The Implications of Mandatory Retirements in Partnerships

The Supreme Court of Canada decision in McCormick v. Fasken Martineau DuMoulin LLP, mentioned recently by Simon Chester, will have implications beyond just how human rights legislation applies to mandatory retirement provisions in partnership agreements. Because such provisions will be upheld, firms can be expected to include and rely on them further, and the baby boomer population of lawyers who are quickly approaching retirement age may now expect a forced retirement from partnership.

Some economists reject the “lump labour” theory, which suggests that unemployment can be, in part, attributable to the refusal of older workers to retire. However, even these skeptics acknowledge that the hierarchy in many societal institutions have changed, making entry-level positions for young workers more scarce.

In a specialized field like law probably the opposite has happened. A couple generations ago the typical practice was a small or solo firm. The past generation of lawyers has seen a huge surge and focus on larger law firms, and it’s only the past few years since the recession we’ve seen a far greater interest among young lawyers in starting their own practices. But the structure of the legal industry still requires some entry-level, through articling or through the skills gained as a junior associate, and shrinkage in these positions due to lawyers who do not retire is certainly just one factor among many for the crisis currently faced by young lawyers today.

One of the most significant effects of the recession is that baby boomer savings, in the forms of bonds and stock dividends, have largely collapsed, and pensions, where they do exist, have been eroded. Baby boomers are facing more risks as retirees than previous generations.

Even if baby boomers cannot be blamed for job shortages, their effect on labour markets when they retire are still experienced in a very pronounced manner. Although the employment rate has been steadily declining in Canada, it has been accompanied by a decline in the participation rate,

The participation rate, a little reported number that tracks Canadians with jobs and those looking for jobs as a percentage of the working-age population, dipped to 66.1 per cent in the latest employment data for April, down from 66.5 per cent from a year ago and from 67.8 in February 2008. The working age population is considered anyone over age 15 years, with no upper limit.

Nathan Janzen, an economist with RBC who analyzed this trend, attributed it to factors other than discouraged workers,

The most important factor appears to have been the aging of the baby boom generation and the resulting increase in the number of worker retirements. One way to illustrate this is to look at the change in the growth and composition of the population that is classified as “not in the labour force” and, thus, not included in the numerator of the labour force participation rate. Most of the increase in the population “not in the labour force” since October 2008 has been concentrated those aged 65 years of age and over. This likely entails a sizeable number of individuals retiring from the workforce. The total number of people aged 15 and up classified as “not in the labour force” has risen by more than 1 million from October 2008 to April 2014.
…most of that increase (about 682K) was in the population 65 years of age and over. Including all age cohorts, about 95% of the increase in the population not in the labour force reflected an increase in the population who report not wanting a job.

When lawyers retire it’s a little more complicated. Lisa Vogt of McCarthy Tétrault stated in the Lawyers Weekly,

Lawyers must start thinking about retirement when they are juniors in their thirties. It’s part of taking ownership of their careers.

Even if they are thinking about it, it’s not clear that the transition is smooth or necessary fully planned out.

Succession planning is most acutely felt in smaller communities, and there is obviously more individual responsibility involved in closing a smaller practice than a larger one. The Law Society of Upper Canada has a guide on Closing Your Practice which details important steps for consideration. The Canadian Bar Association provides a toolkit for planning for partner retirement.

The Law Times also has an article earlier this month focusing on succession planning. Options include merging with another firm, selling the practice, winding down, and hiring an associate.

It’s this last option which makes the possibility of retirement such a boon for young lawyers. Astute practitioners ready to retire can pass on their experience and insight to a next generation of lawyers and maintain their name, reputation, contacts in the field, and hold on to their passions, well into retirement. The trade off would be less compensation and more time spent training and mentoring in areas of interest, basically activities many retirees engage in regardless. Even if lump labour theory doesn’t explain employment problems for young practitioners, the lack of initiative in taking these people under their wings does threaten the continuity of the profession.

Justice Abella mentioned this possibility in McCormick,

[11] … A partner may make individual arrangements to continue working as an employee or as a “regular” partner without an equity stake, but such arrangements are stated in the Agreement to be “the exception rather than the rule”.

Rather than the exception, I’d like to propose that arrangements where equity partners continue to work as employees or counsel to assist with ancillary areas of practice become more of the rule. Indeed, the future of our profession depends on it.