Important New Second Circuit ADEA Decision: Meacham v. Knolls Atomic Power Laboratory

The United States Court of Appeals for the Second Circuit recently issued a significant decision in Meacham v. Knolls Atomic Power Laboratory interpreting the application of the federal Age Discrimination in Employment Act ("ADEA") to employers' downsizing programs. The decision underscores the necessity that employers carefully plan for and implement reduction- in-force programs in order to ensure that they do not have a disparate impact upon older workers.

Knolls Atomic Power Laboratory ("KAPL") is a government-owned research and development facility under contract with the Department of Energy. In 1996, KAPL was required to eliminate 143 of its approximately 2,063 exempt employees for budgetary reasons. In order to achieve the desired staffing level, KAPL instituted a voluntary separation plan, which included severance packages to select employees, job transfers and retraining. In addition, KAPL implemented an involuntary reduction-in-force ("IRIF") program to further reduce its workforce.

In accordance with the IRIF plan, managers were instructed to select employees for participation in the IRIF by ranking them based upon job performance, flexibility, criticality of their skills, and length of service. The lowest ranked employees were identified as candidates for termination under the IRIF. After managers identified employees for layoff, a KAPL human resources representative performed a disparate impact analysis by comparing the average age of the workforce before and after the IRIF, which did not yield a significant difference. KAPL's legal counsel then reviewed the IRIF process by verifying the managers' rankings for mathematical accuracy and speaking with some, but not all, of the managers about the employees whom they had ranked the lowest. Ultimately, thirty-one employees were terminated under the IRIF, thirty of whom were over forty years of age.

Most of the KAPL employees terminated under the IRIF joined in filing an age discrimination lawsuit in the United States District Court for the Northern District of New York. The employees alleged that KAPL had discriminated against them based on age because the IRIF had a disparate impact on older workers. The jury returned a verdict in favor of the employees and awarded them $4.2 million in damages. In addition, the trial judge awarded the employees nearly $1 million in attorney fees and costs. KAPL appealed.

The Second Circuit Court of Appeals upheld the jury's verdict and acknowledged that previous Second Circuit decisions had held that employer’s may be liable for policies which have a disparate impact on older workers even though the employer did not intend to discriminate. The Court recognized that its position is at odds with the majority of federal appellate courts, which have held that the disparate impact theory of liability is not available in age discrimination cases. The Court further recognized that the United States Supreme Court is likely to resolve this issue during its next term.

The Court first set forth the elements of a claim of disparate impact age discrimination. According to the Court, an employee must initially identify a specific policy impact such as the selection criteria utilized in an IRIF plan. Next, the employee must present statistical evidence demonstrating that the challenged policy resulted in a substantial disparity in the selection rates of younger and older employees. The employer must then explain the business necessity for the challenged policy. The employee will prevail if he or she can prove that the employer's explanation is a pretext for discrimination, for example, by showing that equally effective alternatives to the challenged policy were available to accomplish the employer’s objectives without causing a disparate impact upon older workers.

The Court then went on to address the inadequacies of KAPL's IRIF plan which had resulted in the disparate impact upon older workers. The Court found that of the four criteria utilized by KAPL to identify employees for layoff, flexibility and criticality had the greatest influence on the selection decisions, and that the factors relied upon by managers to rate employees on these criteria were imprecise at best. As a result, the individual managers had a great degree of latitude to make subjective assessments of employees' flexibility and criticality. This problem was compounded by the lack of adequate safeguards to audit the subjectivity and ensure that it did not result in a disparate impact on older workers. According to the Court, if an employer uses subjective criteria as part of its IRIF, the criteria disproportionately impacts older employees, and the employer does nothing to audit or validate the results, it may be liable for age discrimination if equally effective alternatives to the challenged features of the IRIF are available. The Court concluded that one alternative available to KAPL was to make simple adjustments to the criticality and flexibility criteria so as to make them less vulnerable to managerial bias.

