Time Is on Their Side

Mick, Cher and The Donald show no signs of slowing down, and baby boomer employees may well follow suit.

By Jonathan A. Segal Feb 1, 2006
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HR Magazine, February 2006

This year, baby boomers—approximately 75 million people born between 1946 and 1964—began to turn 60. Don’t expect most of them to retire right away, however. According to the AARP, 68 percent of workers between the ages of 50 and 70 plan to work during retirement or forgo retirement altogether.

The Mick Jaggers (63), Chers (59) and Donald Trumps (59) in our workplaces don’t see themselves as too old to do what they did in their 20s, 30s and 40s.

When you couple the aging of the baby boomers with the relatively low birth rate, you see that the workforce as a whole will continue to age. Workers 55 or older accounted for 12.9 percent of the workforce in 2000; by 2015 they will make up about 20 percent, according to the U.S. Department of Labor.

For employers, a graying workforce creates both opportunity and potential liability. Opportunity lies in using older workers’ skills to fill gaps occasioned by the declining birth rate. But liability will arise if your organization improperly excludes, marginalizes or tosses aside older workers. They will fight back, and they will find strong allies in juries.

Between 1997 and 2003, age discrimination plaintiffs recovered more money from juries than did any other protected group, according to a Jury Verdict Research report, Employment Practices Liability: Jury Trends and Statistics. Juries’ support for age discrimination plaintiffs is less about empathy and more about narcissism. Aging is universal; we cannot say that about any other protected group.

Clearly, the time is right to brush up on some of the more technical issues in age discrimination law.

Never Can Say Goodbye

When enacted in 1967, the Age Discrimination in Employment Act (ADEA) protected individuals from age 40 to age 65 only, thus permitting employers to impose mandatory retirement at age 65. The age 65 ceiling was increased to 70 in 1978, and, in 1986, Congress finally eliminated the age 70 ceiling, with a few narrow exceptions. Now, even Methuselah could not be forced to retire solely because of his age.

One exception to the no-mandatory-retirement rule allows employers to retire “any employee who has attained 65 years of age and who, for the two-year period immediately before retirement, is employed in a bona fide executive or a high policymaking position.” The exception applies only if the executive is entitled to an immediate, nonforfeitable, annual aggregate retirement benefit of at least $44,000 from any combination of employer-sponsored retirement plans. 29 USC § 631(c).

Not every state has a bona fide executive exception, however, so state law—which applies to the extent that it is more protective of employees—may limit an employer’s ability to take advantage of the federal exception.

Indiana law, for example, protects employees ages 40 to 70 from age discrimination, and it does not make an exception permitting mandatory retirement of bona fide executives under age 70. The upshot? In Indiana, an employer can force an executive to retire only if the individual is both covered by the federal law exception and is 70 or older, and thus is outside state law protection. Unless the individual satisfies both conditions, an employer violates either federal or state law when it forces an executive to retire.

Will You Still Need Me When I’m 64?

Federal law and most, if not all, state laws permit voluntary retirement incentive programs, but there is much litigation on whether and when a program is truly voluntary.

Moreover, even assuming a retirement program is truly voluntary—the employer does not encourage, let alone require, any older worker to participate—unforeseen legal risk may lurk.

Consider this: What if, following a voluntary retirement program, an employer implements an involuntary reduction in force affecting numerous older workers or discharges individual older workers as a result of more aggressive performance management? The terminated workers may point to the earlier voluntary retirement program as evidence that the employer intended to get rid of older workers and that the current involuntary terminations arose from the voluntary program’s failure to achieve its age-focused objective.

Before pooh-poohing the strength of the argument, change “age” to “gender” in the hypothetical: An employer has a voluntary exit program available only to women in management. The clear message would be that the employer wants to eliminate women in management. Employees will hear the same message with regard to age: A voluntary retirement program means the employer wants to reduce the number of older employees to replace them, over time, with younger employees.

There is a way to neutralize the reality that age correlates with retirement, and the corresponding legal risk that voluntary retirement programs may be seen as evidence of age bias. Offer a voluntary severance program to all employees, but with enhanced severance, pension and/or other benefits to workers with substantial service. While enhanced benefits to long-service workers disproportionately will benefit, and perhaps entice, older workers to participate in the program, they would not be the only ones eligible for the program and age would not be a criterion.

But what if a rising star whom you want to retain asks for a severance package? Does the employer have the right to say no? The same issue can arise even under an early retirement program restricted to older workers. What if an eligible employee who wants to retire early is needed in order to avoid a brain drain? Can the employer deny the employee’s request?

