With the economy still slumping, many employers are looking for creative ways to cut costs. You may be tempted to force some of your older employees to retire—but this strategy could land you in an expensive age-bias lawsuit. That’s because, under state and federal law, pushing older workers out the door is OK in only a few limited situations.
When Is Mandatory Retirement Permissible?
The federal Age Discrimination in Employment Act (ADEA), which covers employers with 20 or more workers, bars discrimination against employees age 40 or older. An age-based mandatory retirement can be illegal discrimination under the ADEA, but there are some important exceptions.
You can impose mandatory retirement on employees 65 years and older who held either a “bona fide executive” or “high policy-making” position for two or more years just before retirement—if you guarantee them an annual retirement benefit of at least $44,000. Retirement benefits include pensions, profit-sharing, savings, deferred compensation plans, or a combination of plans.
A bona fide executive is a top-level employee who exercises substantial executive authority over a large business volume and many employees. An example would be the head of a major production facility or an important corporate department or division, such as finance, marketing, human resources, legal, or manufacturing. The head of a minor branch, warehouse, or retail store and middle-management employees wouldn’t qualify.
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High policy-makers are those top-level employees who play a significant role in developing corporate policy and recommending ways to implement it. Their duties are primarily intellectual as opposed to managerial or executive. Examples would be a corporation’s chief economist or head research scientist.
California Requirements
If you employ fewer than 20 people, the federal ADEA doesn’t apply to you. But if you have five or more employees, California’s age-bias rules apply to your organization and mandatory retirement is similarly prohibited except under limited circumstances. State law, like the ADEA, permits mandatory retirement for executives and high policy-makers. California, however, requires only $27,000 in guaranteed annual retirement benefits. There are also special retirement rules for physicians and university faculty members, certain law enforcement and public safety employees, and commercial airline pilots.
Caution Required
If you have a mandatory retirement program or are considering one, make sure you comply with the strict rules that govern when you can and can’t force workers to retire. If you’re seeking other ways to cut costs, here are some suggestions:
- Try a hiring freeze. As employees decide to retire or leave on their own, hold off on filling the vacancies. You may find you need fewer employees than you thought to smoothly operate your business.
- Offer incentives. Although it’s not generally permissible to force older employees to retire, you can implement an incentive plan to encourage voluntary retirement. For this to work, be sure to offer departing employees something of value they wouldn’t otherwise receive, and have them sign a release of claims against your company in exchange. For employees over 40, be sure the release special legal requirements for waivers of age-bias claims.
- Examine your budget. Carefully evaluate how much you spend and what it’s on—you’ll probably find areas you can cut that you haven’t considered and that can help you avoid having to reduce your workforce. This kind of review sounds obvious, but a surprising number of employers never get around to it.