The Court upheld the jury's verdict which found that KAPL willfully violated the ADEA and awarded the employees liquidated damages because the company failed to properly test for age discrimination in the IRIF. That is, KAPL compared the average age of its 2000 plus exempt employees before and after the IRIF (a methodology proven by plaintiffs' expert to be grossly inadequate in identifying statistically significant disparities in the ages of employees selected for the IRIF). Instead, the Court found that KAPL should have compared the age composition of the pool from which the laid off employees were selected with the age composition of the group ultimately selected for layoff.

The analysis, the Court noted, could utilize either of the methods the Second Circuit has approved for identifying adverse impact. These are the four-fifths rule which has been approved by the United States Equal Employment Opportunity Commission or a standard deviation analysis. Under the four-fifths rule, an adverse impact is presumed to exist where the retention rate of older workers under an IRIF is less then fourfifths, or 80 percent, of the retention rate of younger workers. Similarly, a standard deviation analysis considers the degree to which an obtained result varies from an expected result. An employer that reduces its workforce in a manner that is less than statistically perfect may nevertheless be able to avoid an inference of discrimination based solely on the fact that the number of people chosen for layoff who are 40 or older is not in perfect statistical parity with the number of people under 40 by utilizing one of these two methods of analysis.

The Court also held that KAPL willfully violated the ADEA because it knew that its IRIF had affected a disproportionate number of older employees but implemented the IRIF nonetheless. Furthermore, the managers who selected employees for termination under the IRIF did not receive any training on avoiding age discrimination in the IRIF and KAPL's legal counsel performed only a cursory review of the results of the IRIF.

The implications of the decision are significant for employers contemplating an involuntary reduction of its workforce. Until the United States Supreme Court finds otherwise, an employer's IRIF program that has a disparate impact upon older workers potentially violates federal anti-discrimination law. Likewise, Connecticut employers may face liability under the State's Fair Employment Practices Act, which has been interpreted by at least one lower federal court as encompassing claims of age discrimination based upon the disparate impact on older workers of an employer's neutral employment practices and policies. See Rogers v. First Union National Bank, 259 F.Supp.2d 200 (D. Conn. 2003). In light of the Second Circuit decision, it is essential that employers carefully plan for and monitor IRIF plans. Fortunately, the Meacham decision provides a roadmap that may help employers avoid the problems that led to the result in that case. For example:

• Initially, employers should develop jobrelated, objective criteria for evaluating employees. To the extent subjective criteria are used to evaluate employees, those criteria should be carefully defined and tailored to limit the degree to which individual managers' subjective assessments influence the selection process. As the Meacham decision makes clear, if an employer bases its selection decisions primarily upon subjective criteria which are vulnerable to managerial bias, and that subjectivity results in a disproportionate number of older workers selected for layoff, the employer must be prepared to show that there were no other alternatives to the challenged features of its IRIF plan or face the possibility of being found liable for age discrimination.
• Once employees are identified for termination under the IRIF, a disparate impact analysis should be performed to identify statistically significant differences in the selection rates of older workers or any other protected class of individuals. In conducting this analysis, the employer must be certain it has chosen the right groups to compare (e.g., those broadly considered for layoff versus those actually laid off, rather than including in the analysis employees who were never considered for layoff). This analysis may include use of either the four-fifths rule or a standard deviation analysis.
• Where a disparate impact exists, employers should perform a systematic review of the IRIF process, including (i) an examination of the selection criteria, to ensure that they did not result in the discriminatory distribution of layoffs, and (ii) discussions with all of the managers who made the selection decisions, to ensure that the decisions were based upon legitimate, non-discriminatory factors. Where a particular selection criterion is found to have caused the lopsided result, especially if subjective in nature, employers should attempt to identify other criteria that would accomplish their objectives without causing a disparate impact upon older workers or other protected groups.
• It is essential that all managers involved in the IRIF receive training on avoiding discrimination in the selection of employees for termination and that human resources personnel and legal counsel provide oversight throughout the process.