One of the most significant age discrimination rulings in decades means that risk managers, human resource professionals and corporate counsel face a new world of employment discrimination litigation as a result of the U.S. Supreme Court's age-bias ruling in Smith vs. City of Jackson.

In its March 30 ruling, the court determined that disparate impact claims of discrimination state a viable course of action under the Age Discrimination in Employment Act.

The decision is likely to have profound implications on a wide range of corporate decision-making regarding layoffs, reductions in force and employee benefit plans. It also significantly increases liability risks for age discrimination claims.

The ADEA outlaws workplace age discrimination in terms identical to those used in Title VII of the Civil Rights Act of 1964, which prohibits discrimination on the basis of race, color, religion, sex and national origin. Unlike Title VII, ADEA has a provision allowing employer actions that would be otherwise prohibited “where the differentiation is based on reasonable factors other than age”–known as the “RFOA” defense.

In 1971, the Supreme Court construed Title VII to hold that employment qualification standards with an adverse impact on protected minority groups are illegal even if an employer has no intent to discriminate against a minority.

This case–Griggs vs. Duke Power Company–spawned the theory of “disparate impact” discrimination. It allows a worker to prove discrimination by showing that an employer's practice has an adverse impact on members of a minority group and the practice is not otherwise justified by business necessity (and the test of a business necessity is strict and exacting). In contrast, a worker can prove discrimination under a disparate treatment theory by demonstrating that the employer harbored discriminatory intent against the worker.

In Smith vs. City of Jackson, the Supreme Court held that the disparate impact analysis of Griggs applies equally under ADEA because the statute's language prohibiting discrimination is identical to Title VII.

Due to the RFOA provision, however, the Supreme Court indicated that a disparate impact case under ADEA differs from one brought under Title VII, since Title VII has no parallel provisions similar to the RFOA defense incorporated within the ADEA.

Whereas personnel practices with disparate impact can be justified under Title VII only if an employer meets a strict business necessity test, an employer's justification for its action in an ADEA disparate impact case need only be based on a reasonable factor.

What does this mean for risk managers?

The decision in Smith vs. City of Jackson undoubtedly raises the stakes for employers in age-bias litigation. Disparate impact discrimination is easier to allege and prove than disparate treatment discrimination, where an employee must demonstrate intentional discrimination on the employer's part. Decisions by employers in situations involving multiple employees–such as a layoff, a reduction in force, or a change in employee benefit programs–are more readily attacked by plaintiffs' lawyers under a disparate impact theory.

At the same time, employers can take solace in the “reasonable factor” defense recognized by the Supreme Court. While the Supreme Court's decision does not define what “reasonable factors” are, it seems likely that lower federal courts will interpret that phrase as any rational business justification for a personnel decision.

It seems reasonable to assume that lower federal courts will grant deference to an employer's explanation of its personnel decision so long as it is consistent with a legitimate business goal.

For example, in a reduction-in-force situation, an employer trying to cut costs may decide to dismiss certain employees based on their higher wage levels. Given the correlation between wages and seniority (and seniority and age), this hypothetical would likely have a disparate impact on those employees over the age of 40.

However, based on the Supreme Court's decision in Smith vs. Jackson, the employer's rationale that it was trying to cut costs would seem to justify the employer's decision, as a reduction in labor costs is certainly a reasonable business justification.

Employers undertaking personnel decisions that may have a disparate impact on those employees over the age of 40 should review and document the legitimate reasons for their personnel decisions.

Ultimately, so long as employees make reasonable, properly documented decisions, they should be able to escape liability for disparate impact under ADEA. Conversely, ill-planned and poorly administered personnel decisions can prompt age discrimination lawsuits when employees over the age of 40 are adversely impacted by the corporation's actions.

Gerald L. Maatman Jr. is a partner with Seyfarth Shaw LLP in Chicago.

“The decision is likely to have profound implications on a wide range of corporate decision-making regarding layoffs and benefit plans, while significantly increasing liability risks for age discrimination claims.”

Gerald L. Maatman Jr.

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