Together with labor economists and political pundits, employment counsel and HR professionals keep wondering if and when U.S. hiring figures will rebound.  The economy as a whole seemed to have turned a corner as 2014 got underway – new jobs figures had been strong for months, unemployment was declining steadily.  The Federal Reserve, accordingly, announced that its long-expected “taper” (reduced Treasury and mortgage-backed bond purchases) would begin, expecting the markets to see that as a logical next step toward continued recovery.

Then December hiring figures landed with a thud: only 74,000 non-farm payroll jobs created that month (by contrast with 2013’s monthly average of 182,000), with a declining unemployment rate attributed largely to frustrated individuals having withdrawn from the job market.  Lots of level-headed authorities wrote off December hiring figures to unusually cold weather across much of the country. That so many unemployed individuals had abandoned their job search was more troubling, however.  With the East and Midwest still shivering in late January, and more of the same experienced in February, one wonders whether December’s dip might portend relatively flat hiring for much of 2014.

Less insular, longer-term trends raise similar questions.  China’s unprecedented growth has slowed materially, and with it the growth of emerging markets like Brazil, India, Turkey, and South Africa.  (These countries’ exports to China have soared in recent years.)  Meanwhile, as developed world interest rates start to rise, emerging markets are further roiled by investor flight. By late January, global markets look peaked after 2013’s ruddy glow.

Despite local weather and other more worldly woes, many U.S. (and non U.S.-based) employers are expected to hire in 2014.  EU-based companies in general look much stronger than they did a year ago.  Here in the U.S., the economy rose 3.2% in Q4, consumer spending held steady, and consumer confidence looks strong.  All told, American employers in health care, technology, financial services, and manufacturing, among others, will likely add new hires, whose purchasing power and demand for services will in turn generate other hiring.

Why Bother With Pre-Employment Testing?

Faced with conflicting economic signals here and abroad, however, smart employers will hire selectively.  That need not (and, of course, should not) mean “selective” in any discriminatory or otherwise unlawful sense.  Rather, it means that, as with capital expenditures, real estate costs and the like, these employers will insist on value for money.

That’s where testing comes in, and its legal risks that many U.S. employers have not faced since 2008. With former employers providing little more by way of reference than “title” and “dates of employment,” companies that are hiring must choose between pre-employment tests, unchecked managerial discretion (the subject of so many class actions before and since the Supreme Court’s Wal-Mart Stores v. Dukes decision), and hiring by lottery – an unpalatable approach to business owners and front-line managers alike.

What Courts Have Said About Tests Recently

Employment tests have been challenged in court for many years, usually under a disparate impact theory and sometimes successfully.  Numerous challenges have been brought against public employers.  Police and fire departments routinely test candidates, in part to avoid claims of favoritism or outright unlawful bias.  In recent years, public entities have been sued by minorities and non-minorities alike (the latter using a reverse discrimination theory).  Gender bias is another risk, especially with physical strength/abilities tests. See, e.g., Easterly v. Conn. Dept. of Corrections, No. 3:08 00826 (D. Conn. 2013) ($3 million settlement of class action claims by female corrections officer candidates who challenged physical fitness test).

Given the amended ADA’s broad coverage, tests that screen candidates based on physical or mental/intellectual ability are further vulnerable.  One private employer’s test was recently exonerated under the ADA in Council of Carpenters v. Bergland Contr. Co., No. 1:12-cv-03603 (N.D. Ill. Dec. 19, 2013).  There, a construction employer showed its lifting test – administered by an outside rehabilitation center – was job-related and consistent with business necessity because it measured tasks representative of those actually performed by carpenters.  Employers of all types can draw two conclusions from Bergland: (i) tests designed and administered by an independent entity are more likely to be upheld than those designed by the hiring employer; and (ii) with or without formal validation, tests that replicate actual job functions are usually the most defensible.

The EEOC and Testing

The EEOC’s opposition to wide-ranging credit or criminal background checks continues to be a source of litigation and press attention.  (Our colleagues who blog about EEOC matters have written about it HERE and HERE.)  Despite several prominent setbacks in federal court, the agency can be expected to continue challenging background screens for a while.  Some employers pressed to move away from these screens may turn to tests.  Predictably, the EEOC will do the same, especially with hiring discrimination ranked among its top Strategic Enforcement priorities.

When the EEOC files a pattern and practice hiring suit, the company can expect a battle royale – the stuff of expert statisticians, organizational psychologists, and 7 or 8-figure settlement demands.  The employer that prevails in district court can expect a costly appeal. Which is not to say all tests are to be avoided; without some objective assessment of candidate abilities, the company will be a target for EEOC (or plaintiffs’ class counsel’s) arguments that subjective practices were a means by which subtle or not-so-subtle bias factors into hiring decisions.

What’s a Well-Informed Employer To Do?

Many companies tout their workforce as their most valuable asset.  For some, that may just be PR (internal or external or both).  Yet employers who say that ought to mean it, among other reasons because labor costs (certainly for U.S. employers) are their single biggest expense. A company that fails to treat its employees as an investment will face higher turnover, and commensurately higher labor costs.  Thus, it makes business sense to view hiring decisions as investment decisions – choices requiring research and systematic analysis.  That entails time and, yes, money.

Formal validation studies remain the standard, as well as what EEOC expects (OFCCP too if you’re a federal contractor).  Those can cost tens of thousands of dollars.  That cost, however, shrinks by comparison with the defense costs of a single class action/pattern or practice case, not to mention potential exposure. Money well spent? You decide.

Short of a full-fledged validity study, the employer can be well-served by having an outside expert conduct a job analysis. That will help identify the essential functions necessary to defend an ADA case, be it single plaintiff or other, and will provide insight into whether a test measures success on the job, actual job content, or both.

Other measures can also help.  Using test results as a “knock-out” criterion makes the test an easy mark. (Put legally, the plaintiff will be able to pinpoint the test as the hiring step that causes disparate impact.)  Better to use test results as a factor in a multi-faceted decision. And, consider testing later in the hiring process. This can have downsides, for example, candidates who are rejected later in the process will likely meet basic qualification requirements – a prerequisite for recovering damages. However, the potential class of rejected candidates will be smaller, which reduces aggregate exposure. Again, using the test as one of several factors in making final or near-final decisions can further reduce exposure.

It almost goes without saying that good legal counsel (and with it attorney-client privileged consideration of legal risks) is another wise investment.  Employers who forego that on the front end almost inevitably pay later. They typically their own defense costs, the plaintiff’s defense costs, and a part of what the plaintiff demands. If inflation soars and the dollar plummets, paying later might make economic sense, at least if everything else stays constant. Most investors today view those as an unrealistic set of “ifs”.

Where do you come out?