Age of reason

Age discrimination, the decisions in Seddon and Tiffin and the employment ramifications of firms becoming ABSs are the hot issues for the peer panel


Rachel Dineley
Rachel Dineley

What impact have the Employment Equality (Age) Regulations 2006 had since implementation?

 

Charis Damiano, counsel, CM ­Murray: Prior to the implementation of the regulations, individuals who suffered from discrimination on the grounds of age were forced to seek ­redress indirectly, for example by claiming other types of discrimination or unfair dismissal.

However, since age became a category in its own right it’s become ­possible to bring age discrimination claims. Recruitment practices have been altered to take into account age discrimination protections towards both older and younger workers.

Uniquely within discrimination legislation, direct age discrimination is capable of being justified; many cases have turned on the issue of ­justification and proportionality and have opened up a new strand of ­discrimination law.

 

Arpita Dutt, partner, Stewarts Law: Since the regulations came into force on 1 October 2006, the number of Employment Tribunal (ET) claims for age discrimination has increased steadily. Younger and older workers have been empowered to challenge ‘age-old’ stereotypes and comments, and employers have been required to give considerable thought to – and provide evidence as to how to – ­justify age discriminatory practices.

One of the key areas in which the regulations have had effect is retirement ages. Prior to the regulations, while a default retirement age of 65 might have been a cause of chagrin to individual employees (and some ­employers), it did provide certainty.

The 2011 amendment that ­removed the default retirement age has brought some uncertainty to ­employers. Older employees have ­become wary of reasons for their ­redundancy selections and certain compensation scheme rules, giving rise to the need for advice. Indeed, a new body of HR ‘age management’ has been looking at barriers facing younger and older workers.

 

Rachel Dineley, head of equality and discrimination, DAC Beach­croft: Age regulations have had a big impact in the past five years. Many employers have had to rethink their approach to a range of practices and policies. We’ve seen a wide range of claims, in ­particular from middle-aged and older men. The abolition of the default retirement age is ­undoubtedly going to add to the number of claims over time.

We’re regularly seeing claims from employees who perceive that their age has been directly taken into ­account and held against them, or more often that their employer has adopted a practice that is indirectly discriminatory, for example when pursuing a redundancy exercise.

Employers need to plan and prepare carefully to ensure that any practice they adopt that affects a ­particular age group adversely can be justified objectively.

Sam Whitaker, counsel, Shearman & Sterling: For the more obvious areas of HR policy and practice, the age discrimination legislation has had a significant impact.

There have been sweeping changes in the way HR personnel approach the issue of retirement. Most employers have dispensed with specific ­retirement ages and instead now deal with underperforming older employees using underperformance management processes in the same way they would for any other employees.

Recruitment advertising has changed markedly, so you rarely see references to ages any more and there are fewer references to minimum or maximum length of experience required, although minimum PQE still seems to be common in legal recruitment advertisements.

That said, it’s surprising how often you still see employers adopting a ‘wait and see’ approach on some ­aspects of benefit and share plans that could be discriminatory. So, for example, it’s still relatively common to see share plans where favourable vesting treatment is given to participants who are leaving employment, but meet minimum length of service and age requirements. These provisions have the potential to be discriminatory, but some employers have kept them, probably waiting to see the result of any test case.

Where has the Seldon case left default retirement ages for partnerships?

 

Clare Murray, partner, CM ­Murray: The Supreme Court’s decision ostensibly offers partnerships that have retained default retirement ages some comfort. It’s still possible to rely on a set retirement age so long as it’s proportionate and supports

a legitimate aim in the particular ­circumstances of the firm.

However, the recent decision in Seldon makes it clear that, in addition to the partnership’s private aims, there must also be a social policy ­element. While partnerships will still in principle be able to retain retirement ages in their deeds, they will need to ensure that in their own ­circumstances they have cogent ­supportive evidence for the retirement age that will stand up to the ­intense scrutiny of the court.

Some firms have removed the retirement age from their partnership agreements altogether, and many others have increased their retirement ages. It’s noticeable, though, that while most firms are taking partner age discrimination protection ­seriously, some are in practice still targeting their older partners for exit, even where their retirement age has been increased or removed. This is without doubt a risky strategy and likely to result in more age discrimination claims.

