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ADEA Prevention, Not Panic

HR Magazine, September 2005Disparate impact claims, now allowed by the Supreme Court, will have important but manageable effects on HR.

Earlier this year, the U.S. Supreme Court answered a question regarding the Age Discrimination in Employment Act (ADEA) that had been in dispute among federal courts for years: Can employees bring an ADEA claim challenging an employer’s neutral practice that has a disproportionately negative impact on persons age 40 and above?

The answer from the high court was a definitive “yes.”

The ruling means that workers are now able to sue—anywhere in the country—on the theory that their employer’s actions caused unintentional age discrimination, otherwise known as disparate impact.

But the high court also ruled that employers can overcome such suits by proving that the practice in dispute is based on a reasonable factor other than age (RFOA).

Establishing an RFOA under the ADEA will be easier for employers than establishing a “business necessity” for an allegedly discriminatory practice under Title VII, which prohibits job discrimination on the basis of race and sex, among other things. To prove such business necessity under Title VII, employers must show that there is “no less discriminatory alternative available,” which is a “difficult burden for an employer to meet,” says Lawrence Peikes, a partner with Wiggin & Dana in Stamford, Conn.

So, although the high court’s decision in Smith v. City of Jackson, No. 03-1160, was a blockbuster ruling of sorts, it does not portend a dramatic change in employer practices or in plaintiffs’ prospects, employment counselors say. That’s because many employers have long taken their attorneys’ advice to avoid arbitrary or unreasonable business practices that have a disparate impact on older workers.

And even if plaintiffs have a viable statistical case, an employer can overcome it relatively easily on the basis of a well-documented RFOA.

“We are very pleased that there is at least a theory of liability based on impact, primarily because an impact claim does not require a showing of intent,” says Janet E. Hill of Hill & Beasley in Athens, Ga., and president of the National Employment Lawyers Association, a plaintiffs bar group. “Not having to prove intent helps. On the other hand, the plaintiffs in [Smith] did not win. … [I]t’s still going to be tough to bring the claims because the employer can raise an RFOA.”

“The end result is sort of a hollow victory for plaintiffs,” says Peikes. “It’s going to be extremely difficult to prove disparate impact in age discrimination cases.”

What Lies Ahead

How HR professionals will need to respond to the Smith decision may depend on such factors as where they do business and the degree to which their policies generate risk for disparate impact claims, say attorneys interviewed for this article.

The threat of increased litigation is obviously least pronounced in circuits that previously allowed disparate impact age claims, such as the 2nd, 8th and 9th U.S. Circuit Courts of Appeals.

In the 2nd Circuit, which covers the states of New York and Connecticut, Smith is “an employer-friendly result,” says Peikes. It does not add a significant, new legal threat for employers, and it firmly establishes that an employer’s evidence of an RFOA can overcome the plaintiffs’ evidence of disparate impact.

Employers in other circuits, however, may face increased legal risk. “In the circuits that said, ‘There is no such thing as disparate impact [in age cases],’ I would expect an increase in cases,” says Peikes.

Overall, however, the increased risk of being sued on this basis should not be enough to keep HR professionals awake at night.

“I see some small marginal impact on what businesses do, but not terribly significant,” says David Kadue, a Seyfarth Shaw partner in Los Angeles and co-author of a legal treatise on age discrimination in employment. “HR professionals should do exactly what they have been doing.” That, says Kadue, is to make decisions for good business reasons and to make sure that they’re well documented. “It’s not good … to be arbitrary or unreasonable or capricious with respect to decisions that have an impact on older workers.”

Statistically Speaking

The Smith decision does, however, give employers a powerful incentive to perform adverse impact analyses of their decisions on the basis of age.

“Of course, there is no affirmative action plan requirement,” says Ann Elizabeth Reesman, a partner in the Washington, D.C., firm of McGuiness Norris & Williams LLP, and general counsel to the Equal Employment Advisory Council, an employer group. “But to the extent [that employers] already do adverse impact analyses on their decisions, they’re going to have to do this one, too.”