To answer these questions, let’s take a brief detour into the Employee Retirement Income Security Act (ERISA). In the context of voluntary retirement programs, a number of courts have held that an employer does not violate ERISA in denying an employee’s request to retire early under a voluntary retirement program.

As the court reasoned in Hlinka v. Bethlehem Steel Corp., 863 F.2d 279 (3rd Cir. 1988), the employer’s decision to offer early retirement benefits was a business decision rather than a fiduciary obligation. Accordingly, the employer had the right to deny a particular employee’s request to retire early when it concluded that granting the request was not in the employer’s best interests.

The same analysis should apply to a voluntary severance plan. If a voluntary severance plan is properly drafted and distributed in accordance with ERISA, an employer should be able not only to exclude certain groups, positions, etc. from consideration but also to reserve the absolute right to say no to any eligible employee who applies.

Better All the Time

In 2004, the U.S. Supreme Court held that the ADEA does not prohibit employers from favoring relatively older workers age 40 and above over relatively younger workers in the protected age range. In General Dynamics Land Systems Inc. v. Cline, 540 U.S. 581 (2004), the court evaluated a collective bargaining agreement between an employer and a union that eliminated the company’s obligation to provide health benefits to employees who retired thereafter, except for then-current workers who were at least 50 years old.

A lawsuit was filed on behalf of approximately 200 employees who were 40 or older—protected by the ADEA—but no longer qualified to receive retiree health benefits under the agreement because they were under 50. The employees claimed the agreement violated the ADEA by providing discriminatory benefits based on their age. Both the Equal Employment Opportunity Commission and the 6th U.S. Circuit Court of Appeals agreed, allowing the employees’ claim to proceed.

The Supreme Court reversed the 6th Circuit’s decision, however, interpreting Congress’ intent in enacting the ADEA as seeking “to protect a relatively old worker from discrimination that works to the advantage of the relatively young” and not the other way around. Therefore, even though the employees bringing suit were within the ADEA’s protected class, they could not maintain a suit against their employer on the basis that older employees had been treated more favorably.

Notwithstanding General Dynamics, the older-older worker doesn’t necessarily always win out. In O’Connor v. Consoli-dated Coin Caterers Corp., 517 U.S. 308 (1996), the Supreme Court held that, to allege age discrimination sufficiently, employees do not need to show that they lost out to someone under 40, but only to someone “substantially younger.” What is “substantially younger” in this context? The 7th Circuit has adopted a 10-year bright-line rule; other circuits routinely find gaps of less than 10 years insufficient. But the 9th Circuit has found as few as five years to be sufficient.

So, a 65-year-old replaced by a 49-year-old probably could sue for age discrimination even though the 49-year-old also is in the protected group. But a 48-year-old might not have a case against the employer for selecting a 44-year-old. And under O’Connor, a 40-year-old replaced by a 39-year-old probably could not bring an age claim, even though the replacement is outside the protected group.

She Was Just 17

Because the ADEA protects only individuals who are age 40 and older, an employer can discriminate against younger workers without violating federal law. But some states—including New Jersey and Oregon—do prohibit age discrimination against applicants and employees regardless of their age. In those states, it would be legally dicey to deny an applicant a job because he looks too young (as opposed to because of his limited experience) or to terminate someone because of her “immaturity.”

Accordingly, in some jurisdictions, employers need to address the protected status of younger workers in their training, policies and practices.

Here’s another one for you: In states that prohibit age discrimination without limitation, can an employer have a General Dynamics-like retirement program that favors older-older workers over younger-older workers? Can an employer have any retirement plan at all inasmuch as that favors all older workers over all younger workers? Again, the answer lies in ERISA.

The Supreme Court has held in Shaw v. Delta Air Lines Inc., 463 U.S. 85 (1983), that ERISA generally pre-empts any state or local antidiscrimination law whose protections are broader than the federal antidiscrimination laws to the extent the state or local law relates to an employee benefits plan under ERISA. Because a retirement plan would be an employee benefits plan under ERISA, ERISA would pre-empt a state law that prohibits discrimination against younger workers who are unprotected by federal law as applied to the retirement plan.

But remember: Pre-emption applies only to ERISA plans, not to individual employment decisions such as refusing to hire someone because they are too young.

I Really Didn’t Mean It

In 2005, the Supreme Court held in Smith v. Jackson, Miss., that, as under Title VII, the ADEA authorizes employees to sue on a disparate impact theory of age discrimination. However, the court also found that the scope of ADEA disparate impact liability is narrower than that under Title VII.

