Age discrimination – the practical implications of the Scott v Walker Morris LLP decision for LLPs and partnerships, and their members or partners

Introduction

Last year’s decision of the Employment Tribunal in Scott v Walker Morris LLP sheds light on steps that LLPs and partnerships ought to be taking in relation to their retirement provisions and how they deal with partners or LLP members (all referred to in this article as “partners”) who do not wish to retire. In practice, the decision also underpins or strengthens the position of some partners who would prefer not to retire at the normal retirement age designated in their partnership or LLP members agreement.

While Employment Tribunals do not make new law that is binding on other Tribunals, nonetheless the Tribunal in this case was comprised of respected and experienced members, and the parties were represented by leading and accomplished barristers in this practice area. This has resulted in a detailed statement of reasons which is as illuminating as it is clear and thorough in setting out the issues and the basis for the decision. The statement of reasons is in my view required reading for managers of professional practices in particular.

The current retirement age landscape

For many, the prospect of a long and relaxed retirement with enough money to take advantage of increased “healthspan”, travel the world and spend more time with friends and family is more aspiration than reality. Increasingly, partners (and indeed large parts of the workforce in general) do not want to/cannot retire at age 60 or 65 or even later.

While very often retiring partners can move on to other paid positions, they may not be able to achieve the same level of income that they enjoy in their current position. They may well take the view that if they were to be permitted to remain in post they would be able to continue to contribute at the same level as they always have and that there would be no detriment to their partnership or LLP. The arrival of another birthday or grey hair does not diminish the partner or his or her abilities

From the perspective of other (younger) equity partners, it is not uncommon in this day and age for management to bring about a slowing of the rate of promotion to equity (and/or to pursue de-equitisation/demotion of some partners), while continuing to require retirements at the agreed age, with a view to (or at least with the result that) profit per equity partner increases. Thinning out of the equity will not always be deliberate or the predominant purpose, but for those remaining that outcome may be more than welcome. Not so however for those who suffer financial detriment in consequence.

This article explores what those charged with managing LLPs and partnerships should consider in the light of this decision, not least when a partner asks for their tenure to be extended, and what partners might consider as they approach the retirement age mandated by their partnership agreement or LLP members agreement.

The law (in brief)

The following outlines and discusses statutory discrimination law so far as it relates to partners in general partnerships and members of LLPs. That said, it cannot be emphasised too strongly that the rights and obligations of partners and members who may be victims of age discrimination are affected not only by statutory discrimination law, and the contractual terms of any partnership or LLP agreement, but also by the statutes and/or regulations relating to partnerships or LLPs as the case may be, centuries of partnership case law and/or a quarter-century of LLP case law. While partnership case law is expressly disapplied in relation to LLPs, nonetheless it is often persuasive and instructive and is frequently relied upon on that basis. In any dispute or difference arising from a partnership or LLP, and irrespective of any apparent narrowness of the issues, these sources need to be considered together (though that wider consideration is beyond the scope of this article).

While discrimination law on its own may provide a route to a claim or settlement, there may be a “sting in the tail” if other factors/potential exposures are not considered and “battened down”.

Sections 44 (relating to partnerships) and 45 (relating to LLPs) of the Equality Act 2010 separately provide (I have amalgamated the provisions below) that:

To be actionable, the discrimination has to be in relation to one of the protected characteristics, of which one is age.

Section 13 of the Equality Act 2010 (Direct discrimination) provides:

Whether the partnership/LLP can establish a legitimate aim is a question of fact for a Tribunal to decide. The partnership/LLP has to demonstrate a real business need to retire members at a particular age, which is in the public interest and satisfies social policy objectives. For example, it might be necessary for older partners to retire in order to make it possible for younger partners to have career progression (without the prospect of which they might go elsewhere).

Or a partnership or LLP might wish to avoid the indignity for older partners of being taken to task on their failure to perform at the required level, as they (allegedly) lose the ability to put in the required hours or to maintain the mental focus or energy required to achieve in other areas such as practice development.

Of course, in any particular case, advancing age might well, through accumulated knowledge, experience and reputation, make a given older partner more effective and valuable to a business than a younger partner without those benefits.

Even where a partnership’s or LLP’s aims are established as being legitimate, a partnership or LLP seeking to justify the retirement of a partner will have to establish that the means used to achieve the aims were both (a) appropriate to achieve the aims and (b) reasonably necessary/proportionate, and/or that there were no other less discriminatory measures which could meet those aims.

Provided that a claimant can establish that there are facts which (in the absence of any other explanation) suggest that discrimination might have occurred (which in most cases is relatively easy to do), the burden of proof shifts onto the partnership or LLP to demonstrate that there is a non-discriminatory or lawful basis for the retirement. Generally speaking, if it is evident that a retirement has been required by virtue of achieving a particular age, the initial test will be satisfied and the burden of proof will shift onto the partnership/LLP. In some cases (indeed as in Scott) it may be argued by the partnership/LLP that age was not the predominant reason for requiring retirement. But where there is a fixed retirement age (or a set of hurdles that have to be surmounted by a partner who has achieved a particular age, in order to be allowed to remain in post, as was the case in Scott) it is very much an uphill battle for a partnership/LLP to establish that the requirement for retirement was not because of age.

Once the burden of justifying a retirement by reason of age (legitimate aims by proportionate means) has shifted onto the LLP, the discharge of that burden by the LLP is not at all straightforward, to put it mildly. Discharging that burden requires a detailed investigation and presentation of suitable evidence (if indeed that evidence even exists) and supporting arguments. The time and expense involved can be very considerable. In Scott, the size of the documents bundle for the hearing was close to 1,000 pages.

