Mandatory Retirement in Partnerships and Professional Corporations

Generally speaking, state and federal age discrimination laws prohibit an employer from imposing a mandatory retirement age; however, these laws only apply to individuals classified as employees, and do not apply to bona fide partners and shareholders in a closely held professional corporation. By way of example, law firms and physician practices organized as partnerships or professional corporations may, in some instances, require partners or shareholders to retire at a certain age and sell their interests in the firm.

Federal Law

The Age Discrimination in Employment Act (ADEA) applies to employers with twenty or more employees and prohibits employers from discriminating “against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s age[.]” Compulsory retirement of employees at a certain age is not permitted unless the employee is age sixty-five or older, is employed in a bona fide executive or a high policy making position, and such employee is entitled to an immediate non-forfeitable annual retirement benefit of at least $44,000.

The EEOC has set forth a six-factor test to determine whether a shareholder-director is an employee (and thus protected by the statute) or an employer (and thus not protected by the statute): I. Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work. II. Whether and, if so, to what extent the organization supervises the individual’s work. III. Whether the individual reports to someone higher in the organization. IV. Whether and, if so, to what extent the individual is able to influence the organization. V. Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts. VI. Whether the individual shares in the profits, losses, and liabilities of the organization. [EEOC Compliance Manual §605:0009.] The United States Supreme Court endorsed the EEOC’s six-part test in Clackamas Gastroenterology Associates v. Wells, emphasizing that the employer is the group of persons who own and manage the enterprise and that the mere fact that a person has a particular title is not dispositive. The court commented that where shareholders control the operation of the business, share the profits and are personally liable for malpractice claims, those factors weigh in favor of determining that the shareholder is not an employee protected by the discrimination laws. An additional rationale for finding that partners and professional corporation shareholders are not employees subject to the discrimination laws is that by virtue of their status as owners they have other protection under the law.

New Jersey Law

The New Jersey Law Against Discrimination (“NJLAD”) applies to employers of all sizes and prohibits an employer from requiring an employee to retire because of age. Similar to federal law, New Jersey law permits mandatory retirement of bona fide executives or high-level policymakers if the employee is entitled to an “immediate non-forfeitable annual retirement benefit . . . of at least $22,000[.]”

The New Jersey Supreme Court has endorsed the same six-factor test approved by the United States Supreme Court in determining whether a shareholder-director is an employee protected by the New Jersey discrimination statutes. In Feldman, the New Jersey Supreme Court emphasized that “the focus should be on the party’s true power and influence within the organization[,] . . . incorporat[ing] an in-depth inquiry into the dynamics of an organization [revealing] which shareholder-directors are in a position to influence the operation and which are marginalized and have power in name only.” In Feldman, the Court determined that where plaintiff was one of five or six shareholder-directors that shared in the management and control of the firm, possessed an equal vote and voice in all matters, and oversaw credentialing of other shareholders giving rise to the dispute among the shareholders, she was not a protected “employee” under New Jersey discrimination law. However, the Court also noted that in cases where the plaintiff is “a shareholder-director in name only, [is] less powerful than any other shareholder-director, or [where] the power-sharing arrangement set forth in the Agreement [is] not the real state of affairs[,] [e]vidence of any of those claims would likely” create a question of fact concerning whether the shareholder was protected by the discrimination laws.”

Thus, in cases where partners or shareholders in a professional corporation have equal authority over the management and operation of the firm, share in the profits and losses of the firm, and are subject to personal liability for professional malpractice, mandatory retirement provisions may be included in a partnership or shareholder agreement and likely will be enforced if challenged.