The U.S. Court of Appeals for the Seventh Circuit recently addressed whether a company’s liquidation plan violated the Age Discrimination in Employment Act (ADEA) because it caused a disparate impact on older workers.  O’Brien v. Caterpillar Inc. No. 17-2956 (7th Cir. Aug. 20, 2018).  The Seventh Circuit held that although the liquidation plan did statistically disfavor older workers, it did not violate the ADEA because the liquidation plan was designed to promote legitimate business purposes, namely cost-cutting measures and voluntary retirement incentives.

Background

In general, “disparate impact” claims under the ADEA challenge the legality of a practice that tends to negatively impact older workers more than younger workers (or benefit younger workers more than older workers).  Once a plaintiff establishes a disparate impact against older workers (generally through an appropriate statistical analysis), the employer may defend itself by proving that the practice or policy was based on a “reasonable factor other than age.”  Even if the “reasonable factor” is correlated with age, it generally is permissible, so long as age was not truly the driving force behind the policy or practice.

The company at issue in the instant case operates a plant in Joliet, Illinois, where the employees have union representation.  For more than half a decade, the company and the union agreed to a series of collective bargaining agreements (CBAs), which included a pension plan and a supplemental unemployment benefit plan.  In 1999, the company identified the elimination of the supplemental unemployment benefit plan as an important goal. 

The union balked at removing the supplemental unemployment benefit plan in its entirety, but agreed in 1999 that newly hired employees would not participate in the supplemental unemployment benefit plan.  In 2005, the union made another concession, agreeing to a two-tier compensation scale in which all subsequently hired workers would be placed in the lower tier, earning less than employees hired before the 2005 CBA went into effect.

In negotiating the next CBA in 2012, the company proposed eliminating the supplemental unemployment benefit plan in its entirety, offering to liquidate the plan’s $7.8 million trust and distribute the proceeds in pro rata shares to retirement-eligible employees who agreed to retire.  The union formally rejected this proposal on April 18, 2012, on the grounds that it “short changed” the unemployment plan participants who were non-retirement-eligible.  In response to the union’s concern, the company offered an alternative method of liquidating the trust, proposing to distribute the funds in equal shares to two groups:  (i) retirement-eligible participants who agreed to retire; and (ii) non-retirement-eligible participants.  One effect of this proposal was that retirement-eligible participants who did not choose to retire would not receive a share of the distribution, even though non-retirement eligible participants would receive a share.  Of course, retirement-eligible employees tend to be, on balance, older than non-retirement eligible employees.

The union rejected this second proposal, and after the 2005 CBA expired on May 1, 2012, a three-month strike ensued.  Ultimately, the company and the union agreed in August 2012 to end the strike. As part of that agreement, the union accepted the company’s modified liquidation proposal to distribute the trust to (i) retirement-eligible employees who retired and (ii) non-retirement-eligible participants.  Under the agreement reached with the union, retirement-eligible participants who did not retire did not receive distributions.    

The retirement-eligible employees who continued working for the company filed a lawsuit alleging that its liquidation plan violated the ADEA.  The district court ruled in the company’s favor, and the plaintiffs appealed. 

Seventh Circuit Decision

On appeal, the Seventh Circuit agreed with the plaintiffs that the liquidation plan was a “policy” that statistically disfavored older workers.  According to the appellate court, retirement-eligible employees who continued working were, on balance, older than non-retirement eligible employees who received distributions.  Therefore, of the unemployment plan participants who remained at the company, younger participants tended to receive distributions even though older participants did not.  Notably, the Seventh Circuit declined to accept the company’s argument that the proper statistical comparison is between those 40 and over versus those under 40, emphasizing that the only inquiry is whether the disparate impact was because of age. 

The court then turned to the company’s affirmative defense.  The court analyzed whether the company showed that its liquidation plan was “reasonably designed to further or achieve a legitimate business purpose and administered in a way that reasonably achieves that purpose in light of the particular facts and circumstances that were known, or should have been known, to the employer.” The court emphasized that this “reasonableness inquiry” does not require the employer to prove that there were no other ways its goals could have been achieved that would not result in disparate impact.  Instead, the legal question is limited to determining whether there was a legitimate business purpose (as opposed to age) that justified the policy.

The Seventh Circuit found that the company more than met its burden.  The court first focused on the fact that the liquidation plan was designed to achieve cost-cutting measures by reducing labor costs and avoiding the expense of upgrading the unemployment plan’s administration system.

The court then ruled that the disbursement of the plan’s assets was valid (even though it disfavored retirement-eligible employees who chose to continue working) because voluntary retirement incentives are permissible under the ADEA.  The fact that a different arrangement may have treated retirement-eligible employees who chose not to retire more favorably did not matter.  The court was particularly motivated by the fact that the company’s modified proposal was designed in response to the union’s refusal of its earlier proposal, which was strong evidence that the liquidation plan was not designed for the purpose of giving better benefits to younger workers.

Employer Takeaways

The Seventh Circuit’s decision in O’Brien serves as a good reminder that:

• Changes to benefit plans should be generally be analyzed for compliance under both ERISA and the ADEA;

• Even a one-time event can constitute a “policy” under the ADEA if it impacts a large group of employees at the same time;

• Employers can limit exposure to disparate impact claims by ensuring that their policies and practices, including one-off events, are grounded in reasonable business purposes unassociated with age; and

• Maintaining records of the logic behind the adoption of policies or practices can be crucial in proving that a reasonable business purpose, as opposed to age, was the reason for adoption of the policies or practices.