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Special Report: Supreme Court Issues Trio of Decisions Important for Employers
June 15, 2008
By: Justin L. Furrow, William H. Pickering
On Thursday, June 19, 2008, the United States Supreme Court issued three decisions which will be of interest to many employers. Two of the decisions one favorable and one unfavorable addressed employer obligations under the Age Discrimination in Employment Act (ADEA). The third case discussed the conflict of interest which is present when an employee benefit plan administrator takes on the dual role of both evaluating and paying claims under the plan.
Court Puts Burden of Proof on Employer When Employment Decision Has Adverse Impact on Older Workers
In Meacham v. Knolls Atomic Power Lab., 2008 U.S. LEXIS 5029 (June 19, 2008), the Supreme Court ruled that if an employment decision has disproportionate impact on employees over 40, the employer bears the burden of persuading the judge or jury not only that the factors on which it relied in making its decision were not age-related, but also that they were “reasonable.” The Second Circuit Court of Appeals had previously held that the plaintiff bore the burden of proving a negative, i.e., that the non-age-related factors were not “reasonable.”
The plaintiffs in the Meacham case were employed by Knolls, a contractor for the national government that maintained the nation’s fleet of nuclear-powered war ships. When demands for naval nuclear reactors changed with the end of the Cold War, the government ordered Knolls to reduce its workforce. Even after more than 100 employees elected to voluntarily retire, the company was left with more than 30 jobs to eliminate. In deciding which employees to cut, the company instructed its managers to rate their subordinates on three different scales which, along with an additional score for years of service, to produce a total number that determined which employees would be laid off. The plaintiffs sued, alleging that two of the scales relied upon by the company (“flexibility” and “critical skills”), while not age-related, were inherently subjective, and that their use resulted in a layoff that disproportionately affected employees over 40 in violation of the Age Discrimination and Employment Act (“ADEA”). In defending the case, the employer relied on a provision of the ADEA which states that decisions based on “reasonable factors other than age” (RFOA) are permissible even if they adversely impact employees over 40.
The jury ruled in favor of the plaintiffs, but the Second Circuit Court of Appeals reversed, holding that the plaintiffs had failed to carry their burden of showing that the non-age-related factors relied upon by the employer in making its layoff decisions were not “reasonable.” The U.S. Supreme Court, however, ruled that the burden was on the employers to establish that the factors used in the decision-making process were reasonable.
Lessons for Employers
1. Focus on objective criteria when making employment decisions.
The principal complaint by the plaintiffs in Meacham was that two of the three criteria relied upon by the employer in determining which employees to lay off were subjective and gave the rating managers too much discretion. Such subjectivity and discretion, they claimed, permitted the employer to utilize criteria unrelated to age in such a way that the decision still had a disparate impact on employees over 40. Employers should therefore rely, as much as possible, on objective factors such as seniority (within the company or within a department), performance, productivity (measured by objective standards), and the like, when making any employment decision. Employers should avoid using such slippery, subjective concepts as “initiative,” “teamwork,” “attitude,” and other inherently subjective rating criteria.
2. Document employee performance carefully.
At some level, of course, all decision-making criteria (other than mere years of service) will likely have some degree of subjectivity. If an employer has done a good job of documenting an employee’s performance, however, it will be much harder for a plaintiff to claim that the decision-making process was merely a cover for unlawful discrimination. For example, if an employee has made repeated mistakes or has had other performance problems, and those deficiencies were properly documented, the employer may credibly rely on “performance,” or even the more subjective factor, “competency,” as a selection criterion. If no documentation exists, however, these items can be viewed as subjective factors that, while neutral on their face, may be used to discriminate against employees within a particular protected class (age, race, sex, etc.).
3. Be consistent.
While not specifically addressing this issue, Meacham involved multiple managers rating their subordinates in order to determine which employees to lay off, bringing into play a concept critical to all employment decisions: consistency. Employers should train their management employees on relevant rating and evaluation criteria and the application of those criteria in order to produce consistent results across departments. Without such training, individual managers may apply neutral criteria in such a way as to discriminate against employees in a protected class, leading to claims of discrimination. Having employment decisions reviewed by a higher level manager can also ensure a greater degree of consistency.
Conclusion. The Meacham decision emphasizes that an employer making an employment decision must do more than ensure that the factors on which it relies are unrelated to a protected characteristic, such as age. The employer should also be prepared to show that the factors were “reasonable.” Using objective standards related to the task or job in question, creating and maintaining appropriate documentation, and ensuring consistency in the decision-making process will, taken together, go a long way in demonstrating that the employment decision at issue was “reasonable” and in protecting the employer from a finding that its decision was discriminatory.