Dutt: In Seldon the Supreme Court has provided some useful clarification about the type of aims that might be considered ‘legitimate’ in imposing a compulsory retirement age – essentially aims that have a ­social policy, labour market or public interest element.

The difficulty with drawing general principles from the case is that it’s quite fact-specific. There were no provisions in the partnership deed or culture to allow for Mr Seldon’s ­removal by performance management. It was also a small business where it might be reasonable to avoid workplace conflict by minimising the ­necessity to use performance management to remove partners and where it was important for staff retention that there be reasonably predictable opportunities for promotion and admission to the partnership.

For partnerships that can show their aims and ethos in seeking to ­enforce a compulsory retirement age are similar, Seldon provides a framework in which such an argument could succeed, but appellate court ­litigation is a likely outcome. Even then, with increasing life expectancy, the phased increase in the qualification age for the state pension and other economic factors, adopting 65 as the retirement age in 2012 may not be justifiable.

There are certainly going to be moves from partnerships to review their succession planning processes and revisit the removal provisions for partners in LLP agreements. There should also be the potential for creative succession planning, whereby older partners are given consultancy or advisory roles.

Dineley: The Supreme Court’s decision has reaffirmed the principles to be applied in justifying objectively the imposition of a retirement age in a partnership. It makes clear that a firm is entitled to pursue two kinds of legitimate objective: ‘intergenerational fairness’ and ‘dignity’.

The first can encompass the aims of facilitating access to employment by young people as well as enabling older workers to remain in employment. In Seldon the firm placed ­considerable emphasis on the desire to afford associates the opportunity of partnership after a reasonable ­period, thereby ensuring associates did not leave the firm, as well as facilitating realistic long-term expectations as to when vacancies would arise. That was entirely legitimate.

The second objective was ­perceived as more controversial (but also legitimate) – namely, avoiding the need to dismiss older workers for incapacity or underperformance, thereby preserving their dignity and avoiding humiliation, to say nothing of the cost and conflict arising from disputes concerning capacity and performance.

It is frustrating, if unsurprising, that the Supreme Court did not take the opportunity to give clear ­guidance as to how partnerships, and ­indeed employers, should set about justifying objectively a mandatory ­retirement age as a proportionate means of achieving either or both of these aims. The case has been referred back to the ET on the basis that it had not been shown that the choice of age 65 was an appropriate way of achieving the firm’s aim of limiting the need to expel partners by way of performance management, thereby preserving their dignity and contributing to a congenial and ­supportive culture.

There are two important factors not to be forgotten in considering the significance of the Seldon decision. The first is that the partners had agreed to a retirement age of 65. The second is that, at that time, the ­default retirement age’ of 65 for ­employees was provided for under the age regulations and was relied upon heavily by employers. In ­abolishing this the Government has put the onus squarely on employers to assess whether there’s a need to ­retire staff compulsorily.

The upshot of the case is that partnerships may well wish to review their retirement arrangements to ensure that they satisfy their intended purpose or purposes and are warranted. There are usually ­significant differences in the role of partner compared with employee, and the rights and obligations ­between individual partners and the firm need to be considered in that context.

Whitaker: To the extent that partnerships still have set retirement ages (and many now don’t), there is a danger that the decision may be seen as a justification in itself for maintaining those provisions. The Seldon decision helpfully established that a partnership or employer can in principle ­justify a directly discriminatory ­retirement age on social policy grounds, or to preserve the dignity of individuals by limiting the need to dismiss because of performance.

However, to establish that the ­retirement age is not unlawful ­discrimination, the partnership must go further and show that its set retirement age was a proportionate way of achieving those legitimate aims.

So, for example, although in ­principle preserving the dignity of ­individuals by avoiding termination through performance management may be a legitimate aim, if the firm in fact has sophisticated performance management processes in place ­already it may not be legitimate to avoid them for one section of the workforce only.

Thus Seldon is helpful in establishing general principles; but much will depend on the circumstances of each case. And the case should not be seen as a general justification that specific retirement ages are now justified.

Does the Tiffin case encourage the use of multi-tiered partnerships?

