On October 4, 2007, the Equal Employment Opportunity Commission (EEOC) reached a $27.5 million settlement on behalf of 32 former members of the law firm of Sidley Austin Brown & Wood in a landmark age discrimination suit that challenged age-based mandatory retirement policies in the partnership context. The EEOC brought its lawsuit, United States Equal Employment Opportunity Comm’n v. Sidley Austin LLP, in response to Sidley’s October 1999 firm-wide operational restructuring that reduced its mandatory retirement age from 65 to a sliding scale between 60 and 65 and forced nearly three dozen Sidley partners older than 40 to either leave or accept demotion from partner to counsel or senior counsel.

In addition to monetary relief, the consent decree reached between Sidley and the EEOC provides injunctive relief, prohibiting Sidley from using age as a basis for terminating partners or changing their partnership status. It also bars Sidley from maintaining any formal or informal age-based retirement policies.

The Downfall of Mandatory Retirement Policies

The Sidley settlement signaled the potential demise of age-based retirement policies, not just amongst the nation’s law firms, but also amongst consulting, accounting, and other firms that use the partnership framework. As stated by the EEOC’s general counsel, Ronald Cooper, “the demographic changes in America assure that we will see more opportunities for age discrimination to occur . . . Therefore, it is increasingly important that all employers understand the impact of Age Discrimination in Employment Act on their operations and that we re-emphasize its important protections for older workers.”

Historically, large law firms have used mandatory retirement policies. According to a 2005 study by Altman Weil, a consulting firm, 57 percent of firms with 100 or more attorneys enforced a mandatory retirement age, which typically ranges from ages 65 to 75. This practice, however, has begun to change in the wake of the Sidley lawsuit, and the change is expected to expand to professional organizations in addition to law firms.

At the August 2007 Annual Meeting of the American Bar Association (“ABA”), a resolution was passed urging law firms to abandon mandatory age-based retirement policies for partners in favor of more flexible policies that recognize the value that older attorneys bring to the table. As stated in its endorsed position paper, forced retirement at a fixed age is “inconsistent with accepted employment practices, against public policy and not in the best interest of either law firms or their clients.” The ABA House of Delegates made clear that law firms “should instead evaluate senior partners individually in accordance with their attributes and interests and the firm’s generally accepted performance criteria.” While the ABA resolution is persuasive, it does not have a legally binding effect.

The Partner-Employee Debate

The Sidley settlement also signaled a dramatic shift in legal doctrine with respect to the parameters of “partnership” in the employment law context. Although the Age Discrimination in Employment Act (“ADEA”) typically applies only to employer-employee relationships, and partners are commonly classified as employers within the antidiscrimination paradigm, the consent decree between Sidley and the EEOC expressly declared that the partners in the suit were employees for ADEA purposes; “[for settlement purposes,] Sidley agrees that each person for whom the EEOC has sought relief in this matter was an employee for the purposes of the ADEA as of the dates when Sidley made and carried out the decision to remove him or her from the status of partner, and that in any proceeding to enforce this decree, Sidley will not assert as a defense that a partner is not or was not an employee for the purposes of the ADEA.” The consent decree extends through December 31, 2009.

This striking shift in the Sidley partner-employee debate was first introduced in a 2002 decision by Judge Richard Posner from the U.S. Court of Appeals for the 7th Circuit relating to Sidley’s refusal to cooperate with the EEOC’s preliminary investigation of Sidley’s October 2002 operational restructuring. EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002). In that decision, Judge Posner declared that an individual technically classified as a “partner-employer” under state partnership law might still be considered an “employee” for federal antidiscrimination purposes and therefore would be protected by the ADEA.

In so ruling, Judge Posner pointed to Sidley’s highly centralized management of its law firm, where partners did not vote on issues and a self-selecting executive committee made all major decisions. Although Sidley is clearly a partnership, the judge stated that, “the question is whether, when a firm employs the latitude allowed to it by state law to reconfigure a partnership in the direction of making it a de facto corporation, a federal agency enforcing federal antidiscrimination law is compelled to treat all ‘partners’ as ‘employe[e]s’” EEOC v. Sidley Austin Brown & Wood, 315 F.3d at 705.

As large professional firms have become even larger through mergers or other forms of expansion, most have adopted centralized management structures where governance and decision making is controlled by a managing partner and/or committee, rather than by the participation and vote of each and every partner in the firm, as occurs in more general partnership models. These centralized management structures, however, can complicate the question of whether partners function as employees versus owners of a business, because individual partners often have almost no control over the direction of the firm. Significantly, this lack of governing influence supports the argument that partners be considered “employees” for federal antidiscrimination purposes.

As EEOC regional attorney John Hendrickson declared, “Generally in law firms and other professional service firms—whether you’re talking about medical doctors or architects or social workers—the idea that an individual has a title such as ‘partner’ is not dispositive of whether the employment discrimination law [will] apply. What is really going to count is whether they in fact look like employers or employees.”

It is important to note, however, that because Judge Posner’s 2002 decision and the Sidley lawsuit involved large firms with centralized governance structures, the partner-employee issue does not appear to extend to firms and corporations with general partnership arrangements. Contrary to the centralized models, decision making and governance within general partnerships and like structures are typically shared amongst the partners; therefore, partners are more likely to be considered employers, and thus, not covered by the ADEA.

Bottom Line for Employers

The Sidley settlement should encourage all professional firms calling themselves a partnership to re-examine their management structures and retirement policies. This includes not only law firms, but also accounting, consulting, and all firms with centralized governing structures. Although a centralized governance model will likely continue in many large firms, it is recommended that employers impart more fluidity into the decision-making process. More importantly, it is recommended that organizations consider abandoning age-based mandatory retirement policies in favor of more flexible, performance-based models. Review of a partner’s book of business and/or how she or he manages clients, for example, rather than strict age criteria, may result in more effective retirement policies and productive, harmonious workplaces.