Mandatory retirement for CPA firms?

What to look out for

by Larry Morgan, MA, SPHR, SHRM-SCP, GPHR, Orion HR Group, LLC | June/July 2017 Footnote

Editor's note: Updated May 31, 2017

Do you have a retirement date in mind? Does your firm have the same date in mind for you?

In 1967, the Equal Employment Opportunity Commission (EEOC) was charged with enforcement of the Age Discrimination Employment Act (ADEA), which prohibits discrimination based on age.

At a federal level, age discrimination can occur with persons older than 40. The Minnesota Human Rights Act sets age discrimination at age 18 and above*. In essence, the ADEA was designed to protect the rights of older workers from discriminatory termination, layoffs, reduced benefits and limited employment opportunities. The ADEA prohibited mandatory retirement except for limited positions, such as air traffic controllers, pilots, firefighters, law enforcement and CEOs under certain conditions.

However, many CPA firms have a requirement that partners retire at a predefined age of 60, 62 or 65. This would appear to be in conflict with the ADEA. The primary reason for such policies is to attract and retain top talent in firms, as well as the growth of younger employees expecting to advance through the ranks. But careful analysis of your retirement policy is necessary if you don't want to land into legal trouble.

Attention turns to CPA firms

In 2014, the EEOC began questioning some of the Big Four accounting firms about their policy of requiring their partners to agree to retire at a specific age. Deloitte LLP testified at a congressional hearing about the practice of mandatory retirement at 62 and the firm's partnership structure. While Deloitte maintained that some partners retire prior to 62 and that the practice opens new opportunities for women and minorities, the EEOC challenged the organizational structure of the firm and the application of the ADEA on this practice.

In the end, the EEOC contended that Deloitte is not a true partnership and, therefore, its mandatory retirement policy violates the ADEA. The EEOC also challenged the same practice with KPMG LLP, PricewaterhouseCoopers, LLP and law firm partnerships.

Does this practice still make sense?

People older than 60 comprise nearly one billion of the world's population; this total will grow to more than two billion by 2050. We are seeing increasing numbers of employees who want to continue working beyond 60. The link between age and the health and functional status of individuals is tenuous at best. An additional issue is the labor workforce challenge with higher demand due to a strong economy, changing regulations and fewer employees entering the workforce, creating more demand for talent and the need to retain individuals.

Some firms offer a separate signed agreement allowing partners to continue working with the firm with a reduced compensation package and reduced workload. This allows younger employees the opportunity to gain experience with oversight and a smooth transition. Changing expectations with partners suggest many do not want to be forced out and want to continue working, even with a reduced workload and greater flexibility with schedules. In some cases, persons want and need to continue working based on financial security, as well as the need to remain engaged and feel relevant.

Historically, organizations have offered early-retirement programs with enhanced benefits to encourage the departure of more experienced (and often more expensive) employees on a voluntary basis. This involves a variety of factors, including business and strategic reasons based on economic conditions, promotions of employees otherwise blocked, social and cultural reasons, and a shift toward "phased retirements."

Organizations must also consider their long-term strategy, future staffing needs, cost of enhancements, eligibility determination, as well as the potential of losing key employees with an enhancement package. Benefit documents and employee communications must be carefully orchestrated along with a timeframe for consideration of any enhanced or early retirement program. This may include modifications to retirement plans and compensation programs as part of the package. Qualified legal and financial staff should be involved to assist with the program design and communications, including plan documents and employee release forms such as acceptance or rejection of the plan offering.

Considerations for mandatory retirement of partners in CPA firms

  • Work with legal to ensure partnership agreement will not violate the ADEA.
  • Have a formula to consider payout options, with valuation and timeframe of payment schedule defined.
  • Consider additional options for phased retirement or consulting arrangements. Under what conditions would this be allowed or voted on by partners?
  • If a partner continues to work, what is the pay and who decides on what client work is performed?
  • Do you pay for nonbillable time?
  • Are health care or other benefits provided?
  • Is an office and support provided?
  • What notice is required by the employee or organization?
  • How are clients transitioned?

Potential discrimination issues with non-partners

Firms must be careful not to require or suggest non-partners retire. Even well-meaning comments or actions can get the organization into trouble with an ADEA complaint and the potential filing of age discrimination with the EEOC. As organizations consider succession planning, care must be given on how the question of retirement is addressed unless the employee brings it up. In general, focus on employee performance issues and business needs rather than age or health issues. This area can be tricky. MNCPA members may wish to discuss these issues with legal counsel or the MNCPA HR Hotline.

Careful consideration must be given for mandatory retirements, including knowledge transfer, client retention, succession planning, legal implications and employee morale. A review of current and future staffing needs along with clear communication will assist organizations with a smooth transition.

Larry Morgan, MA, SPHR, SHRM-SCP, GPHR, is the MNCPA HR Hotline expert. He is also owner of Orion HR Group, LLC, an independent HR consulting organization specializing in the alignment of compensation and benefit programs with business strategies. He has more than 35 years of human resources experience in industries such as retail, high-tech, manufacturing and financial services. Previously, Morgan served in lead HR practice roles for organizations including Best Buy, HB Fuller, Lawson Software and Grant Thornton.