Sept. 5, 2012 – Earlier this year, the U.S. Equal Employment Opportunity Commission (EEOC) issued new regulations that complicate an employer’s ability to protect against disparate impact claims brought under the Age Discrimination in Employment Act (ADEA).

Although it was already known that an employer can defend against an ADEA disparate impact suit if it made the challenged job action based on “reasonable factors other than age,” the new regulations¹ add several new requirements to proving that these factors are reasonable.

The discretionary nature of these factors will make the employers’ decision-making processes more complex with respect to hiring, firing, promotion and assignment. These complications could lead to increased ADEA disparate impact claims, and employment attorneys should understand how the new regulations will affect future claims of age discrimination.

What the Law Says

The ADEA prohibits discrimination against employees age 40 and older. It is clear that an employee who is over 40 can claim that he or she was intentionally treated differently than a similarly-situated younger employee, which is known as “disparate treatment” claim.

In addition, the recent U.S. Supreme Court decision in Smith v. City of Jackson, 544 U.S. 118 (2005), has permitted employees to bring an ADEA claim if the employer has an age-neutral policy that affects older workers negatively, known as a “disparate impact” claim.

Most companies, and their lawyers, are aware that an employer can defend against a disparate impact claim brought on the basis of race, sex, national origin, or any other class protected by Title VII of the Civil Rights Act, if the employer can demonstrate a “business necessity” for the neutral policy that affects certain classes of workers negatively.

Under the ADEA, an employer is not required to prove that the neutral policy exists due to “business necessity.” Instead, an employer can state a valid defense against an ADEA disparate impact case if it made its decision based on “reasonable factors other than age” (RFOA).

The RFOA test required by the ADEA generally is easier to prove than the “business necessity” defense. The business necessity test requires the employer to prove that there is no other way to achieve its goals that would not result in a disparate impact; the RFOA test only requires that the employer’s actions be “reasonable.”

The EEOC Changed the Law

In response to decisions by the U.S. Supreme Court, the EEOC issued regulations that raise the employer’s bar in meeting the RFOA test. The EEOC defines a RFOA as “a non-age factor that is objectively reasonable when viewed from the position of a prudent employer mindful of its responsibilities under the ADEA under like circumstances.”

An employer must prove that a policy was reasonably designed to further or achieve a legitimate business purpose and was administered in a way that reasonably achieves that purpose. The new regulations require the employer to consider the following:

1. the extent to which the factor is related to the stated business purpose;
2. the extent to which the employer defined the factor accurately and applied it fairly and accurately, including the extent to which managers and supervisors were given guidance or training as to application of the factor and avoiding discrimination;
3. the extent to which the employer limited supervisory discretion in assessing employees subjectively, particularly where the criteria evaluated was known to be subject to negative age-based stereotypes;
4. the extent to which the employer assessed the adverse impact on older workers of the practice or policy in question; and
5. the degree of the harm to employees age 40 or older, in terms of both the extent of injury and the number of people adversely affected, and the extent to which the employer took steps to reduce a harm.

The EEOC has stated that no particular combination of these considerations is required to establish a RFOA defense. It is possible that an employer may not have to prove that it considered all of the above. However, the EEOC also stated that this list is non-exhaustive, implying that the EEOC reserves the right to later require other “considerations.”

In the EEOC’s comments to the regulations, it states that “cost-cutting alone would not be sufficient to establish the RFOA defense,” meaning that cutting a senior position because it is highly compensated will not constitute a RFOA.

Where These Changes Lead Us

It is likely that litigation will follow in response to the RFOA regulations. The EEOC’s regulations conflict with the Smith decision issued by the Supreme Court. The Smith decision stated that employers may lawfully implement a facially-neutral employment practice, even if that practice has a disparate impact on older workers, provided it is based on a RFOA.

The EEOC’s regulations conflict with this holding because it implies that an employer can only prevail with a RFOA defense if it demonstrates that it took numerous steps to minimize the potential impact of the policy or practice in question.

In other words, the U.S. Supreme Court only requires a decision to be “reasonable.” The EEOC requires an employer to take action well beyond making a reasonable decision.

By requiring these steps to be taken, the EEOC has gone beyond the U.S. Supreme Court’s holding in Smith and drastically diluted the RFOA defense.

Moreover, the EEOC appears to be requiring employers to view their neutral policies through a lens of “age bias.” If an employer has created a facially-neutral practice or policy, it has met the U.S. Supreme Court’s requirement and the employer has made its business decision without reference to age. The ADEA does not require more.

Employer Policies

Regardless of the expectation of litigation over the EEOC’s new regulations, employers must take precautions until these regulations undergo the scrutiny of the courts.

Lawyers who represent employers should advise them to review employer policies, hiring practices, and termination procedures, with the following considerations in mind:

• If it appears that a policy negatively impacts employees age 40 or over, determine whether this policy is absolutely necessary to the success of the business.

• If it is determined the policy is necessary, the employer should record the reasons why and include objective data to support the determination.

• Review whether the policy can be modified to lessen or remove any negative impact on older employees.

• If job action decisions are performance-driven, create a system to objectively evaluate employee performance and quantify the relevant performance attributes which have been weighed.

• Incorporate an objective rating scale into performance evaluations.

• Train supervisors again to emphasize that they must be completely candid when completing performance evaluations.

• Compile and retain statistical data regarding all hiring decisions, terminations, promotions and job assignments.

• Examine historical promotion and assignment trends to determine if there has been a disproportionate impact on older employees. If so, discuss why this may have occurred with hiring managers.

• Require annual harassment and discrimination training for all hiring managers and evaluating supervisors.

• Clearly define and document reasons for all terminations.

Conclusion

While the new EEOC regulations may complicate an employer’s ability to protect against disparate impact claims brought under the ADEA, employers can take precautions to minimize risk. Lawyers should advise their clients to review existing policies to address the new rules.

About the Author

Geoffrey S. Trotier, Minnesota 2003, is a shareholder at Davis & Kuelthau S.C., Milwaukee. He counsels clients on labor and employment issues, and provides representation in employment litigation matters.

Endnotes

¹ See 29 CFR § 1625.7.