Murray: Tiffin tends to support the status quo of firms using such multi-tiered structures, including fixed-share partnership status. The ­decision as to whether or which of those structures to use tends to be driven by tax and national insurance (NI) issues. It is now more important for law firms to document the nature of their relationships clearly at each tier, ensuring that such documentation reflects the reality of the relationship. It’s essential to address the range of factors relevant in determining true partner status and collate supporting evidence.

However, it’s not enough simply to document these issues: each firm needs to check that it’s an accurate reflection of how the relationship ­operates, otherwise it runs the risk of being held to be a sham. A sham arrangement is likely to lead not only to exposure for the firm to employment law claims, but as indicated, also to potentially extensive tax and employer NI liabilities. Partnerships should use the next review of their partnership or LLP agreement to clarify, and if necessary regularise, arrangements for each tier.

Dutt: Partnership, whether in the traditional sense or of an LLP, ­connotes a broad (and contiguous) spectrum. Tiers of partnership may be demarcated by profit share, ­financial contribution to the business and/or management rights.

Tiffin confirmed that the true ­nature of the relationship will be ­determined by the factual and ­commercial reality. The judgment also suggests that there is unlikely to be any practical difference between the way full equity partners and fixed-share partners are viewed for the purposes of employment ­legislation.

However, there is a real and ­relevant difference between salaried partners and other types of partner where a salaried partner does not take a share of profit, makes no ­capital contribution and has no rights to join in management ­decision-making. Such a partner is an employee in all but name.

Tiffin does not necessarily encourage the use of tiered partnerships, but it does emphasise that partnerships should be clear internally about the intended status of partners.

Where it is intended that such an individual be a genuine partner, it is important that they assume the rights and obligations commensurate with partnership. However, where a tiered scheme delineates such rights and obligations it will be likely to assist in resisting any ­challenge to the status of an individual as anything other than a partner. It is a matter of substance over form. Is the next question to be determined by the appellate courts whether a partner can ever be an ­employee?

Dineley: The case undoubtedly ­encourages the use of clear terminology and what separates each band. The reasons for having multi-tiered partnerships and differentiating ­between equity, fixed-share and salaried ­status is driven principally by the ­relative contributions made, risks undertaken and rewards ­received. An LLP agreement will ­ordinarily make clear distinctions that should avoid the issues that arose in the ­Tiffin case.

The decisions of the Employment Appeals Tribunal (EAT) and the Court of Appeal (CoA) are helpful. They make clear the importance of having a clear and genuine agreement to minimise the risk of an ­allegation that partnership arrangements are a sham.

One of Mr Tiffin’s complaints was that he did not have a “real voice” in the management of the firm, but this was met with little sympathy. Given that in large firms much of the day-to-day decision-making is ­devolved to a small group of partners, the analysis of the status of a partner and their relationship to the firm is more likely to focus on the nature and ­extent of their obligations rather than their rights.

Although Mr Tiffin was unsuccessful in establishing employment rights, it should not be forgotten that partners do have other rights, in ­particular under the Equality Act 2010. Claims that can be brought to the ET extend to claims brought in connection with so-called ‘whistle-blowing’ under the provisions brought in under the Public Interest Disclosure Act 1998.

The recent EAT decision of Mr ­Justice Clark in Bates van Winkelhof v Clyde & Co (2012) makes clear that an LLP member can be a ‘worker’ in this context, so the lesson emerging from the Tiffin case is that the ­provisions of section 4(4) of the ­Employment Relations Act 2000 leave a lot to be desired and partnerships should not leave anything to chance by failing to provide comprehensively for the rights and obligations of partners in each tier of the firm and, in the event of a dispute, the appropriate mechanism for ­seeking to resolve it.

Whitaker: The aspects of Mr Tiffin’s fixed-share partner relationship that led the CoA to conclude he was genuinely a partner and not an employee are probably fairly common to most fixed-share partners. For example, he made a (small) capital contribution, received a limited profit share, had limited voting rights and would share in any surplus of the firm on a ­winding-up. From that perspective the case is reassuring for firms that use, or are considering using, fixed-share partners as one tier of their partnership structures, as such individuals will not be able to claim ­employment status.

