Older and wiser?

Does the Government’s fight against age discrimination spell the end for lockstep? Jon Robins reports on how the prospect of seventy-year-old partners could spark a change in law firms’ partnership structures

Could the proposed age discrimination legislation mean a forced early retirement for the increasingly outdated notion of lockstep? This is one of the more intriguing questions keeping employment law-yers busy as they study the details of the Government’s consultation paper ‘Equality and Diversity: Age Matters’, which aims to ban direct and indirect discrimination on the grounds of age by the October 2006 deadline.
“It will probably be another nail in the coffin of lockstep,” says Ronnie Fox, senior partner of Fox Williams and founding member of the Association of Partnership Practitioners. “It will encourage a climate whereby people will be looked at for the actual contribution they are making and not how long they have managed to sit around.”
It is expected that the unreconstructed ways of some law firms could prove a boon for discrimination law specialists. How to manage under-performing partners – that is, chop the deadwood from the equity partnership – is a perennial topic of practice management seminars. Making it illegal for partnership agreements to require their partners to retire in their 50s (as opposed to allowing lawyers to work until they are 70 years old, which is the recommended retirement age), could represent a huge spanner in the works for efficient and unsentimental law firms.
Ministers stress that their proposals will not ban employment practices that can be reasonably justified, as businesses “must be able to operate
productively”. But employers who adopt an age-based approach will have to justify it – potentially at an employment tribunal – on one of five grounds. These grounds are: health, welfare and safety; assisting employment planning; if the post requires years of training; encouraging or rewarding loyalty; or if there is not a “reasonable period” of employment before retirement.
So will the traditional lockstep – where profits are divided among partners strictly according to when they joined the partnership – survive the revolution? Or will aggrieved rain-making stars whose business acumen generates millions in fees take on those partners who are deskbound but effectively retired?
Janet Gaymer, senior partner at Simmons & Simmons and founding chair of the Employment Lawyers Association, believes that any potential legal challenge is dependent on three questions: Will the legislation cover partnerships? What elements of lockstep would be vulnerable to a challenge? Could it be justified under the legislation?
On the first point, Gaymer says: “The law will protect people whether they are directly employed or working under another type of contract, such as agency workers and some self-employed people. On past form, sex discrimination and equal pay discrimination has historically applied to equity partners so one can make an educated guess that this legislation will similarly apply.”
There are some dissenters. According to Dickinson Dees employment partner Robin Bloom, the scope of the legislation is clearly aimed at employer-employees. “My view is that partnership is not an employer relationship, it’s a contractual relationship and so this law will not have a direct impact on equity partners,” he says. Having said that, the most commonly held view is that partnership arrangements will be well within the range of the legislation.
The second question is whether a seniority-based system such as lockstep will offend age discrimination proposals. “There is no doubt that it would be capable of being challenged by someone who is younger than the average partner, but the challenge would not be direct discrimination on the grounds of age because the system is based on length of service,” explains Michael Rubenstein, the editor of ‘Industrial Relations Law Reports’ and a leading expert on age discrimination. Instead, the claim would be for indirect discrimination. “It would be up to the firm to justify its use of such an arrangement, but personally I think it is likely that they would be able to do that in the great majority of cases,” he adds.
Gaymer agrees that firms could justify a seniority-based scheme and flags up the possible justifications mentioned in the consultation paper, such as encouraging and rewarding loyalty and facilitating employment planning. “One reason why lockstep is there is to encourage cohesiveness,” she says. “If firms have a lockstep system, particularly pure lockstep, they will need to ask themselves if they can justify the seniority element and would they say it was a legitimate practice?”
James Davies, co-head of Lewis Silkin‘s Employment and Incentives Department and chair of the Employment Lawyers’ Association’s working group on age discrimination, says that there are two possibilities for justifying lockstep under the current proposals. “One is, as the consultation paper envisages, they will have to say it is a legitimate aim, but it is up to each employer or partnership to demonstrate that it is an effective way of encouraging and rewarding loyalty. I personally think that’s going to be very difficult.” He cites the example given in the consultation paper that a voluntary organisation that gives additional leave after a period of employment would be expected to demonstrate that it
was an effective way of rewarding staff for loyal service. As Davies says: “It’s going to be a dangerous route for employers and partnerships to follow because you will be specifically relying on your ability to persuade an employment tribunal that the best way of encouraging loyalty is lockstep.”
