Feature

posted 3 Apr 2007 in Volume 9 Issue 10

Feature: Older and wiser – a dangerous combination

EU age-discrimination regulations came into force in the UK on 1 October 2006, so law firms should have considered their potential impact some time ago. As one prominent firm begins 2007 with the prospect of a tribunal, however, there may still be lessons to learn to ensure compliance and minimise the risk of bad publicity. Lewis Silkin LLP, a firm specialising in partnership and employment law, outlines some of the key points to consider.

By Clive Greenwood and Fergus Payne, joint heads of Partnership and LLPs, and James Davies, joint head of Employment and Incentives, Lewis Silkin LLP

Law firms are particularly vulnerable to age-discrimination claims for at least three reasons. Generally, lawyers earn a lot of money, which can make it worth their while to sue; they work in an environment where resolving problems through the courts and tribunals is second nature; and they often know their rights or, if not, know someone who does. In this article, we will examine common pitfalls law firms may encounter as a result of The Employment Equality (Age) Regulations 2006 (‘the Age Regulations’).

Partner appraisals

In the case of partners, the most likely claims will come from 50-somethings who are forced to leave and whose rights have historically been limited to those under the partnership or limited liability partnership (LLP) members’ agreement. These partners may well assert that they have been discriminated against on the grounds of age – and point to younger partners, whose personal or client billings are less than their own. A law firm that cannot show it takes equality and diversity seriously, (for example by training partners in the area), or whose statistics show an insufficiently diverse partnership, may find it has to prove it did not discriminate. Without objective, transparent and well-documented performance-management systems this might not be straightforward.

Even for firms that operate a lock-step system, it is increasingly common for partner appraisal systems to be in place. It should be possible to manage some of the problems the Age Regulations create by using an effective appraisal system – and, ideally, a reward structure based on clear, pre-determined performance requirements. A good appraisal system will be clearly structured and transparent, with partners set specific objectives that will differ according to skills and work undertaken. These objectives should be defined and easy to measure. Appraisals should be regular, and where standards have not been achieved, this should be discussed.

It is important any such system does not put a strain on management. Where a firm has adopted a remuneration system based on performance, the standards forming part of an appraisal can in turn form the basis of the profit-share allocation. If the practice has a lock-step system, the appraisal process is of equal importance, justifying that decisions regarding new and retiring partners are made on the basis of performance and not age (or any other discriminatory) criteria.

It will also be necessary to consider who is best suited to carry out the appraisals and ensure appraisal meetings are carried out consistently across the firm. It might be appropriate to use an external appraiser with appropriate input from line management. It is also essential to have the buy-in of the individual partners. General performance standards can be set centrally, but individual objectives should be agreed with the partner in question. They should not just be related to fees, however, but balanced across the skills set required of the partner.

Whether using a lock-step system or a performance-related system, however, good appraisal procedures with clear objectives for each partner can provide a balance of monitoring performance and dealing with issues as they arise. It should not be surprising that many firms are rapidly organising appraisal systems and partner training sessions on age awareness.

Partner retirement ages

The other big challenge will be determining what to do about retirement ages. On the face of it, requiring someone to retire at a set age irrespective of their performance is the most obvious form of age discrimination imaginable. The Age Regulations contain an exception for retirement ages at 65 or above. However, importantly this exception only applies to employees. It does not include partners.

Of course, the firm cannot argue that the partners agreed to the retirement age and therefore must be bound by it. If a company announced it was paying its women less than its men and a female recruit accepted these terms, she would not be prevented from turning round at a later date and claiming the shortfall. One does not ‘agree’ to be discriminated against and thereby lose one’s rights.

A partnership will still be able to set a retirement age if it can objectively justify it. However, firms that simply expect to be able to apply an age of 65 through an analogy with employees may be disappointed. The government deliberately limited its default age of 65 to employees as it did not consider that the same considerations applied to partners. Some firms have abolished their retirement age and others have raised it. Many others are adopting a ‘wait and see’ approach instead, particularly in situations where there are no partners imminently reaching retirement age. In the meantime nobody wants to be that first test case.