That said, will the Tiffin decision by itself encourage the use of such tiers? Probably not, as the decision as to what structures to use for a partnership is generally determined by other factors, such as the culture the firm wishes to implement, the ­proposed management structure and so on. The question of what, if any, ­employment rights partners may be able to assert is likely to be of little importance when deciding the ­appropriate partnership structure.

QWhat are the employment issues that will affect alternative business structures (ABSs), particularly in a listed arena?

Damiano: Mergers with companies or businesses, or incorporation of the practice for example, will often result in employment issues, such as the Transfer of Undertakings (Protection of Employment) (Tupe) requirements and protections; changes in terms and conditions of engagement; new profit share arrangements; changes in tax and NI arrangements; and the issues arising from integrating different professional and commercial disciplines and workplace cultures.

Whereas law firms are regulated by the Solicitors Regulation Authority (SRA) and are free to decide their internal governance and profit-sharing arrangements, public companies owe obligations to outside shareholders, particularly in relation to profit and loss and remuneration of executives, and they must comply with the rules of the relevant listing authority.

Determining how former partners will be paid and who will receive share allocations in the new structure will need to be handled carefully. A director of a company (who is likely also to be a lawyer in the new structure) has to act in the best interests of the company, while as a lawyer their primary duty is to the client. Protecting client confidentiality and client interests generally in a listed environment may prove challenging.

Dutt: Lawyers used to the ‘packed-up’ role of partners in traditional firms may find that, in an ABS, they have less control over how the business is run. It’s also likely that the ­introduction of independent shareholders and specialist managers leads to greater analysis of business models and increased performance management for employees delivering front-line legal services.

In line with common commercial practice, some ABSs will choose to ­remunerate employees partly by way of shares (and share options) in the ABS. For the first time legal services providers may need to deal with ­employees as shareholders and the issues this can cause on term-ination of employment. Employees will need to understand how deferred ­compensation works, taxation and the forfeiture provisions that will be ­attached to these shares.

Career development for senior lawyers who can no longer find a path to equity and have to relinquish partner status will also be an issue. This could give rise to more flexible professional development into other senior business roles and more ­business-focused continuing professional development (CPD) training.

Lawyers who are also ­office-holders in an ABS will need to consider any actual or perceived tension between their legal and ethical ­regulatory requirements – for example, to act in the best interests of a client and the fiduciary duties of an office-holder.

Dineley: Any firm contemplating the merits of adopting an ABS will need to consider carefully how it is likely to affect employees at all levels. Some may see it as a positive move, which is likely to secure the longer-term competitiveness and success of the business. Others may view it with caution, if not scepticism.

All employees will expect change to ensue. Those resistant to change may find a shift in culture unpalatable. The challenge for management will be winning the hearts and minds of employees in embracing change.

One challenge may be retaining the talent of employees who perceive that a change in business model will be detrimental to their prospects of promotion, particularly to a traditional partner role. However, a successful transition from a traditional partnership to an ABS may afford more opportunity for employees as a whole and those with particular ­talents may thrive.

There is no doubt that headhunters are alive to the insecurities that change can generate, and ­employees who are otherwise settled in their jobs may be persuaded to jump ship if a promising opportunity arises elsewhere.

The employment issues any individual firm may face will depend on their strengths and weaknesses as an employer. In many professions – and particularly the legal profession – a firm’s people are at the heart of its success. Understanding and anticipating employment issues are essential when identifying and adopting the right ABS. Particularly in a listed arena, careful planning and appropriate consultation will be key.

Whitaker: If – and I think it’s a big if – one sees law firms in the UK listing on a stock exchange, I don’t see ­employment issues as one of the key challenges for ABSs. There would of course be issues for them because of the change in the status of partners to directors/employees or senior managers, but those should be relatively easy to deal with in practice.

If partners transition to become employees with employment rights and protections, it’s unlikely to cause headaches for firms. The majority of firms’ staff are already employees, so HR departments are used to dealing with employment ­issues; although it would mean they’d now have to deal with the most senior employees in the ­organisation.

In brief

Employment law is a constantly changing area. This week our panel examines recent cases affecting the legal profession and discusses their impact on issues such as the status of a partner.

The panel also looks at the employment issues law firms converting to alternative business structures should bear in mind.