Power of Attorney - December 2006

Are Your Partners Actually Employees?

You Might Be Surprised by the Answer

by David B. Dornak

The government normally does not target mom-and-pop companies when its goal is to scare corporate America into doing the “right” thing. No, it aims at the big boys and girls like Wal-Mart, Tyson Foods and even Martha Stewart. Although law firms have generally been immune from such attacks, the United States Equal Employment Opportunity Commission (EEOC) has broken this tradition by challenging the mandatory retirement policy of Sidley Austin Brown & Wood LLP (Sidley), one of the largest law firms in the nation. The novel issue being decided by the court is whether partners can sue their partnership like employees can under the Age Discrimination in Employment Act (ADEA).

Although the thought of having a law firm sued by the EEOC might bring an immediate smile to most people, the EEOC has cautioned that this “case has far-reaching consequences for several industries – not just the legal industry.”  Specifically, the pending litigation will impact all Nevada partnerships using a centralized management style. Indeed, the case against Sidley is no laughing matter if your partnership is controlled by a management committee in which decision-making authority lies solely with individuals on such committee.

Although the EEOC first began fighting Sidley six years ago, the case recently grabbed the attention of business organizations when the United States Supreme Court refused to consider an appellate court’s decision that the EEOC could pursue monetary damages on behalf of ousted Sidley partners, including ex-partners who failed to exhaust their administrative remedies. This was the latest win in a string of victories for the EEOC.

The facts of the case are straightforward – Sidley demoted 32 of its equity partners to “counsel” or “senior counsel” in conjunction with changing the firm’s mandatory retirement age from 65 to a sliding scale between the ages of 60 and 65. The partners selected for demotion had the choice of accepting the demotion for less compensation or leaving the firm. Sidley’s goal was to create more opportunities for younger lawyers while increasing profits. The EEOC, however, maintained that such demotions violated the ADEA, which prohibits employers from discriminating against employees who are at least 40 years old.

Considering the ADEA does not provide protection to “employers,” Sidley immediately countered that its partners, as equity owners of the firm, were employers who could not sue the firm for discrimination. The EEOC disagreed, proclaiming that a court must not rely solely upon a title to determine the status of an individual and instead must determine whether the partners actually participated in management of the firm. The court agreed with the EEOC by finding that partners can lose their “employer” status when their partnership operates as a de facto corporation whereby a small executive committee has absolute power over the partnership. Considering the Supreme Court’s recent decision not to consider a subsequent ruling that the EEOC may pursue damages for ex-partners who failed to file charges under the ADEA, barring them from bringing their own individual lawsuit, Sidley’s exposure is now compounding.

If the EEOC wins the final battle in the pending litigation, professional partnerships such as law or accounting firms will bear the initial brunt of the decision. Nevertheless, the EEOC has warned that it will not hesitate to investigate other partnerships. At least one analyst has even predicted that mandatory retirement might entirely disappear for certain partnerships. If your Nevada partnership is operating as a de facto corporation by having a few selected partners manage its operations, then the case against Sidley might change the status of your partners to employees.

David B. Dornak
David B. Dornak is of counsel at the Las Vegas office of Lewis & Roca, practicing in the areas of labor and employment.