Yahoo's Forced Ranking Raises Legal Questions About Ratings

Forced ranking—which requires managers to rate each worker’s performance using a number that compares him or her with peers—is sometimes used to provide a nondiscriminatory reason for layoffs. But the practice is subject to abuse and often results in claims of discrimination, as shown by a lawsuit filed Feb. 1 against search engine and tech company Yahoo.

“A forced ranking system should not be used simply as a means of reducing head count,” said James McDonald Jr., an attorney with Fisher & Phillips in Irvine, Calif. “There are more strategic methods that are less likely to trigger lawsuits, such as eliminating an unprofitable location or a redundant department.”

In his lawsuit against Yahoo, Gregory Anderson, editorial director of Yahoo’s Autos, Homes, Shopping, Small Business and Travel sections, alleged that Yahoo used forced ranking as part of its performance rating system to discriminate against men in Yahoo’s media division. He also claimed that Yahoo violated the California and federal Worker Adjustment and Retraining Notification (WARN) acts.

As forced ranking became criticized in the press, Marissa Mayer, the president and CEO of Yahoo, on Dec. 21, 2012, and Nov. 7, 2013, publicly denied that the company’s rating system resembled forced ranking, Anderson asserted in his complaint. She focused on how the company’s performance management system relies on the five categories that employees fit in—anywhere from “greatly exceeds” to “misses” expectations.

Jon Parsons, a lawyer in Palo Alto, Calif., who represents Anderson, told SHRM Online that the ranking system was “a tool of terror. Nobody had to explain why they were letting you go.” It also was subject to manipulation for discriminatory reasons, he emphasized.

Quarterly Performance Review

Anderson was fired while on personal leave in 2014 for the prestigious Knight-Wallace Journalism Fellowship at the University of Michigan. During the fellowship, Anderson was working on a documentary for Yahoo Autos about the toxic effects of leaded gas on children.

At the time he was discharged, he was told he was ranked among the lowest 5 percent of Yahoo’s employees—all of whom were being terminated at substantially the same time. Yahoo terminated approximately 600 employees then, based on its quarterly performance review procedure.

The quarterly performance review procedure closely resembles a forced ranking or stack ranking. But stack ranking has been abandoned by other companies due to class-action discrimination lawsuits, and the companies that still use it conduct the ranking annually and provide more employee feedback, according to Anderson’s complaint.

Under Yahoo’s performance ratings process, the manager who directly supervised an employee allegedly assigned that worker a rating from 0 to 5. The ratings were called buckets and were labeled “greatly exceeds,” “exceeds,” “achieves,” “occasionally misses” and “misses.”

Each quarter, a specified percentage of each department’s employees would be assigned to each bucket. Then there was calibration, where higher-level management modified the employee scores up or down. Those at the bottom of the ratings were terminated, but the cut-off point for termination varied from quarter to quarter, Anderson claimed. The percentages assigned to each of the five buckets allegedly changed from quarter to quarter companywide, and different departments would be assigned different percentages.

At one point, two “occasionally misses” quarterly designations within a one-year period would result in termination. For some quarters, the scores were averaged over a period of several quarters and the bottom 5 percent were terminated. In other quarters, the metric used to identify bottom performers was altered solely to reach a head count reduction goal, Anderson alleged. Manipulation of the ratings system permitted employment decisions, including terminations, to be made on the basis of stereotyping, he claimed.

Anderson also claimed that it was Yahoo’s policy and practice that employees on approved leave were not subject to its ratings process for the quarters they were absent.

WARN Acts

“In the case of any reduction, you have to keep an eye on federal and state WARN laws in case they apply,” McDonald said.

Anderson asserted that between January 2012 and July 2015, Yahoo unlawfully reduced its workforce by 31 percent to less than 11,000 employees without declaring a reduction in force under the California or federal WARN acts. The federal WARN Act requires employers to provide notification 60 calendar days in advance of plant closings and mass layoffs and pay employees for the 60 days.A covered mass layoff occurs when a layoff of six months or longer affects either 500 or more workers or at least 33 percent of the employer’s workforce when the layoff affects between 50 and 499 workers. The California WARN Act applies to layoffs of 50 or more employees within a 30-day period regardless of the percentage of workforce.

Yahoo paid employees 60 days of severance, which Parsons said did not comply with the WARN Act. Either the 60 days payment counted as WARN Act payment or it was payment for a release of claims—not both, he explained.

Parsons also said 60 days of notice should have been provided in accordance with the laws to help give employees the opportunity to find another job while they still were employed.

Gender Discrimination

Anderson also sued for intentional discrimination based on gender under state and federal law, citing a colleague’s remark that Yahoo was looking to fill his old position with a woman. Yahoo eventually did hire a woman to replace Anderson.

He also said the calibration process was full of personal bias, pointing to a vice president’s alleged comment during calibration that one individual should be rated lower because “He just annoys me. I don’t want to be around him.”

In addition, Anderson noted that when the female vice president of editorial began working at Yahoo, less than 20 percent of the top managers in the media division were female. Three years later, more than 80 percent of the top managers were female. And of the approximately 16 senior-level editorial employees hired or promoted by her in an 18-month period, 14 of them were women.

Women with the same rating as men were treated better than their male counterparts, he further alleged. One woman who received the same “occasionally misses” score as a male colleague wasn’t fired. He was, and she took his job. She was allowed to appeal her rating, but he was not, Anderson alleged.

There has to be a “good explanation of that,” Parsons said. He said that Anderson “is not some angry white guy lashing out. [Anderson believes] for generations, women were discriminated against in positions of management.” However, Parsons added, laws can’t be broken today to remedy past discrimination. “No discrimination is acceptable,” Parsons said.

“The most effective way to prevent discrimination is to tie the rankings to objective evaluation criteria,” McDonald observed. “This becomes more difficult the higher the employee rises in the company in most cases, as supervisory evaluation of management- and executive-level employees almost always carries a subjective element.”

McDonald added, “Another way to prevent discrimination is for HR to monitor the results of the rankings to ensure they do not have a disparate impact on any protected classification and if they do, to determine whether the rankings were legitimate. An organization’s using a forced ranking system primarily to reduce the number of male employees would be apparent from such a review.”

When asked what Yahoo might have done differently, Parsons said it should have stopped its acquisitions, announced a reduction in force and respected its obligations under the WARN acts.

Yahoo did not respond to a request for comment. The company announced on Feb. 2 that it would explore “strategic alternatives” as part of a restructuring that will eliminate roughly 15 percent of its workforce.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.