Consider the example of a 55-year-old partner pushed out to make way for ‘new blood’. If he was to retire at 65, and had drawings of, say, £200,000, then his claim would be worth £2m, give or take something for mitigation. But if the firm was unable to set a retirement age and the partner could establish plans to work to the age of 75, the claim might be worth twice that.

Partnership agreement amendments

Firms that are contemplating amendments to their partnership and LLP members’ agreements in an effort to try and reduce the risk of discrimination need to keep a careful eye on how such amendments can be achieved.

A well-drafted agreement will usually confer power on a specified majority of partners/members (or a majority of the equity partners/members) to amend the agreement and will set out the procedures to be followed to achieve an amendment.

Where detailed procedures do exist, they must be followed. A failure to adhere to agreed procedures for amendment of the agreement will, in all probability, render any amendment invalid. If no procedures are specified, the safest course of action is to give notice of the proposed amendment to all relevant partners/members. A failure to provide an opportunity for individuals to be heard, even if a resolution can be passed by a majority, can mean that such individuals, if they oppose the amendment, will not be bound by it.

It is also important to have regard to the exercise of the power by the majority. Partners in a traditional partnership are fiduciaries and owe one another a duty of utmost good faith. Provided the majority exercises its power in good faith, the fact that the amendment may disadvantage a minority of partners does not per se constitute grounds for challenging the decision of the majority.

The position is likely to be the same in LLPs although the actual circumstances are somewhat different – there is no express duty of good faith between members. However, in relation to any resolution requiring approval of a majority, it is likely that a duty will be implied that each member should act honestly and fairly.

Accordingly, the power of a member should not be exercised in a manner that is dishonest or unfairly discriminatory against any other member, or in a manner which is anything other than bone fide for the purpose for which such power was conferred. In short, the majority must not discriminate dishonestly or unfairly against a minority and must not exercise their power solely to secure themselves a special and personal advantage.

Resolving claims

When considering the right of partners and members not to be discriminated against, an additional factor to be considered is the forum for the resolution of claims that might be brought.

The Age Regulations provide that a discrimination claim by a partner or member may be presented to an Employment Tribunal. This right does not sit well with the usual provision of a well-drafted partnership or LLP members’ agreement which provides that disputes will be referred to arbitration (allowing them to be resolved in private).

The right to bring a claim in an Employment Tribunal is not removed by the existence of an arbitration
clause. The Age Regulations make it clear that any term in a contract that purports to exclude or limit any provision of the regulations is unenforceable. Accordingly, an arbitration agreement will not be enforceable and cannot be relied upon to prevent an individual from presenting a claim in an Employment Tribunal. As a consequence, discrimination claims will be dealt with in a public forum and adverse publicity and potential damage to reputation may become highly relevant.

Although it is possible to exclude the individual’s right to bring a claim in an Employment Tribunal by way of a compromise agreement, to create a valid compromise agreement it must relate to the compromise of a particular complaint. It is unlikely that a well-advised individual (and an individual must be advised if a binding compromise agreement is to be created) will enter into a compromise agreement that excludes their right to bring a claim in an Employment Tribunal unless their entire claim is settled to their satisfaction.

The media is also quick to publicise disputes between highly paid individuals and professional firms, and one might reasonably anticipate that threats to launch discrimination claims in an Employment Tribunal will be a powerful negotiating tactic for individual partners or members.

Impact on employees

The new age laws will also impact on law firms as employers, however. No doubt we will see age claims from dismissed law firm employees, but it is perhaps in other areas that law firms will be most vulnerable.

For example, law firms will need to analyse their recruitment methods to identify any directly or indirectly discriminatory practices. If any do arise, the firm must decide whether they fall within any of the exceptions in the legislation, or can be objectively justified. If not, the firm should amend its practice.

Direct discrimination arises where candidates are treated differently because of their age. This is rare. However, firms will want to fix upper age limits for trainees. As employees, trainees are subject to the retirement age exception and firms can safely retire a trainee at 65. This may sound fanciful, but at what age would it be safe to reject a candidate for a training contract?