Peikes agrees that employers must “at least analyze the risks.” If you know what your risks are, you can take them into account before undertaking a reduction in force (RIF) or putting a policy or practice in place. Doing so “certainly provides a comfort level that you have a strong case,” he says.

Joseph Schmitt, a partner with Halleland Lewis Nilan & Johnson in Minneapolis, also advises his clients to look more carefully at practices or policies that may disproportionately affect older workers—and also lay the grounds for a defense—by:

  • Undertaking more disparate impact analysis.
  • Articulating at the outset the justification for specific actions, such as RIFs or changes in policies and practices.
  • Taking additional time to review their actions in light of the effects on older workers.

Schmitt says people get into trouble when they’re convinced they need to conduct an RIF or make a policy change today. “[But] the risk of waiting is almost always lower than the risk of going forward,” he says. “HR professionals need to have the courage to step forward and say, ‘Something’s wrong,’” when pressed to implement an ill-considered RIF or policy change.

Whether and when to do age-based disparate impact studies may depend on the type of policy at issue. For example, you don’t need a statistical study to reveal that certain educational requirements will have an adverse effect on the selection of older workers, Schmitt says.

With respect to new or changed policies, study their impact before implementing them, he advises. As for ongoing policies, Schmitt says there’s no need to analyze their impact every year. But it is advisable to have a look “if something significant changes in the workplace—an acquisition, a merger, a significant RIF that changes the demographics.”

Age-based disparate impact analysis may be easier said than done. “According to my data people, it’s nearly impossible to do, because the numbers [of workers 40 and over] change on nearly a daily basis,” Reesman says. “For your data folks, this is a walking nightmare.”

RIF Riff

Most HR professionals immediately will think of policies and practices associated with an RIF as prime targets for lawsuits alleging that an employer’s neutral practice had an adverse impact on older employees—and they would be correct, experts say.

Most companies already do analyze the impact of an RIF or restructuring on the workforce, acknowledges plaintiffs’ attorney Hill. “But layoffs and RIFs will be scrutinized a little bit more” in light of the Smith decision, she says.

“Reductions in force are going to be scrutinized,” Reesman agrees. But valid reasons for an RIF still should be enough to protect employers.

Case in point: If a company stops making a particular product line because there is no longer a market for it and lays off the workers—a disproportionate number of whom are 40 or over—the layoff has an age-based adverse impact, Reesman explains. If the layoff is challenged in a lawsuit and the company comes back with a good reason—say, the product was discontinued—“you should win the lawsuit.”

Some employers might be tempted to conduct an RIF for other reasons, such as cutting employees who make the most money—often, older workers. Is that reasonable or unreasonable?

“I think it would be a huge mistake to rely on salary alone without any further consideration of whom to dismiss. Incredibly stupid,” says Kadue. “If you’re not considering any alternatives [to salary], on some level you’re being unreasonable.”

That doesn’t mean it doesn’t happen though. “I think it’s relatively common for employers to rely on salary,” says Kadue. “It was considered common enough that the California legislature said you can’t rely on salary if doing so has an adverse impact on older workers.”

Peikes continues to recommend that employers identify candidates for layoff by comparing employees’ relative merits via a matrix involving multiple criteria. Many sophisticated larger employers with HR and legal departments already do it this way, he says. The matrix itself leaves the employer with a well-documented reasonable basis for its decisions.

Risky Business

While RIFs are among the more obvious disparate impact traps for the unwary employer, they are by no means the only ones. Anything might be suspect—from a college degree requirement for promotion to a particular job to eliminating a health plan’s prescription drug benefit.

“I think that the benefits area is one in which there will likely be attacks,” says Hill. “Health insurance is always a huge cost. As you get older, that’s probably a bigger concern. As employers look for ways to cut costs, they may choose plans that adversely affect older persons.”

