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LAWBIZ COACHES CORNER: Are buyouts ageism or a contract issue?

Ed Poll is a speaker, author and board-approved coach to the legal profession. He can be contacted at edpoll@lawbiz.com. Also visit his interactive community for lawyers at www.LawBizForum.com.

An excess number of lawyers — surely there must be a joke about that!

In all seriousness, though, there is an excess number of lawyers because the Baby Boomer generation, which accounts for many current practicing lawyers, is not quite ready to retire and new lawyers are already anxiously awaiting their departure.

Under these conditions, many law firms are wrestling with the issue of succession. Simply terminating older lawyers is a recipe for legal action, so firms have embraced the concept of buyouts.

Succession sans lawsuits

In the past, firms simply terminated lawyers. There was no buyout of an interest because the larger law firm said that there was no goodwill, that the lawyers did not have goodwill in the firm. Thus, the lawyers who were put outside the door had nothing. They had no pension, they had no buyout of an interest in the law firm, they had no job.

This was ageism, and, depending on the jurisdiction, it’s illegal. Substitute the word race or gender for the word ageism, and you can see what the result would be.

So what’s a good law firm to do?

Here’s the deal …

An interesting strategy to deal with the succession issue is an attractive, hard-to-resist buyout. For example, one law firm, Skadden Arps, has offered to buy out its senior management team members who have reached a certain age. Under the terms of the buyout, Skadden Arps will pay the lawyers, for a period of five to seven years, 50 percent of their average compensation for the past five years, and the firm will keep them on their health program as long as they do not go to work for a competitor. The lawyers can go to work for a corporate client, i.e., a corporation as a general counsel, and they can work for a public entity like Public Counsel or Legal Aid. However, they cannot go to another law firm as a competitor.

Most of these people are making $1 million to $2 million a year, and so that’s a very attractive offer. If you’re earning, arbitrarily, $1 million a year and for the next five to seven years you can get $500,000 a year with no work, no responsibilities, no billing and no client relations obligations, well, that’s a very attractive deal. It’s especially attractive for lawyers whose kids have gone through college because those lawyers no longer have that financial obligation. In addition, their mortgage may be paid off, and they could start traveling or whatever.

Buyout with a twist

A twist on the buyout strategy is a buyout with a transition for the lawyer from partner to employee. What some firms have done is say, “We will not fire you. But at a certain age (whatever that might be—55, 60, 65, 70 — whatever the number is), you must sell your interest in the partnership back to the partnership. You will stay on as an employee, but you’re no longer a partner that is legal. And once you’re an employee, you have to produce so many billable hours. If you can do that, we will continue to engage you. If you cannot do that, there are other consequences.”

Contract versus constitutional law

Some people might argue that a buyout is ageism. The fact is, however, that it is a contract issue, pure and simple. If you buy into a business and the business has certain rules and regulations — such as in 10 years you have to sell your interest in the business back based on some formula or some evaluation or some other metric — that’s a matter of contract. That’s not a matter of constitutional law. And, after all, you’re grown up, and you read the partnership agreement before you signed on.

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