In defending against a disparate impact claim under Title VII, an employer must show that the policy or practice was consistent with business necessity and there was no other way for the employer to achieve its goals. In contrast, in defending against a disparate impact under the ADEA, an employer need show only that its practice or policy was based on reasonable factors other than age (RFOA)—a significantly lesser standard than that required under Title VII.

The application of the RFOA standard in Smith illustrates the ADEA’s relatively lower burden on employers. Thirty police officers and dispatchers sued the city over a pay plan that provided substantially larger pay raises to employees with five or fewer years of service, claiming that the plan had a disproportionately negative impact on officers age 40 and over.

The Supreme Court held that the city’s justification for the plan—to make salaries for junior officers more competitive with those in other cities—was an RFOA that responded to the city’s legitimate goal of retaining police officers. While that’s good news for employers, keep in mind that many cases involve both a disparate treatment and a disparate impact claim. Even if the employer prevails on the disparate impact claim, a jury may consider unfavorable statistics or related anecdotal evidence in determining whether a particular employee has been the subject of disparate treatment.

To understand how that might play out, assume the following facts:

  • A white-collar reduction in force in which the primary selection criterion is performance.
  • Out of 100 managers, the employer is laying off 20, 10 of whom are age 40 or older.
  • Fifty-two percent of the employer’s managers are age 40 or older.

Under these circumstances, if you compare only those who are 40 or older with those under 40, the numbers look great. But recall that O’Connor held an individual may have a viable disparate treatment claim even if both the complainant and the comparator are in the protected age group, if the comparator is “substantially younger” than the complainant.

Although the Supreme Court’s holding in O’Connor was limited to disparate treatment claims, its rationale would appear to apply equally to disparate impact claims. Further, there is nothing in Smith to suggest otherwise.

Therefore, when assessing disparate impact, employers should do what smart plaintiffs’ lawyers do: Look at subgroups. For example, compare not only those 40 or older with those under 40, but also those 60 or older with those under 60, and those 50 or older with those under 50.

Returning to the hypothetical: Suppose seven of the 10 managers being let go are over age 60, and that there are only 10 managers over age 60. In that case, the employer is laying off 70 percent of its managers age 60 or older. Bingo! The oldest managers being laid off may have a statistically significant basis for a disparate impact age discrimination claim.

If the employer successfully defends that the disparate impact is due to an RFOA—such as performance—a jury still may consider the bad numbers in determining whether application of the performance criterion to a particular employee was a result of age discrimination.

You’re Too Good for Me

An employer does not violate the ADEA when it makes decisions on the basis of criteria that correlate with age as opposed to age itself. The Supreme Court held in Hazen v. Biggins, 507 U.S. 604 (1993), that years of service may correlate with age but is not age itself, so that making an employment decision on the basis of years of service is not per se unlawful.

The same analysis applies to overqualification. Nevertheless, courts have recognized that overqualification can serve as a proxy for age discrimination, and they tend to scrutinize overqualification cases carefully. But this does not mean that employers must ignore the fact that an individual is overqualified for a particular job. Overqualified employees may become bored quickly and leave as soon as they land a higher-level job. Or they may stay but resist supervision by a younger (or older), less experienced manager.

The key to avoiding and defending overqualification cases is to articulate objective reasons unrelated to age but specific to the applicant you are rejecting. If you have legitimate concerns about a candidate’s overqualification, ask about it during the interview: “This job will have substantially less authority than you had in your last job. Tell me how you feel about that.” (But never ask, “How would you feel reporting to someone younger?” and make sure to train hiring managers on this point.)

Listen carefully to what the applicant says—and doesn’t say. If you reject the applicant, focus on the person’s responses to show that you did not categorically disqualify the applicant on the basis of being overqualified—which may correlate with age—but rather on the basis of the applicant’s specific and unique answers. The mere fact that you knowingly interviewed an overqualified candidate suggests that age itself was not the basis of your rejection.

The flip side of rejecting an overqualified candidate is expecting more from someone because of their substantial qualifications. Expecting more from experienced workers may correlate with age but is not age itself. Staying on the right side of the law in these cases may come down to the precise wording used. You’re on safer ground saying, “You have 20 years’ experience; I shouldn’t have to tell you what to do” than “You’re not a kid out of school; I shouldn’t have to tell you what to do.”

When the issue is experience, managers should focus solely on experience. Train them to avoid age-based comments that may correlate with experience and make an otherwise legitimate expectation appear to be age-biased.

Author’s Note: This article should not be construed as legal advice or as pertaining to specific factual situations.

Jonathan A. Segal, Esq., a contributing editor of HR Magazine , is a partner in Philadelphia and the vice chair of the Employment Services Group of Wolf, Block, Schorr and Solis-Cohen LLP.

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