For example, say an employer eliminates prescription drug coverage and that doing so has an adverse impact on the company’s older employees. Is reducing health care costs an RFOA? Maybe, maybe not. Hill says a plaintiff’s attorney would probe issues such as how much the drug coverage cost, how much the company saves by cutting that benefit as opposed to some other perk, and what alternatives management considered before implementing the change.

Tuition assistance plans are another area of potential concern. Consider a plan that pays benefits for employees only up to a certain level in the company. Or a tuition plan that pays only for undergraduate, but not graduate, degrees. Such policies will harm older workers who may tend to be in higher-level jobs or already have college degrees, explains management attorney Lisa Aguiar, a Palo Alto, Calif.-based partner at Squire Sanders & Dempsey.

Hiring or promotion policies that rely on ironclad criteria also may have a disproportionate effect on older workers, Schmitt points out. For example, imagine an internal job posting for an opening that requires a college degree. A 20-year employee who is more than 40 years old and possesses no degree will automatically lose out to a short-timer with a sheepskin.

“There’s something wrong there,” says Schmitt. “It’s really difficult to explain why a degree and three months of experience is better than 20 years of experience. I would certainly be concerned if it were my client.”

Schmitt’s advice in such situations: “Don’t impose a requirement such as a college degree when you could easily avoid the problem by saying college degree or equivalent.” What about the “overqualified” bugaboo? Could be a problem, says Hill. “I don’t know how that’s going to play out.”

Other attorneys predict possible problems with compensation practices, retirement and health plans, dependent care assistance plans, etc.

Will They or Won’t They?

Because employers can prevail in disparate impact age discrimination cases by showing that their actions were based on RFOAs, it will be difficult for plaintiffs to win on such claims. But that doesn’t mean they won’t try.

“Certainly employee advocates will be looking at cases in a little different manner now. Some people will have claims that they did not have before,” says Hill.

And where there are more potential claims, there are more potential legal fees.

“Yes, the employer has a good defense, but you and I both know how much it takes in attorneys’ fees to get to a successful conclusion,” Reesman says. “I’m not at all comfortable with the theory that plaintiffs won’t bring the lawsuit in the first place.”

Even in those jurisdictions that recognized disparate impact age-bias claims before the Smith ruling, there is a possibility that employers could face some degree of increased legal threat.

The 8th U.S. Circuit Court of Appeals, encompassing a large swath of the Midwest including Minnesota, at least theoretically recognized disparate impact age claims prior to Smith. But despite paying lip service to the validity of such claims, the 8th Circuit never affirmed a case involving one, Schmitt says. The plaintiffs never were able to establish disparate impact.

Even so, Schmitt saw an increase in legal claims alleging age bias. The Smith ruling, he believes, will only accelerate that trend, leading to age discrimination cases that involve potentially higher risk, bigger discovery, more people and greater costs.

Aguiar points out that the Smith ruling also makes it easier for workers to bring class-action claims of age discrimination. Proving an employer’s discriminatory motive in either an individual or a class suit alleging intentional age discrimination is a heavy burden for plaintiffs.

In contrast, a disparate impact claim, relying on a statistical analysis, can show that an entire group of older workers was disproportionately and negatively affected by an employer’s actions, and does not require proof of the employer’s intent—the perfect formula for a collective lawsuit.

Such class-action lawsuits could increase the legal bill for employers.

“Class actions are extremely expensive to litigate,” says Aguiar. As a result, the Smith ruling “will put more pressure on employers to settle these lawsuits,” she predicts.

That, in turn, provides yet more incentive for employers and HR professionals to conduct disparate impact analyses based on age and to consider and document their RFOAs as soon as possible. Doing so can help strengthen the employer’s legal position, avoid lawsuits entirely, or at least get them resolved at an early—and less costly—stage.

Margaret M. Clark, J.D., SPHR, is manager of workplace law content at the Society for Human Resource Management.

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