Court Upholds Pension Plan Giving More Favorable Treatment to Younger Workers Who Become Disabled Before Retirement Age
In Kentucky Retirement Systems v. Equal Employment Opportunity Commission, 2008 U.S. LEXIS 5032 (June 19, 2008), the Supreme Court upheld a Commonwealth of Kentucky pension plan that used a more favorable benefit calculation for workers who became disabled before reaching retirement age. The EEOC had argued that the plan violated the ADEA because older employees who continued working past retirement age and then became disabled did not receive a similar increase in benefits.
Facts
The Commonwealth of Kentucky's retirement plan allows policeman, firemen and other workers in hazardous positions to receive "normal retirement" benefits after either 20 years of service or when they reach age 55 (so long as they have at least five years of service). The pension for employees taking "normal retirement" is calculated by multiplying the individual's years of service times 2.5% times the person's pay immediately before retirement.
However, if an employee becomes seriously disabled before becoming eligible for normal retirement benefits, the employee may retire immediately and receive "disability retirement" benefits. The calculation of the pension for these employees adds a certain number of "imputed" years of service to the individual's actual service. The number of "imputed" years of service that gets added to the calculation is equal to the number of years that the disabled employee would have had to work in order to receive normal retirement benefits.
Under the Plan, a younger worker who becomes disabled before normal retirement age gets a break by having the "imputed" years of service added to his pension calculation. In contrast, an older employee who keeps on working past normal retirement age and then becomes disabled doesn’t get this boost. In the Commonwealth of Kentucky's view, the older worker doesn't need the added benefit because he was fortunate enough to qualify for his retirement benefits before he became disabled.
A Kentucky sheriff's deputy who kept working past age 55 and later became disabled complained about the Plan to the EEOC. The deputy said that it was age discrimination for the Plan to give the extra, "imputed" years of service to employees who became disabled before reaching normal retirement age. The EEOC agreed and sued the Commonwealth of Kentucky in federal district court. The EEOC pointed out that, if the deputy had become disabled before he reached age 55, the Plan, in calculating his benefits, would have given him credit for additional years of service that he didn't actually work. According to the EEOC, the Plan failed to give the employee this additional boost solely because he had become disabled after reaching age 55.
The trial court disagreed and dismissed the case, but the Sixth Circuit Court of Appeals reversed and ruled in favor of the EEOC. The Commonwealth of Kentucky then appealed to the U.S. Supreme Court which reversed the Sixth Circuit and upheld the validity of the Plan.
Supreme Court's Analysis
The Supreme Court noted that ADEA allowed employers to make age a condition of pension eligibility and that the question in this case was whether a plan that lawfully made age a condition of pension eligibility and also treated workers differently in light of their pension status automatically discriminated on the basis of age. The Court answered this question in the negative and ruled that, in this case, the differences in treatment were not "actually motivated" by age.
The Court looked at a number of factors in reaching its conclusion, but a couple of factors seemed to be key in the Court's analysis. First, the Court stated that there was a good reason – not based on age – for the difference in treatment. The reason for giving some workers the "imputed" years of service was to treat them as though they had become disabled after, rather than before, they had become eligible for normal retirement benefits. The Plan only gave these workers enough imputed years of service to put them on par with employees who were fortunate enough to continue working to normal retirement age, and the workers did not receive an amount in excess of the "normal" retirement benefits. In short, the Court found that the Plan had a legitimate objective: giving each disabled worker, regardless of age, the normal retirement benefit.
Second, the Court found that Kentucky’s Plan was not based on any of the stereotypes about older workers that the ADEA was enacted to eradicate. For example, the Plan was not based on any stereotypes about the working capacity of "older" workers as compared to "younger" individuals. The Plan only assumed that all disabled employees would have worked to the point at which they would have become eligible for a pension, but no further.
Considering these and other factors, the Court was convinced that Kentucky’s Plan did not, on its face, create differences in treatment that were "actually motivated" by age.
Comment
The rule announced by the Court in the Kentucky Retirement Systems case was that an employer may adopt a pension plan that includes age as a factor and may treat employees differently based on their pension status, so long as age is not the true motivation for the differing treatment. There is no hard and fast rule for determining when the differing treatment will be considered to have been "actually motivated" by age, but the Court's decision provides some good guidance. For example, plan provisions that have good reasons behind them – unrelated to age – are much more likely to be upheld. In the Kentucky Retirement Systems case, the Court was obviously impressed by the fact that the whole purpose of the plan provisions that the EEOC was trying to invalidate was to allow disabled workers to get the retirement benefits that they would have received if they had not been injured.
Differences in treatment are also more likely to be upheld if they go no further than necessary to provide the younger employees with benefits that are on par with those given to their older counterparts. Finally, the Plan provisions should not reflect any of the adverse stereotypes about the abilities of older employees.
