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High court decision a setback for older workers, U. of I. law professor says

Mark Reutter, Business & Law Editor
217-333-0568; mreutter@uiuc.edu


3/24/2006

CHAMPAIGN, Ill. — A potential legal hurdle for corporations seeking to cut costs through mandatory or voluntary layoffs was lifted when the U.S. Supreme Court gave its latest interpretation of the Age Discrimination in Employment Act (ADEA).

At issue in Smith v. City of Jackson, a case decided last year, was whether age discrimination took place when an employment policy had an adverse, or “disparate,” impact on older workers.

While the court approved “disparate impact” claims as a basis for employer liability, it did so on such narrow grounds that as a practical matter, plaintiffs will need to prove that an employer intentionally discriminated against older workers.

“Although the decision was heralded as a new tool to fight age discrimination in employment, the decision will have serious and detrimental effects on the ability of elderly employees to seek redress for unfavorable employment decisions,” according to Sandra F. Sperino, a visiting law professor at the University of Illinois.

Sperino wrote that the legal obstacles erected by the Smith decision, along with decreased incentives for elderly plaintiffs to pursue disparate impact claims, “will result in many potential claims being abandoned or being pursued unsuccessfully.”

Enacted by Congress in 1967, the age discrimination act was intended to “prohibit arbitrary age discrimination in employment” and “help employers and workers find ways of meeting problems arising from the impact of age on employment.” ADEA originally prohibited discrimination against people between 40 to 60 years old. Congress later eliminated the upper age limit.

While banning age discrimination, the law permits employers to take actions that are based on “reasonable factors other than age.”

What constitutes “reasonable factors” has been at issue ever since. For many years, the lower courts analyzed disparate impact claims using a framework that required an employee to prove that a particular employment practice had a significant negative (disparate) impact on older workers. The employer was then required to establish that the disputed practice was consistent with “business necessity.”

Even if this burden was met, the employee could still claim damages under ADEA by demonstrating that the employer failed to adopt alternative practices that did not discriminate by age.

In 1993, the court limited this framework in Hazen Paper Co. v. Biggins. A 62-year-old claimed that he had been fired shortly before he had reached the years of service needed to be vested in the firm’s pension plan. The court ruled that years of service – while sometimes correlated with an employee’s age – did not necessarily result in age discrimination. Thus, Hazen Paper Co. did not violate ADEA, though the firm did violate provisions of the Employee Retirement Income Security Act (ERISA).

By 2004, five federal circuit courts of appeals had issued opinions that prohibited disparate impact claims under ADEA, while seven federal circuit courts accepted the claims, resulting in a circuit split that required resolution by the highest court.

On March 30, 2005, the Supreme Court decided by a 5 to 3 vote to recognize disparate impact as a ground for employer liability under ADEA, but placed strict limits on such claims.

Just how narrow was evident from the ruling. A group of older police officers in Jackson, Miss., sued the city because it had awarded higher percentage pay raises to officers with fewer than five years of service.

The city did not dispute that this policy had a disparate impact on older officers, but defended the decision with a wage survey showing that it needed to grant higher raises to younger officers in order to remain competitive with surrounding jurisdictions. A majority of the court agreed that this was a “reasonable factor other than age” permitted under the law and rejected the plaintiffs’ claim.

Many legal authorities believe that the Smith ruling will have its greatest impact in reducing potential litigation involving reductions-in-force plans, which increasingly are used by large corporations to lay off employees.

Many of these plans target for termination high-paid employees, who also tend to be older employees. Under the Smith decision, such plans would not constitute age discrimination so long as employers offered reasonable factors other than age for their layoff decisions.

“At best,” the Illinois scholar wrote, the Supreme Court ruling will have a mixed result for older workers. “On the positive side, the decision recognizes disparate impact as a possible claim under ADEA and thereby provides companies with an incentive to create [termination] policies that do not single out older workers. However, the case also places many obstacles in the way of litigants who want to challenge such policies.”

There are ways for companies to structure cost-cutting plans that could avoid potential litigation. For example, higher-paid workers could be given the choice of taking a salary cut or first refusal for other jobs at the company. “These alternative methods tend to show that it was simply cost – and not age – that motivated the employer,” the paper noted.

Another alternative is offering cash incentives to older employees to retire early. This kind of plan was announced on Wednesday (March 22) by General Motors Corp. Workers who have reached retirement age will be offered $35,000 in cash to give up their jobs immediately. In exchange for such incentives, employees are typically asked to sign waivers releasing their employers from potential age discrimination suits.

Sperino recommended that more companies develop practices that eliminate, as far as possible, age discrimination. “Companies certainly have an incentive to avoid costly litigation, even if they believe that they would ultimately prevail on the merits,” she said.

Her paper, published in the Illinois College of Law’s Elder Law Journal, is titled “Disparate Impact or Negative Impact?: The Future of Non-Intentional Discrimination Claims Brought by the Elderly.”