In a decision that may have significant ramifications any time a business seeks to reorganize or streamline its workforce, the United States Supreme Court declared yesterday in Meacham et. al v. Knolls Atomic Power Laboratory aka KAPL, Inc. ("Meacham") that when an employer engages in an action that has a disparate impact on older workers and a lawsuit ensues, it is the employer who will bear the burden of proving (a) that the decision was based on a factor other than age, and (b) that the decision was "reasonable."

In general, when an employer engages in business practices that have a disproportionately harmful effect on older workers, and when equally effective but less discriminatory alternatives are available, an employer may nevertheless avoid liability for age discrimination if its practices are based on a "reasonable factor other than age" (RFOA). Until yesterday, there was a question as to whether it was the employer's burden to prove that it based its actions on a RFOA, or if, instead, it was the employee's burden to prove that the employer did not base its actions on a RFOA. Yesterday, in Meacham, the Supreme Court decided that the burden of proof falls on the employer.

The Meacham case arose after budget cuts forced KAPL, Inc., which operates the Knolls Atomic Power Laboratory under contract with the Department of Energy, to reduce the size of its approximately 2000-person workforce by 108 employees. Because of changing research priorities, KAPL identified several areas that would be critical to the laboratory's future work, as well as a number of other areas in which it had "excess skills." KAPL created a "voluntary separation plan," which offered early retirement incentives to workers in the latter category who had at least twenty years' experience. Even after offering these incentives, however, KAPL found that it still needed to reduce its workforce by approximately 35 additional employees.

KAPL implemented an "involuntary reduction in force" (IRIF), using procedures that were based in part on practices used by companies such as IBM, GE, Pepsi, and Ford. Pursuant to the procedure, supervisors were asked to rank employees with a score between zero and 10 based on three factors — performance, flexibility and the criticality of their skills — and then add up to 10 points for years of service. Upon completing the rankings, 31 workers were let go. All but one of the 31 employees dismissed were over the age of 40. Twenty-eight of those workers filed suit, alleging age discrimination in violation of the Age Discrimination in Employment Act (ADEA).

A jury found that the reduction in force had a disparate impact that discriminated on the basis of age and awarded plaintiffs more than $6 million in damages. The Court of Appeals affirmed, but the Supreme Court vacated and remanded in light of its decision in Smith v. City of Jackson, which held that an employer is not liable for a disparate impact that is the result of a reasonable factor other than age. On remand, the same Court of Appeals panel ruled in favor of the employer. The employees sought review by the Supreme Court on the issue of which party bears the burden of persuasion for showing a "reasonable factor other than age."

In a 7-1 ruling (Justice Breyer did not participate), the Court held that in disparate-impact ADEA claims, the employer bears the burden of both producing evidence and ultimately persuading the fact finder that there is a reasonable explanation other than age for the company's action. On a practical level, what this means is that where an employee has shown that an action had a disparate impact on older employees, the employer will have to prove both (a) that the decision was based on a factor other than age, and (b) that the decision was "reasonable." In the opinion, the Court specifically held that "there is no denying that putting employers to the work of persuading fact finders that their choices are reasonable makes it harder and costlier to defend than if the employers merely bore the burden of production; nor do we doubt that this will sometimes affect the way employers do business with their employees."

In light of the Court's opinion, employers who are considering layoffs or reductions in force should carefully examine whether such action will have an adverse effect on older workers. If the statistics demonstrate such adverse impact, employers must take extra precautions to ensure that they have legitimate and objective explanations for the selection process that are entirely separate from age or age-related characteristics and that would be considered reasonable by any independent fact finder. Failure to engage in such an analysis prior to implementing a layoff or RIF is now more likely to expose the employer to liability.

We will continue to monitor developments in this area. If your company is considering a reduction in force or other job action that may have a disparate impact on older workers, please contact any member of Schiff Hardin's Labor and Employment Group to discuss ways to minimize potential liability.