Jonathan Segal is a partner with Duane Morris and managing principal of the Duane Morris Institute.
“It’s time for fresh voices; yes, younger voices,” said President Joe Biden in Wednesday’s national address from the Oval Office. This very public “passing of the torch” to a younger generation came after weeks of growing concerns and public discussions about the President’s age and just days after he announced that he would not accept the nomination to be the Democratic candidate for another term.
Though turnover at the White House is obviously of a different magnitude than corporate succession, there are significant legal concerns for the growing number of aging company leaders when it comes to mandatory retirement, voluntary retirement and related questions in corporate America.
Can an employer require that an executive retire?
Under federal law, the Age Discrimination in Employment Act, an employer generally cannot mandate retirement.
Prior to the 1986 amendments to the ADEA, an employee was protected from age discrimination only until age 70. Since the 1986 amendment, there is no age cap, so an employer generally could not require that even Methuselah retire because of his age.
There are, however, a few narrow circumstances under the ADEA where an employer may be able to mandate retirement. Relative to corporate America, there is a narrow exception for bona fide executives under the ADEA.
More specifically, the exception notes that bona fide executives who are 65 or older may be mandated to retire if they are “entitled to an immediate nonforfeitable annual retirement benefit from a pension, profit-sharing savings, or deferred compensation plan, or any combination of such plans, of the employer of such employee, which equals, in the aggregate, at least $44,000.”
Yes, the $44,000 number is relatively low. But federal regulations implementing the ADEA restrict the annual income that can count toward that number.
If an employee is a bona fide executive as defined above, the employee can be required to retire at age 65 under federal law. However, even if the exception applies, an employer must look at state and local laws, too.
Some states do not have a comparable bona fide executive exception. In the absence of such an exception under applicable state law, there is no mandatory retirement age for executives in that state.
Bottom line: mandatory retirement will be available to few, if any, of your employees.
Can an employer have a voluntary retirement plan?
In contrast to the limited availability of mandatory retirement, voluntary retirement is generally permissible under federal and state law. But that does not mean it is risk free.
Assume that, after the voluntary retirement program, there are involuntary terminations of older workers. This could occur as a result of a reduction in force or an older employee being performance managed out of the organization.
The prior voluntary retirement program may be seen as evidence of the employer’s intent to get rid of older workers and that the involuntary terminations later taking place are a result of the voluntary program’s failure to have achieved its objective.
Before dismissing the strength of the argument, change “age” to “disability.” Assume an employer has a voluntary exit program that it offered only to disabled employees. What’s the message you would hear? The clear message is that the employer wants to eliminate disabled workers from the workforce.
The way to reconcile the business reality that age correlates with retirement and the legal risk that voluntary retirement programs may be seen as evidence of age bias is to offer a voluntary severance program to all employees, regardless of age, but with enhanced severance, pension and/or other benefits to workers with substantial service. While the enhanced severance, pension and/or other benefits to workers with substantial service will benefit disproportionately and perhaps entice older workers to participate in the program, the key is that older workers would not be the only employees eligible to participate in the program.
Can an employer ask an employee his or her retirement plans?
Succession planning is, or at least should be, critical to every organization. And the reality is that someone age 65 is more likely to leave the workforce than someone age 45.
With this background, it is lawful to ask an employee about their retirement plans. Stated otherwise, the mere question, without more, is not unlawful.
However, once again, there are legal risks of which leaders need to be aware so that they can navigate them.
First, there is how the question is framed. Make clear you are asking only relative to succession (and/or workplace development planning). “Just curious” is, well, just stupid.
Second, in all cases, make clear that you are neither requiring nor encouraging retirement. These words should be explicit and later documented.
Third, if the individual indicates that they have no plans to retire soon and/or declines to answer, don’t ask again. Asking again understandably may send a message that the employer wants the employee out because of their age and could be admissible in any dispute between the employer and the employee.
Finally, even if you say everything right, or at least nothing wrong, the mere question may cause the employee to believe the employer wants them out because of their age. For this reason, it is generally recommended to avoid the question if the employee has performance issues.
Where there are performance issues, focus on them directly and respectfully but don’t ignore them simply because the employee is older. To many older employees, the bias is in the avoidance and that’s what sets the employer up for litigation.