All of this gives the retired partner a considerable advantage, including in any negotiation of a settlement that may take place before proceedings are contemplated and/or commenced.

If a retired partner can establish unlawful discrimination then there is no statutory limit to the loss recoverable, subject to establishing what that loss is after pursuing all reasonable steps to mitigate the loss. Thus, for example, a 65 year old partner who is retired compulsorily by reason of age, and who establishes that they have been unlawfully discriminated against, and who despite best efforts, loses half of their income, can recover the difference over a time span that might be several years (let’s say, until age 70, or such other age they can establish they would most likely have continued working until if given the opportunity). So, in that example the retired partner might recover 2.5 times their former annual profit share. In some partnerships and LLPs we are therefore talking potentially of millions of pounds, which in effect the remaining partners would have to pay (less tax relief on the resultant diminished profits).

Another potential downside is that any award might result in the partnership or LLP becoming insolvent. That might not relieve the remaining partners of paying compensation since partners in a general partnership will have unlimited personal liability and in the case of an LLP it is often the case that the partners responsible for the decision to retire the partner concerned may have been joined to the proceedings personally, and the award may have been made against them personally as well as against the LLP.

Where things went wrong for Walker Morris LLP

The Tribunal accepted that the LLP had legitimate aims in maintaining a collegiate atmosphere by maintaining the dignity of older members, by sparing them from performance management, and in seeking to ensure inter-generational fairness. But the LLP did not establish that its treatment of Mr Scott was an appropriate and reasonably necessary/proportionate way of achieving those aims. In particular:

• There was no convincing evidence to the effect that poor performance by older partners was something that happened in the LLP (and in any event the LLP had measures in place to deal with any partner under-performance, through its remuneration committee, which could increase or reduce profit points).
• The LLP could not establish that the effect of not retiring older partners would be to block the advancement of younger partners or other staff members. There was no evidence that the LLP had difficulty recruiting or retaining younger people because of a perception that the equity was “blocked”.
• Indeed, there was evidence to suggest that the LLP was making lateral partner hires from other practices.
• There was evidence that the LLP had earlier concluded that the result of its agreed retirement age was that it had too few partners, and had lost good partners.
• The LLP could have adopted less discriminatory alternatives, for example it “…could have used career conversations with partners and staff to identify what their short term and long-term career goals were”, it could have“…require[ed] partners to hand over equity and influence whilst retaining their partner tag”, it could have offered incentives to members to persuade them to retire, or it could have adopted a higher retirement age.

What should partnerships and LLPs be doing in light of Scott?

The Scott v Walker Morris case should be a wake-up call for many partnerships and LLPs.

It would be prudent for a partnership or LLP to:

• Review how they should approach age-based retirements in the future.
• Review whether there is any evidence that would support a defence of age-based retirement in the case of their particular business.
• Consider what alternatives there may be to a straightforward “You must retire at age X” provision.
• Consider what advantages might be derived from such alternatives, such as retaining and encouraging older partners/members with a view to increasing growth and benefiting partners/members of all ages, rather than letting older partners/members go, only to see them re-emerge as competitors elsewhere and/or (after the expiry of any restrictive covenant period) take clients and turnover away.
• Consult with members and seek to build a consensus as to the best way to go, and record the process and the resultant resolution (which would not provide a complete defence in itself in the event of a future claim, but might be persuasive and lead to a better outcome).
• Do the above regularly, for example annually, and amend the partnership or LLP members agreement accordingly.
• Carefully consider requests by partners to defer their retirement, and avoid “digging a deeper hole” in response.

What steps could partners take when faced with the prospect of retirement before they are ready to retire?

While it is impossible to give guidelines that will suit every case (and therefore individually-tailored advice is essential before taking or not taking steps), the following are worth considering (and discussing with your chosen adviser):

• Keep tabs on all developments in the business that are relevant to retirement – both generally and in relation to yourself. What debates have there been, what conclusions have been reached, and how have they been justified? Also, what has happened in relation to other partners reaching any agreed retirement age? The better you are prepared, the easier it will be to take advice should circumstances so require, which often needs to be done in a short timescale.
• Ensure that your performance does not dip with increasing age.
• Keep records in relation to your own performance assessments, and respond appropriately to correct any identified shortcomings.
• Avoid conduct that might justify retirement/expulsion for reasons other than age.
• Identify arguments that can be advanced in support of your continuing to be a partner, so that you can articulate them as and when appropriate, in particular the advantages of keeping you on and the lack of disadvantages for the business. This will assist in achieving a consensual outcome.
• Be open to alternatives that may be presented to you. For some, a reduction in stress and working hours may be just what they are looking for.
• Consider and be able to articulate what incentives/payoff you would be happy to receive in return for “going quietly”.
• Take advice promptly at the first sign of potential difficulty. Your partnership or LLP may be willing to contribute to the cost.
• Do not agree to anything without taking advice.
• Do not give notice in a huff (or for any other reason). It is far easier to pursue a claim if you have been pushed as opposed to having jumped of your own accord.
• Keep an eye on the short limitation period in which to bring claims. Currently a partner only has three months from the date of suffering a detriment in which to take steps towards making a claim (specifically, commencing early conciliation with ACAS, which temporarily stops time running, but which requires careful consideration as to content and who to name as the potential respondents). While there are other factors that might extend the limitation period before such steps have to be taken, many a good claim has been lost to limitation, and you can’t be too careful.