Few topics today are more fiercely debated at local CPA firms than mandatory retirement.
Here are the two camps:
What’s-best-for-the-firm: First and foremost, we need to think long term to perpetuate the firm. We need an orderly transition of clients and firm management to new leaders. We need a predictable progression of staff from entry-level to partners. This progression is unlikely if our young talent sees senior partners hanging on indefinitely, continuing to run the firm and control clients. Mandatory retirement assures the firm of seamless succession planning, attracts and retains talent and results in a more diverse partner group.
Mandatory-retirement-is-wrong: Small business owners have the right to decide on their own when and how to retire. They reason “as long as I’m healthy, sharp, productive and perform at a partner level, why should I retire? I love what I do and don’t want to stop. Besides, even at my age, I’m an important reason why this firm is profitable. They’ll only hurt themselves by forcing me to retire.”
Some members of this camp believe that mandatory retirement is discriminatory.
How CPA firms have changed Webster’s definition of “retirement”
If you want to know when partners will be out of the firm, don’t ask them when they plan to retire. Over 90% of partners at local firms do not retire cold turkey. Their definition of retirement is to “announce” their retirement, revert to a non-equity status and work for 3-10 more years, first full-time followed by part-time. Further, during their full time years, they usually want to continue controlling their clients.
What mandatory retirement really means at most firms
Two-thirds of partner agreements include a mandatory retirement provision. But this is rarely interpreted as requiring the partner to retire immediately. Instead, it means the partners give up their equity, and their continuing to work must be approved annually by the other partners:essentially is a compromise between the two camps described in the beginning.
This generous interpretation of ‘mandatory’ retirement, at least gets the retirement issue on the table, preventing conflicts over the subject. Firms without a mandatory retirement provision have to deal with situations where elderly partners who are “losing it” continue to work because none of the other partners are willing to confront them.
What the legal world says
Laura B. Friedel and Russell I. Shapiro are partners in the Chicago-based law firm of Levenfeld Pearlstein, LLC. They wrote an outstanding article in CPA Practice Management Forum in 2011, summarizing the legal aspects of mandatory retirement perfectly. The following are excerpts from their article.
The federal Age Discrimination in Employment Act (ADEA) protects employees aged 40 and over from adverse action relating to their employment. Many have believed that partners of professional service firms were exempt from this act because they were “employers.” In 2003, The Supreme Court ruled that the key to determining if people are employees is the extent that they supervise the performance of others and participate in the firm’s profit distribution. The mere fact that someone is a partner should not necessarily determine whether that person is an employee or an employer.
The EEOC has established several factors that determine if a partner is an employee or an employer. They include the extent that a partner (1) can be fired by the firm, (2) is supervised by superiors, (3) influences the firm (voting) and (4) shares in the profits and liabilities in the firm.
Recent cases have also looked to the structure of the firm and the role partners have in running the firm. The more control that is vested in partners as opposed to an executive or management committee, the more likely the partners will be considered owners rather than employees.
In recent years, the EEOC has investigated PwC and Deloitte. In the case of Deloitte, the EEOC demanded that the firm eliminate its mandatory retirement age requirement and offer compensation and reinstatement to retired partners. Deloitte appealed. As of July, 2016, the AICPA says these EEOC initiatives were either dropped or settled.
It should be noted that non-equity partners are considered employees because they don’t share in profits, have no vote and usually report to equity partners.
The AICPA chimes in
In October, 2014, Barry Melancon, President of the AICPA, wrote the EEOC on this matter, asserting that the EEOC’s initiatives “would be detrimental and disruptive to the accounting profession and thus, to the public at large. “ He went on to state that “partners agree to mandatory retirement terms when signing their firms’ partnership agreements.” Melancon concluded by writing “firms have adopted these policies for sound business reasons. This business model has thrived and prospered for decades while also serving the public interest. In particular, retirement policy provisions allow for the predictable progression of lesser tenured, and often more diverse individuals into the partnership, and facilitate the orderly transition of a firm’s clients from senior partners to those who will succeed them.”
What does this mean for CPA firms?
As firms grow involving every partner in every decision becomes impractical. However, by the EEOC’s criteria, partners at all but the top 25-50 CPA firms qualify as employer/owners,not employees because they have a vote, work fairly independently from others, participate in a firm-wide distribution of profits and share in the firm’s liabilities. At this point, the EEOC seems primarily focused on the huge national and regional firms, so firms below the Top 50 don’t have much to worry about on the mandatory retirement issue.
But Friedel and Shapiro warn: “Don’t be surprised if you have trouble determining where your partners fall on the spectrum; the combination of somewhat vague legal standards and personal involvement often makes these determinations a daunting task.”
============————–
Marc Rosenberg is a nationally known consultant, author and speaker on CPA firm management, strategy and partner issues. President of his own Chicago-based consulting firm, The Rosenberg Associates, he is founder of the most authoritative annual survey of mid-sized CPA firm performance statistics in the country, The Rosenberg Survey. He has consulted with hundreds of firms throughout his 20+ year consulting career. He shares his expertise regularly on The Marc Rosenberg Blog.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
Tags: Benefits, Firm Management
