The number of layoffs by employers has increased as the economy has weakened. In light of the creation of a large pool of potential plaintiffs, employers must take steps to guard against claims that their restructuring activities have had a disparate impact on a protected class, such as employees forty years of age and over who are protected under the Age Discrimination in Employment Act of 1967 (the “ADEA”).

Preventive measures have become more critical since the United States Supreme Court clarified in Meacham v. Knolls Atomic Power Laboratory, 128 S. Ct. 2395 (2008), the standard employers are confronted with in defending against disparate impact claims under the ADEA.

Knolls Atomic Power Laboratory (“Knolls”) terminated thirty-one employees as part of an involuntary reduction in force (“RIF”); thirty of the thirty-one individuals were at least forty years old. In making selection decisions for the RIF, Knolls told its managers to evaluate their employees in three categories: performance, flexibility and critical skills. The scores were aggregated, together with points for years of service; the individuals with the lowest scores were selected for termination. Almost all of the affected employees sued Knolls, alleging claims for disparate treatment (discriminatory intent) and disparate impact (discriminatory result) under the ADEA and state law. With respect to the disparate impact claim, the plaintiffs alleged that, regardless of Knolls’ intent, the RIF had a discriminatory impact on ADEA-protected employees, relying on expert testimony that results so skewed as to age could rarely occur by chance and that the flexibility and critical skills scores over which the managers had the most discretion had statistical ties to the outcome.

The jury ruled for the plaintiffs on the disparate impact claim (but not the disparate treatment claim), and the United States Court of Appeals for the Second Circuit affirmed. After the United States Supreme Court vacated the judgment and remanded for further proceedings in light of intervening case law, the Second Circuit ruled in favor of Knolls because the plaintiffs had not carried their burden of persuasion. The Supreme Court granted certiorari.

The provision of the ADEA at issue in this dispute creates an exemption for employer actions “otherwise prohibited” by the ADEA that are “based on reasonable factors other than age” (“RFOA”). Disagreeing with the Second Circuit and relying on the text of the ADEA, the Supreme Court held that exemption for liability for disparate impact claims under the ADEA for employer actions based on RFOA is an affirmative defense, on which employers bear both the burden of production and burden of persuasion; the Supreme Court thus vacated the Second Circuit’s judgment and remanded the case.

Trying to allay employers’ concerns that its holding would open the floodgates, the Supreme Court ruled that it would not be enough for an employee to assert a disparate impact claim without identifying the specific employment practices that allegedly are responsible for any observed statistical disparities and posited that “the more plainly reasonable the employer’s ‘factor other than age’ is, the shorter the step for that employer from producing evidence raising the defense, to persuading the factfinder that the defense is meritorious.” Nevertheless, the Supreme Court recognized the consequences of its ruling:

[T]here is no denying that putting employers to the work of persuading factfinders that their choices are reasonable makes it harder and costlier to defend than if employers merely bore the burden of production; nor do we doubt that this will sometimes affect the way employers do business with their employees.

Further, the Supreme Court recognized that “[i]t will be mainly in cases where the reasonableness of the non-age factor is obscure for some reason, that the employer will have more evidence to reveal and more convincing to do in going from production to persuasion.”

By clarifying the standards in an ADEA disparate impact case, Knolls confirms the legal risks inherent to employers when conducting layoffs. Employers can minimize such risks by:

  • Properly documenting performance issues throughout an employee’s employment and conducting performance evaluations on at least an annual basis.
  • Ensuring managers are trained to consider only legitimate, non-discriminatory reasons as the basis for termination and other employment decisions.
  • When a RIF is necessary, developing clear factors other than age (or other discriminatory classifications) that are reasonable on their face to guide managers in their selection of employees for inclusion in such layoff. The more objective the criteria used, the more easily defensible the factors will be if litigation ensues.
  • Reviewing initial layoff lists compiled by managers to ascertain whether employees age forty and over (or in any other protected class) are disproportionately included in the layoff list. If they are, a review should be undertaken to determine why this is so, including whether the factors are properly being applied by managers.
  • Providing employees with separation agreements in which employees are offered consideration for executing a binding waiver and release.

The existence of a statistical disparity does not lead inexorably to the conclusion that a violation of the ADEA has occurred. Nonetheless, employers are well advised to take care in planning RIFs to ensure that any such disparities are the result of a reasonable factor other than age.