Downsizing Risks Highlighted In Case Heard By Supreme Court

The Meacham case was brought under the Age Discrimination in Employment Act, which prohibits employment practices that have an unjustified disparate impact on older employees. At the same time, the law also provides that it "shall not be unlawful for an employer…to take any action otherwise prohibited where the differentiation is based on reasonable factors other than age."

Essentially, the question the court is dealing with is whether an employee alleging disparate impact under the ADEA bears the burden of persuasion on the "reasonable factors other than age" defense.

The 2nd U.S. Circuit Court of Appeals in Manhattan reversed a jury verdict in favor of the plaintiffs, despite the fact the decision conflicts with the decisions of other circuits as well as a regulation of the Equal Employment Opportunity Commission.

The employees sued the laboratory, based in upstate New York, when only one of the 31 employees laid off was under 40 years old. At the same time, 60 percent of the work force was over 40. The laboratory is owned by Lockheed Martin Corp.

The lawyer for the laid-off employees, as well as a lawyer for the U.S. Solicitor General, in oral arguments before the Supreme Court in April cited the ADEA provision saying that employers could justify laying off one employee as opposed to another based on "reasonable factors other than age" as justification of their position that the employer had the burden of proof in these cases.

Specifically, the lawyers told the justices that through this provision Congress was offering employers a defense, but one which they would have to prove.

"And the question for the employer is just to show that its business practices–it's own business practice–is reasonable, is supported by some reasonable factor other than age," said Daryl Josefer, an assistant U.S. solicitor general, in supporting the employees.

"It ought not be hard for an employer, especially considering that the reasonableness standard is not very daunting, to explain why its own business practice is reasonable."

In addition, he said, "If an employer can't even persuade someone that its own business practice is reasonable, then the odds are that there is a problem."

Seth Waxman, a former solicitor general and now a lawyer at Wilmer Cutler Pickering Hale and Dorr in Washington, D.C., said in supporting the 2nd Circuit decision that the court should keep in mind the difference between age discrimination and other kinds of workplace discrimination.

He said policies that have a differential impact on the basis of race or sex can rarely be justified as reasonable. On the other hand, Mr. Waxman said, age "often does correlate with reasonable employment factors."

Robert Sargent, executive vice president of MercatorPro, the management professional liability division of Mercator Risk Services in Hartford, Conn., said, "An adverse decision in this case will impact how employers should plan for and execute downsizing programs."

Mr. Voluck went a step further. "Quite simply, I can't help but think it will spike employment discrimination claims, particularly age claims," he said.

What that means for employment practices liability insurers, and their clients, he said, is that exclusions some insurers put in policies for layoffs will become much more commonplace, and that "some companies may withdraw entirely from high risk lines," or from writing coverage for industries in which layoffs are a likely occurrence.

Mr. Sargent argued, however, that even an unfavorable ruling should have only a minimal effect for those employers who are careful in limiting their exposure.

"The impact on the employment practices liability insurance market should be negligible for those employers that practice thorough employment risk management," he said.

"The EPLI market is currently competitive, and a moderate change in one aspect of employment exposure should not have any significant impact on underwriting or rating," he said.

Mr. Voluck said that insurers will still be conducting significant due diligence regardless of how the case is decided, and may shy away from offering coverage to a company they feel has not made the necessary steps to manage their own exposure.

"It underscores something that employment lawyers should always be advising their clients about," he said. "When you are selecting people for a layoff, you have to make sure the criteria is looked at every which way" to ensure that no bias, or even the unintended appearance of a bias, exists, he said.

"Many companies find, unintentionally, that a lot of the people in a layoff are over 40," he said. "These are the types of precautions, or risk management, that an insured should be expected to take."

If the decision should come down on the other side–meaning plaintiffs have the burden of proof, Mr. Voluck said insurers will maintain a conservative stance, and that companies should, too.

Many companies in the wake of a favorable decision, he said, "will undoubtedly feel a false sense of security," which he added was a "short-sighted position to take."

If companies feel they are less likely to face litigation, he said, they may be more likely to actually make themselves vulnerable by using subjective criteria when choosing employees for a layoff. "It could cut both ways," he said, adding that much will "depend on just what the court writes."

Paul Mickey, an employment practices liability specialist at Steptoe & Johnson, said that many commentators "think this relatively conservative court is likely to favor the employer and put the burden on the plaintiff."

"If it goes the other way, then employers' exposure for decisions with an adverse effect on older workers, such as RIFs, will increase, perhaps significantly," he said.

A case already decided by the Supreme Court this year, Sprint/United Management vs. Mendelsohn, Mr. Mickey said, put an increased burden on employers to deal with people who create a hostile environment on the basis of age.

The ruling in Mendelsohn dealt specifically with the issue of "me-too" witnesses. The high court ruled that it is a trial court that must determine whether witnesses for an employee in a job discrimination case can be allowed to testify that in different circumstances at the same employer, comments were made by other supervisors that could be viewed as discriminatory.

The Mendelsohn case "is not a landmark case, not seismic," but does increase the burden on employers to deal with people who create a hostile environment. He explained that stray comments suggesting age bias in the workplace may be admissible in a case even where the person making the comments is not the decision-maker.

The February ruling has been called "unsatisfying" by many commentators "as it merely affirmed familiar principles about deference to a trial court's rulings on evidence and the need to make those rulings on a fact-specific basis," he said.

Still, he said, it is a "moral victory" for plaintiffs for ADEA cases.

"I do think it is more helpful to plaintiffs than to defendants, because it leaves the door open for a trial court to conclude that a jury should indeed hear testimony about age bias in an organization that isn't directly related to the decision being challenged by the plaintiff and the motivation of the person who made that decision."

While the nine Supreme Court justices are considering the Meacham case, federal lawmakers have given overwhelming approval to legislation designed to protect workers from discrimination based on the results of genetic testing.

The issue had been debated in Congress for over a decade, but on May 1 the House voted 414-1 to send HR. 493, the Genetic Information Nondiscrimination Act, to the White House just one week after the Senate gave its approval in a 96-0 vote.

The measure, signed by President Bush on May 21, bars employers and health insurers from discriminating based on the results of genetic testing. In the employment context, genetic information can't be used in hiring, firing or other job placement decisions.

For those in the EPLI industry, the likely result of the bill becoming law was seen as fairly predictable.

"It will have an effect," said Mr. Voluck. "Anything that broadens employee protections will have an effect–and the effect is increased claims," he said.

While Mr. Sargent acknowledged the good intentions behind the bill, protecting employees from discrimination, he noted that some of its provisions "may be onerous for employers, and may lead to additional litigation." The overall impact of discrimination claims related to genetic testing created under the bill may not be very significant in relation to all claims, he said, but "it will certainly not be helpful."

Mr. Voluck said that some of the bill's impact would also be mitigated by the fact that many employers are already operating under similar rules enacted by lawmakers in over 30 states. He noted, however, that the federal law will likely increase the number of claims made, and that even if those claims are without merit, they can still be made and still require being contested.

"It's another brick for employees to throw," he said.