On June 19, 2008, the U.S. Supreme Court handed down its decision in a much-anticipated decision, Meacham v. Knolls Atomic Power Laboratory (No. 06-1505), ruling that an employer defending against a disparate impact age bias claim, and not the employee making the charge, bears the burden of proving that the adverse action was based on a reasonable factor other than age. The theory of disparate impact is based on the principle that a policy that seems neutral on its face may nevertheless have an adverse impact on a protected class, here, older workers. By their nature, disparate impact cases generally involve multiple plaintiffs. Thus, the Court's decision now makes it easier for older workers to prevail in what is typically the most costly kind of age discrimination case.
The basic facts of Meacham are fairly straightforward and particularly relevant in these volatile economic times when many companies are implementing or contemplating downsizing measures. Following an order from the government to cut its staff, Knolls, a federal contractor, developed a reduction-in-force plan. Pursuant to this program, the company directed its managers to score their subordinates in three areas: "performance," "flexibility" and "critical skills." The managers enjoyed significant discretion in applying these criteria. Layoffs were then determined based on an employee's score in each area, combined with points awarded for years of service. The result was that 30 of the 31 employees selected for layoff were at least 40 years old.
Twenty-eight of the laid off employees subsequently filed a lawsuit against the company alleging, among other things, that the method for determining who would be laid off was unlawful under the Age Discrimination in Employment Act (ADEA), because it had a disparate impact on older workers. In support of their claim, the workers provided testimony from a statistical expert which indicated that "results so skewed according to age could rarely occur by chance," and that the scores for "flexibility" and "critical skills," for which the managers had the most discretion, had the "firmest statistical ties to the outcomes."
Among its defenses, the company contended that the RIF was lawful because the layoff decisions were based on reasonable factors other than age (RFOA), one of the specific exemptions to liability contained in the ADEA.
The case went to a jury, which found for the employees on their disparate impact claim and the U.S. Court of Appeals for the Second Circuit affirmed the verdict.
At this point, however, the case got slightly more complicated. In response to Knolls's petition to the Supreme Court to review the decision, the Court vacated the judgment and directed the appellate court to reconsider its ruling in light of the High Court's intervening decision in Smith v. City of Jackson, 544 U.S. 228 (2005). In City of Jackson, the Court held that (1) a disparate impact claim is cognizable under the ADEA; (2) the Act permits an employer to implement a policy that has a disparate impact if it is based on RFOA; and (3) the plaintiff in an ADEA disparate impact case must identify the "specific employment practices that are allegedly responsible for any observed statistical disparities" (emphasis in the original).
In so ruling, the Court in City of Jackson expressly rejected the "business necessity" test applied by the Second Circuit in Meacham and replaced it with a "reasonable" test. In other words, unlike the business necessity test, which asks whether there are other ways for the employer to achieve its goals that do not result in disparate impact on a protected class, the reasonableness inquiry includes no such requirement. Thus, even if there are other reasonable ways for the employer to achieve its goals that arguably have less of a disparate impact, the employer need not choose one of those as long as the one selected was not unreasonable.
Reconsidering its decision in Meacham in light of City of Jackson, the Second Circuit found in favor of Knolls, concluding, in part, that the workers had not carried the burden of persuasion. Specifically, the appeals court ruled that the employees had not shown that the employer's reliance on a factor other than age was unreasonable.
Now it was the workers turn to seek the High Court's review. They argued that the statutory RFOA exemption was an affirmative defense which placed the burden of persuasion on the employer-defendant. An affirmative defense requires that the party claiming its benefits – here, the employer Knolls – prove it. Knolls contended that the RFOA provision should be read as "mere elaboration on an element of liability," because the provision bars liability where a disputed action is taken for reasons other than age.
The Court, in a 7-1 decision, rejected this argument and ruled for the employees, finding that the RFOA exemption is an affirmative defense which places the burden of persuasion on the employer. Among its reasons for reaching this conclusion, the Court cited its own prior holding that another ADEA exemption – the one for a "bona fide occupational qualification" – is an affirmative defense.
Notably, the opinion, written by Justice Souter, acknowledged the concern of some that the Court's ruling could "nudge plaintiffs with marginal cases into court." The Court responded by emphasizing the significant burden on employees to identify a specific policy as being an unreasonable factor other than age, and reasoning that concerns about a potential surge in age-based disparate impact litigation are "to be directed at Congress, which set the balance by both creating the RFOA exemption and writing it in the orthodox format of an affirmative defense. We have to read it the way Congress wrote it."
The decision was joined by Chief Justice Roberts and Justices Stevens, Kennedy, Ginsburg and Alito. Justice Scalia concurred in the judgment. Justice Thomas concurred in part (agreeing that the RFOA exemption is an affirmative defense) and dissented in part (disagreeing with the underlying premise that disparate impact claims are cognizable under the ADEA).
Bottom Line
In light of this decision and the current trend in downsizing initiatives, employers should expect an increase in ADEA disparate impact claims. It appears that the company in this case may have left itself vulnerable to a lawsuit by granting its managers too much unchecked discretion in determining which employees should be laid off. To minimize the risk of liability, employers should ensure that the criteria used for identifying employees for layoff are as objective as possible, that the discretion vested in managers to apply such criteria is limited, and that an additional layer of independent review is in place to prevent an abuse or misuse of discretion by managers.
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