The law allows employers to reject any job applicant within six months of the employer’s retirement age – so rejecting any candidate over 64 years and six months will be lawful. Any younger and the firm would have to objectively justify the rejection. To do this the firm would need to identify its aim (or reason) and then show that the need to achieve this aim in this way outweighed the discrimination. It is clear from the consultation that accompanied the new laws that the training requirements of the post – and ensuring a reasonable period of employment – both represent legitimate aims for the employer. Rejecting a candidate with less than two years to retirement would therefore almost certainly be lawful. Beyond that, it becomes less certain.

Indirect discrimination occurs where a provision, criterion or practice is applied which, while age-neutral on the face of it, actually disadvantages a particular age or age group. Therefore firms will also want to avoid inferences of discrimination being drawn from the language or imagery of job advertisements.

Work experience

Work experience schemes should also be reviewed. Participants in these schemes are covered by the Age Regulations just as any other employee. A cursory glance at a selection of leading firms’ websites shows that several remain exposed to claims. Schemes restricted to university students will, of course, indirectly discriminate against older candidates who are less likely to be current students. Indeed, some schemes still specify that applicants must be at a specific point in their studies.

These schemes are often a common route to training contracts. Similarly the ‘milk round’, where firms visit universities, attracts many trainee applications. Both remain legitimate recruitment methods. Firms should, however, ensure that these schemes do not dominate other methods that are likely to attract a more age-diverse group of candidates.

Requiring trainee candidates to be recent graduates would be indirectly discriminatory, as older candidates would be unable to satisfy the requirement. The firm might say that the requirement was justified, as they needed candidates with up-to-date knowledge. However, the firm might also struggle to justify this requirement, as it will have difficulty showing that proximity to graduation is a good proxy for up-to-date knowledge.

PQE requirements

Equally, firms should review the terms on which they recruit qualified lawyers. Much has been said about the use of post-qualification experience (PQE); recruiting by reference to levels of experience as a qualified solicitor. Contrary to the belief of many, the age regulations do not outlaw the use of PQE.

Setting minimum or maximum levels of PQE for candidates can potentially indirectly discriminate against younger or older candidates respectively. However, such discrimination will only be unlawful if the employer cannot objectively justify its use.

Law firms might be able to pass this test, but they should also consider each person specification on a case-by-case basis. The firm might want a particular level to fit into a team at the appropriate point. The firm might, for example, ask for a minimum of three years PQE, as it needs lawyers with the skills to undertake the work available. It might ask for someone with between three and five years’ PQE, as it does not want to have to pay the lawyer the salaries commanded by more experienced lawyers, or because it has a number of other associates approaching partnership in the next couple of years and it considers that a more experienced lawyer is likely to have partnership aspirations of his or her own.

On the other hand, a 25-year-old star associate with two years’ PQE might argue that he is being unfairly ruled out of this position. A 35-year-old associate with ten years’ experience, without partnership aspirations and who would be happy to be paid at the rate of a five-year PQE lawyer as this is his ‘dream job’ at his ‘dream firm’, might similarly complain about what he regards as the arbitrary upper limit.

In practice, lower minimum levels of PQE will be easier to justify than a requirement, for instance, for a minimum of seven years’ PQE or upper limits. In any event, a prudent firm will not set absolute bars but will explain that ‘candidates will normally be in the approximate three to six years’ PQE range’ if it does decide to persist with PQE in recruitment.

Harassment claims

It is already apparent that different firms are taking differing approaches to this issue. Finally, firms should be aware that age discrimination is different from other forms of prohibited discrimination, as it is not yet generally acknowledged that ‘ageism’, and in particular ageist banter, is necessarily wrong. Many employers will run workplaces where attempts to combat ageist jokes is seen as political-correctness gone mad.

Firms are unlikely to receive many claims of ageist harassment. They should, however, be concerned by the possibility the banter may be raised by an aggrieved employee at a later date to support a claim. This may be, for instance, that his selection for redundancy was tainted by the bias of his institutionally-ageist employer.

Clive Greenwood, Fergus Payne and James Davies are partners of Lewis Silkin LLP. They can be contacted at clive.greenwood@lewissilkin.com, fergus.payne@lewissilkin.com and james.davies@lewissilkin.com