New EEOC Regulations Subject U.S. Employers To More Scrutiny

The EEOC today issued new regulations under the Age Discrimination in Employment Act ("ADEA"), regulations that promise to intensify EEOC scrutiny of employers needing to downsize or otherwise reduce employment-related costs. The new regulations detail what an employer must prove in order to justify action that adversely affects older employees. The Supreme Court has held that such action must be based on a "reasonable factor other than age" (a phrase taken from ADEA itself). In purporting to construe that phrase, however, EEOC reads it to mean the employer must demonstrate its action is not only rational, but also reasonable in design and administered in a way that reasonably achieves the employer's intended purpose. The regulation lists five factors to be considered in deciding whether the employer has acted "reasonably." As a practical matter, few employers can be confident of satisfying EEOC's view of the law unless they comply with each and every factor. Even then, employers will be left wondering if they have done enough because, according to EEOC, whether an employer has met its RFOA burden "must be decided on the basis of all the particular facts and circumstances surrounding each individual situation." In short, employers needing to reduce costs face yet another set of regulatory hurdles, at the end of which they may or may not have reached compliance.

The Underlying Supreme Court Decisions

In Smith v. City of Jackson (2005), the Supreme Court recognized disparate impact claims under the ADEA -- a cause of action by employees age 40 or above who are adversely affected by a facially neutral employment practice (for example, a decision to terminate mid-level managers earning over $100,000, assuming that decision falls disproportionately on older managers). At the same time, the Court held that an employer would not be liable if its action was based on a "reasonable factor other than age."

Smith raised and left unanswered the question of which party has the burden of showing a RFOA. The Supreme Court answered that question in Meacham v. Knolls Atomic Power Lab. (2008), holding that RFOA is an affirmative defense as to which the employer bears the burden of proof. The Court in Meacham made clear, however, that the employer's burden under ADEA was less than under Title VII (which prohibits race and gender discrimination, among other things). In the Title VII context, disparate impact is lawful only if shown to be "job related and consistent with business necessity." All courts agree that this is a very high standard, requiring an employer to show its action is closely related to an important business purpose; even then, a plaintiff can prevail by showing that the intended purpose could have been achieved by a less impactful means.

The Regulatory Back-Drop

EEOC first promulgated proposed RFOA regulations back in 2008, before the Court decided Meacham. Those relatively straightforward regulations summarized the Court's holding and analysis in Smith, and went on to opine that the employer bore the burden of proving RFOA (in effect foreshadowing Meacham). That decision effectively mooted EEOC's then-proposed regulations.

In February 2010, EEOC legal staff under the new administration put forward a new set of proposed regulations, one altogether different from those previously proposed (and from what the Supreme Court had stated in Smith and Meacham). In November 2011, the Commission approved the regulations by a 3-2 vote and sent them on to OMB for final review and approval. The final regulations issued today differ slightly in verbiage and substance from those proposed in 2010.

The Regulations Themselves

In its comments accompanying the new regulations, EEOC says repeatedly that its RFOA analysis differs from Title VII business necessity analysis. Notably, however, the regulation itself does not say this. Moreover, the detailed scheme set forth in the final regulations imposes on employers a set of compliance steps seemingly at odds with the Supreme Court's view of "reasonableness." Among those steps (that must be taken in the event of adverse impact) are an analysis by the employer of:

1. The extent to which the factor is related to the employer's stated business purpose;
    
2. The extent to which the employer defined the factor accurately and applied the factor fairly and accurately, including the extent to which managers and supervisors were given guidance or training about how to apply the factor and avoid discrimination;
    
3. The extent to which the employer limited supervisors' discretion to assess employees subjectively, particularly where the criteria that the supervisors were asked to evaluate are known to be subject to negative age-based stereotypes;
    
4. The extent to which the employer assessed the adverse impact of its employment practice on older workers; and
    
5. The degree of the harm to individuals within the protected age group, in terms of both the extent of injury and the numbers of persons adversely affected, and the extent to which the employer took steps to reduce the harm, in light of the burden of undertaking such steps.
    

Importantly, EEOC says that no combination of the above "considerations" is required to establish a RFOA defense. The EEOC later elaborates and says an employer may not need to prove it took all the above into account. Other passages are more troubling, however, especially in the comments. For example, EEOC therein states that the list of regulatory factors is non-exhaustive, meaning EEOC reserves the right to think of others in investigating charges or in litigation. Moreover, EEOC's comments say that "cost-cutting alone would not be sufficient to establish the RFOA defense." This is surprising, to say the least, inasmuch as it was cost that motivated the defendant in Smith v. City of Jackson. Indeed, the need to reduce costs drives virtually every reduction-in-force, along with across-the-board pay cuts, benefit cutbacks, etc. One would have thought heretofore that saving money was the prime example of a RFOA. Not so, according to EEOC.

What's Next?

Although surprisingly detailed in some regards, the new regulations raise at least as many questions as they answer, for example:

• Will courts defer to these regulations, and if so to what extent?
   
• Will the regulations be challenged in court, and if so will they hold up? Employer groups may decide to challenge the regulations, either before they are applied to particular employers or when they are applied or both. As approved by OMB, the final regulations contain a requisite cost-benefit analysis that was missing from the 2010 iteration. Whether that will survive judicial scrutiny remains to be seen.
   
• Are the new regulations retroactive (applicable to pre-March 30, 2011 conduct), or are they prospective only? EEOC will likely argue for retroactivity, on the basis that the regulations merely restate and/or explain existing law. Given the regulations' level of specificity, however, and their idiosyncratic reading of Smith and Meacham, the arguments for prospective application appear strong.
   
• Most importantly, just what must an employer do to comply? Is the standard different for a company that employs 1,000 as opposed to 10,000? If a company conducts an adverse impact analysis, how must it measure impact?
   

Seyfarth Shaw will address these and other questions in a forthcoming issue of Strategy & Insights. In the meantime, if you would like more information, please contact your Seyfarth Shaw LLP attorney or Condon McGlothlen at cmcglothlen@seyfarth.com.