themselves.



‘It’s difficult to think of any other sector more affected by the new law than law firms,’ says James Davies, joint head of employment at City firm Lewis Silkin, which has been running workshops on the impact of the regulations over recent weeks. ‘I’m not trying to be alarmist but it’s clear to me that many law firms are not properly prepared and are less prepared than firms in other industries.’



The new law, the Employment Equality (Age) Regulations 2006, exposes firms to potential age discrimination claims from many quarters. The most likely source of claims, say experts, will be from partners who are forced to retire before they want to – euphemistically referred to as ‘easing out’ or ‘managing out’.



Under the regulations, partnerships will only be able to impose a retirement age on partners by proving an ‘objective justification’ for doing so. Crucially, in the case of partners, there is no statutory default retirement age of 65, so even if partnerships have a retirement age of 65 or above, the firm will still have to prove objective justification. Both the Employment Lawyers Association (ELA) and the City of London Law Society lobbied unsuccessfully for partners to be within the exemption that means a mandatory retirement age of 65 or above for employees will not amount to unlawful age discrimination.



In today’s youthful law firm culture, where many practices operate a de facto retirement age for partners of around 55, this could present real difficulties. While many partners are happy to quit early, certainly some, given the opportunity under the law, may assert their right to continue working. Indeed, it is striking how few are over 55, particularly among City firms – less than 5%, according to most surveys. This is in stark contrast to US practices, where partners routinely work into their 60s, or even 70s.



‘The whole concept of retiring partners early is going to be difficult to sustain,’ warns Ashley Norman, an employment partner at national firm Pinsent Masons. ‘Even if you want to retire a partner at 65 you are going to have to objectively justify that. You can’t just serve a six-month notice and have a meeting with them. You will have to come up with a business need.’



Most employment law experts predict that finding an objective justification for retiring a partner will be difficult. One possible justification is ‘workforce planning’ – so that the size of the partnership can be properly managed – but even this may be difficult to argue. In practice, this means that enforcing any retirement age in a partnership, even one over 65, will be problematic. If so, the only lawful method to retire unwilling partners will be on ‘performance’ grounds, if the partner is not contributing to the expected standard.



‘What we will get in the future is partners leaving and claiming they were pushed out for reasons influenced by their age,’ says Mr Davies, who chairs the ELA’s age discrimination working party. ‘Law firms are going to have to prove age was not a factor. In order to show that, they will have to show they have transparent criteria.’



The problem at the moment, says Mr Davies, is that ‘many law firms do not manage partners very vigorously’. As a result, he says: ‘If a partner says “I don’t think I was pushed out on grounds of performance – I’ve had no warning, no appraisal”, he is going to have a very good chance of winning.’



To illustrate the scale of the threat, Mr Davies cites a partner earning £300,000 a year who plans to retire at 65, but is forced to retire at 55. ‘He will have a claim of £3 million… that is big money.’ As with sex discrimination claims, there is no cap on compensation in age discrimination claims.



The upshot of the regulations, says Michael Short, chairman of the Law Society’s employment law committee, is that firms are ‘going to need to give careful thought to how they manage declining performance on the part of older partners’. He suggests that firms should now be putting in place partner performance appraisal systems, so that ‘older partners who are not performing satisfactorily can be managed out of the firm, if need be’.



A second potential source of age discrimination claims comes from younger partners. In this case, firms are vulnerable because of the lockstep system of partner remuneration, which is widely used in law partnerships.



As with most discrimination law, age discrimination can be committed directly and indirectly, by a policy or practice that causes discrimination to certain groups. As a service-related benefit, because partners are paid on the basis of number of years served as an equity partner, the lockstep system may be open to challenge from younger partners who claim they are entitled to a greater share of profits.



This potential problem has not gone unnoticed. Eversheds recently changed its remuneration system to a completely merit-based one, linked purely to performance rather than seniority, citing the age discrimination legislation as one reason for the change.



According to the regulations, service benefits can be awarded lawfully for length of service for up to five years. After this, the service benefit must be shown to ‘fulfil a business need’, such as encouraging loyalty or motivation.



While it is unclear how an employment tribunal would view ‘business need’, many experts think that the lockstep system is vulnerable to challenge. ‘Lockstep is probably under threat,’ says Mr Short. ‘In the short term, many firms will continue to use it, but it would not surprise me if there are challenges to lockstep arrangements that exceed five years.’ He expects that firms which operate lockstep pay scales of more than five years ‘will shrink them’.



Simon Jeffreys, an employment partner at City firm CMS Cameron McKenna, is more sanguine about challenges to lockstep. ‘If you have a lockstep system – and we do here – that requires objective justification. It doesn’t mean you cannot do it, and it isn’t to say other methods of remunerating partners are OK. That might be equally tainted. A lockstep system looks bad on the face of it but is quite capable of objective justification.’



Firms should also not overlook the fact that age discrimination applies as much as to the young as to the old. At the moment, some employment lawyers contend that firms’ trainee recruitment programmes are a potential source of litigation.



‘People are not ready for this,’ says Mr Davies, whose employment team has been looking at firms’ graduate recruitment Web sites to test the extent of the problem. In trainee recruitment materials, he says, ‘there is a tendency to assume trainees will be in their early 20s… the images associated with trainees and the language associated with trainees gives the appearance a firm is looking for younger candidates. This will be used by older candidates who are refused places to support their claims’.



Mr Davies says he already receives frequent correspondence from disgruntled training contract applicants making allegations of law firm discrimination, often from older applicants.



In addition, Mr Davies suggests practices will have to increase the net of recruitment beyond the usual ‘milk round’ of universities to demonstrate they are seeking to attract older graduates.



A final headache for firms comes from recruitment in general, specifically advertising of positions using the acronym PQE (post-qualification experience). By stipulating a minimum, and particularly maximum, required number of years’ experience, the worry is that practices may be discriminating against younger, or older, candidates.



‘If an advert says “Wanted: two to three years’ PQE” – that is a fairly obvious own goal,’ says Mr Jeffreys. ‘You shouldn’t be using a shorthand for someone who has particular qualities. That is indirect age discrimination.’ To be safe, says Mr Jeffreys, job adverts should state the type of skills wanted and range of experience, rather than a specific number of years.



But Mr Norman thinks firms will be given some latitude when using the term PQE: ‘I don’t think it’s a definite no-no. Law firms may argue that having certain levels of experience is an indicator of someone’s familiarity with certain aspects of the job, although that’s going to be a difficult argument to sustain up to the higher levels of PQE. Really, law firms should be trying to establish a person’s specific experience rather than how long they have been qualified.’



For firms that have not yet resolved these issues, it could be time to call in the lawyers.



Cameron Timmis is a freelance journalist