But Davies believes that it could also be possible for such schemes to be dealt with under Article 6 of the original directive, which allows for the justification for direct discrimination and, in Davies’s view, goes some way further. “I think it would be an unpopular result of age discrimination law if any service-related benefits were to be left at risk,” he argues. “The question is whether or not the Government could – through the devil in the detail – say that service-related benefits are inherently lawful, and it might be able to do that under Article 6.”
Rubenstein also believes that lockstep is part of the wider prob
lem of how the legislation would treat service-based pay systems. He believes that the Government might be minded to “put forward either an exclusion or other express guidance or code of practice”. He adds: “The short answer is that I don’t think that lockstep would be under threat at the moment. Yes, it’s capable of being challenged, but in my personal opinion it’s unlikely to succeed. But there could also be a specific exclusion as regards service-based systems in any event.”
The question remains, should lockstep go on the grounds that it offends the spirit of the legislation? “I don’t think so,” says Davies. “I don’t think that the purpose of this legislation is to tackle service-related arrangements. They are almost a little-thought-of consequence of the directive.”
Fox says: “There’s always a danger that it encourages people to retire while still sitting at their desks, so I am afraid that lockstep, which has stood many very large and well-known City firms in good stead, will be under attack partly as a result of age discrimination legislation.” Fox, a fan of modified lockstep, believes that it is “extraordinary” in this day and age that people are “judged to be all the same and to have the same retirement age”.
Fox draws the comparison between the age profile of UK firms with practices on the other side of the Atlantic, where it is not uncommon to find partners well into their 70s and 80s. As he puts it: “Grey hair commands a premium [in the US]. US firms have learned to play to the strengths of people rather than to the dates on someone’s birth certificate.” Fox believes that the new legislation will hasten the decision by many firms to implement a modified form of lockstep with a merit-based element.
And what about those long-serving partners who are not quite as productive as their young and thrusting managing partner would like them to be? According to many employment law specialists, age discrimination law could forever change the dynamics of equity partnerships.
As Tarlo Lyons partner Nigel McEwen says: “There are an increasing number of partners and lawyers who want to stay on longer in practice than has been the case over the last five years. This is especially true at a time of both declining profits in small-to-medium sized firms and reduced pension funds.”
At the same time, according to McEwen, it looks likely that the UK Government will set a mandatory retirement age of 70 years. “The result will be that many older partners will want to take advantage of the age discrimination laws to protect their position, giving management quite a large potential headache,” he says. “Do they accept the position – possibly leading to fewer younger partners being made up – and exist with an older-profile partnership, or do they leverage out older partners with a larger compensation package incorporating an element to pay off that partner’s age discrimination rights?” So, time for a partnership cull to clear the way for young blood before the October 2006 deadline, then.
Lewis Silkin’s Davies predicts: “There are a number of older partners in law firms in the UK that are eased out who are going to have huge claims if they think this is a result of ageist stereotypes.” As he points out, there has been age discrimination legislation in place since 1967 in the US and the most common claims on the other side of the Atlantic are made by “highly paid white male executives who lose their jobs in their 60s”. He says: “Take a partner who is in their late 50s at a big corporate law firm who is eased out to create a space in the partnership for the thrusting young senior associates, and he is going to say ‘Well, my age was a factor behind the decision’.” And the sums are not difficult – if, for example, he is 57 years of age, making £50,000 a year and plans to work for another 13 years, “that’s a lot of money,” says Davies. Partnerships may never be the same again.
Age matters Earlier this month, the Department of Trade and Industry published a consultation document, entitiled ‘Age Matters’, on proposals to outlaw age discrimination in the workplace by October 2006. The Government is now consulting on how the UK should implement the EU Employment Directive, which prohibits age discrimination in employment and vocational training. Issues up for consultation include: the abolition of employers’ mandatory retirement ages (dismissal at a given age) unless employers can objectively justify them; the possibility of a default retirement age of 70, at which employers could retire employees; proposed legitimate aims which employers, exceptionally, could use to help justify the retention of a small number of age-related practices; and changes to the legislation regarding unfair dismissal and redundancy. Patricia Hewitt, Trade Secretary and also Cabinet Minister for the Women and Equality Unit, said: “Age discrimination is the last bastion of lawful unfair discrimination in the workplace and it will be outlawed. In particular, we must challenge the ageist assumption that younger employees make the best workers. It’s a sad fact that thousands of people in their 40s and 50s who have been made redundant never work again.”