Court Makes It Easier for Employees to Challenge Benefit Denials
In Metropolitan Life Insurance Company v. Glenn, 2008 U.S. LEXIS 5030 (June 19, 2008), the Supreme Court held that an insurance company that both evaluated and paid claims for employee benefits had a conflict of interest and that the conflict would be considered when employees challenged the denial of their benefits. Although the case involved the actions of an insurance company that both decided claims and paid claims from its own funds, the case is also significant for employers who sponsor benefit plans for their employees through the purchase of insurance or through self-insured programs.
Background
The Employee Retirement Income Security Act ("ERISA") was enacted in 1974 to provide uniform federal regulation of employee benefit plans such as plans providing health insurance and disability insurance. If a claim for benefits is denied, ERISA gives the employee the right to have the decision reviewed in court.
By the mid 1980s, there was a great deal of conflict in the courts about how these cases should be reviewed, and the standard the courts applied often determined whether the employee won or lost. In 1989, the Supreme Court decided the case of Firestone Tire & Rubber Co. v. Bruch to reconcile these conflicting decisions and to clarify the standard for judicial review of benefit determinations. In Firestone, the Court stated that a denial of plan benefits should generally be reviewed by a trial court under a so-called de novo standard, meaning that the trial judge would take a fresh look at all of the relevant evidence and make a decision without any deference to the decision made by the employer or insurance company. On the other hand, if the plan gave the administrator the discretionary authority to determine eligibility for benefits and to decide claims, the administrator’s decision would be entitled to deference and would be overturned only if there was a clear abuse of discretion. Since most plans soon gave the administrator this discretionary authority, employees had an uphill battle in trying to get the administrator’s decision overturned. The Court also stated, however, that if the plan administrator or employer had a conflict of interest, the conflict would be considered in determining whether there was an abuse of discretion. In this situation, the employees stood a better chance of getting their claims approved in court.
The application of these principles led to a variety of decisions in the lower courts. The courts often wrestled with the question of whether a plan administrator or employer with discretionary authority was operating under a conflict of interest and how that conflict was to be considered in deciding a challenge to a benefits decision.
The Met Life Case
In the Metropolitan Life Insurance Company case decided last week, Met Life was the insurer of disability benefits for Wanda Glenn's employer, Sears, Roebuck & Co. Ms. Glenn applied for total disability benefits based on a heart condition, and Met Life approved her claim, finding that she was unable to perform the duties of her job. Met Life also sent Ms. Glenn to a lawyer to help her obtain Social Security disability benefits ("SSI"). The Social Security Administration approved Ms. Glenn’s claim and found that she was unable to perform any job for which she was qualified.
After exhausting her initial 24 months of disability benefits, Ms. Glenn applied for continued long term disability (LTD). The standard for receiving LTD was tougher than for the initial award of benefits and was similar to the standard for receiving SSI benefits (which Ms. Glenn had already satisfied). Met Life denied Ms. Glenn’s claim and said that she could do sedentary work for which she was qualified. Ms. Glenn sued. The trial court upheld Met Life's decision, applying the deferential standard of review. The Sixth Circuit Court of Appeals reversed, holding that Met Life operated under a conflict of interest which required a de novo review of its decision.
Met Life then asked the Supreme Court to determine whether an insurance company that both evaluates and pays claims from its own funds always operates under a conflict of interest in making discretionary benefit decisions. The Solicitor General of the United States suggested that the Court also determine how any such conflict should be taken into account by the courts in reviewing a discretionary benefit determination. The Supreme Court agreed to consider both questions.
On the first question, the Supreme Court held that a plan administrator that both evaluated claims for benefits and paid those claims from its own funds operated under a conflict of interest. The Court stated that the conflict was clearly present for employers who have self-administered and self-funded benefit plans, and the Court held that the conflict likewise existed for insurance companies that both evaluated and paid benefit claims. As a result, the administrator’s decisions are not entitled to deference and are to be reviewed under the de novo standard.
The Supreme Court then talked about how a trial court should weigh the conflict of interest in deciding whether an insurer or an employer properly denied a claim. The Court stated that you would have to consider the "totality of the circumstances” and that the conflict of interest could be a "tie breaker" when other factors were closely balanced but was not necessarily the primary factor in determining whether there had been an abuse of discretion by the plan.
Comment
As more and more employers seek to control the cost of providing employee benefits without eliminating them entirely, the Metropolitan Life case could encourage more litigation by employees or beneficiaries whose claims have been denied, increasing the cost of providing such benefits. Plan administrators will need to be sure that their claims decisions are reasonably based on all available information and not clearly influenced by financial considerations. Otherwise, the inherent conflict will be weighed against them when their decisions are challenged.