Date: April 1st, 2010
Categories: Employment Law

The Equal Employment Opportunity Commission (EEOC) has released a Proposed Rule intended to define one of the primary defenses used by employers facing claims of age discrimination under the federal Age Discrimination in Employment Act (ADEA). An employer can defend an age discrimination suit by claiming its employment decisions were based on “reasonable factors other than age,” which is commonly referred to as the RFOA defense. If the Proposed Rule is adopted, it will limit the applicability of the RFOA defense and will likely require businesses to change certain HR practices in order to maximize the potential applicability of the RFOA defense.

Let’s see how the Proposed Rule might affect the way your run your business. Imagine you are the owner of a once profitable computer software development company. I say “once profitable” because over the past several years you’ve seen the company’s market share decline and the young, bright employees you have mentored for years have been heading for greener pastures.

In discussing the situation with a friend, you discover that your pay scale model is horribly out of date, which is partially to blame for the “brain drain” your company is experiencing. After researching how your competitors are retaining their talented employees, you realize that the company must do something new or different to regain its competitive edge.

To bring your company’s pay structure in line with your competitors, you reformulate the pay structure for all employees, increasing salaries. In doing so, something interesting happens. In bringing your younger employee’s salaries in line with your competitors’, they see a very large pay increase; almost 20%. But your senior employees, whose salaries were already close to those of competitors, see only a modest increase in pay; say, 5%. Problem? Maybe.

Under the Age Discrimination in Employment Act (ADEA), an employer may not discriminate against those employees, aged 40 and older, on the basis of age. Further, the ADEA protects covered employees from actions taken by an employer that, on their face seem age neutral, but in reality disproportionally affect older workers.

By increasing salaries, you may have just made your company more vulnerable to lawsuits by the older, ADEA protected, employees of your company who likely make up the senior levels of management. Your intention was not to discriminate against the older employees of your company. You merely sought to bring your salary scale in line with competition.

So if a senior level employee brings a discrimination action against you what defense do you have? If you can prove that your policy change was based on “reasonable factors other than age” (RFOA), you may be in the clear. See 29 USC § 623(f)(1). What factors qualify as “reasonable” under the ADEA?

Though the unique RFOA defense has been available to employers under the ADEA for the past 28 years, Because the ADEA has not contained a definition of RFOA, for many years it has been left largely to the courts to make sense of the regulation. The EEOC felt compelled to address the meaning of RFOA after two recent U.S. Supreme Court cases where the Plaintiffs claimed an employer’s apparently neutral policy or practice (like the one described in the hypothetical above) had a disparate impact on older employees. Smith v. City of Jackson, 544 U.S. 228 (2005); Meacham v. Knolls Atomic Power Lab, 128 S. Ct. 2395 (2008). If approved, the EEOC’s new guidelines would provide both additional guidance for attentive employers and another weapon in the aggrieved employee’s arsenal.

Consistent with Smith and Meacham, the Proposed Rule “explains that whether a particular employment practice is based on reasonable factors other than age turns on the facts and circumstance of each particular situation and whether the employer acted prudently in light of those facts.” It also makes clear that a “reasonable factor” is one that is “objectively reasonable when viewed from the position of a reasonable employer under like circumstances.” This is not a subjective test, The employer’s actions are judged based on the standard of a prudent employer who is aware of, and factors into its decision-making process, reasonable nonage factors.

To assist the employer, the Proposed Rule provides a non-exclusive set of “factors” for employers to consider when preparing to implement an employment action. Before implementing the new policy or practice, an employer should evaluate:

• Whether the employment practice and the manner of its implementation are common business practices;
• The extent to which the factor is related to the employer’s stated business goal;
• The extent to which the employer took steps to define the factor accurately and to apply the factor fairly and accurately (e.g., training, guidance, instruction of managers);
• The extent to which the employer took steps to assess the adverse impact of its employment practice on older workers;
• The severity of the harm to individuals within the protected age group, in terms of both the degree of injury and the numbers of persons adversely affected, and the extent to which the employer took preventative or corrective steps to minimize the severity of the harm, in light of the burden of undertaking such steps; and
• Whether other options were available and the reasons the employer selected the opinion it did.

None of the factors require an employer to adopt an employment practice that has the least severe impact on members of the protected age group. As the Supreme Court noted in Smith v. City of Jackson, “Unlike the business necessity test, which asks whether there are other ways for the employer to achieve its goals that do not result in a disparate impact on a protected class, the reasonableness inquiry includes no such requirement.” 544 U.S. 228, 243 (2005). It is important to remember that the employer has the burden of proof on these issues, so evaluation of impact prior to taking adverse employment action is essential.

Besides providing an employer with guidance, the proposed RFOA definition will also provide more ammunition to aggrieved employees. Most employers who end up subjected to ADEA lawsuits are unaware of the impact their employment action has on older employees, until the action/policy is implemented. These new regulations basically require an employer to consider all of the factors above before making any major employment policy change because if they do not, their failure to do so can be used against them by a protected employee.

It may seem arduous, but if the proposed revisions are adopted, it is of the utmost importance that employers update their employment practices to consider the factors above before altering their decision making process for hiring, promotions, terminations and reductions in force (RIF). Under the new regulations, our hypothetical employer could be in real trouble if the factors laid out above were not considered. From situations such as reevaluating pay scale to preparing a RIF strategy, consultation with a qualified attorney is advisable.

The EEOC will adopt the proposed revisions sometime after the required notice and comment period expires, on April 19, 2010. If further changes are made during the required comment period, we will keep you apprised of them here. The proposed revision can be reviewed online here.