Statement of Laurie A. McCann AARP Foundation Litigation

Meeting of July 15, 2009 – Age Discrimination in the 21st Century-Barriers to the Employment of Older Workers

I. The History of the ADEA's Prohibition of Age Discrimination When Providing Employee Benefits.

A. Pre-Betts Discrimination in Employee Benefits

From the date of its passage, section 4(a) of the ADEA, 29 U.S.C. § 623(a) made it unlawful to "discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's age; . . . ." While this statutory prohibition did not expressly mention employee benefits, another provision of the ADEA did. Section 4(f)(2) of the ADEA, 29 U.S.C. § 623(f)(2), under a heading captioned "Lawful Practices," set forth an exception to the prohibitions of section 4(a) which allowed an employer "to observe the terms of any . . . bona fide employee benefit plan such as a retirement, pension or insurance plan, which is not a subterfuge to evade the purposes of this Act . . . ." (emphasis added). Reading these two provisions in tandem led the Department of Labor to the logical conclusion that the phrase "compensation, terms, conditions, or privileges of employment" encompassed not only wages, but all non-wage forms of compensation and employee benefits.

Just two years after the passage of the ADEA, the Department of Labor issued an interpretative regulation entitled "Costs and Benefits Under Employee Benefit Plans." 29 C.F.R. § 860.120 (1969); 34 Fed. Reg. 9709 (June 21, 1969). The regulation announced the following rule, which has since become known as the "equal benefit or equal cost" rule:

A retirement, pension or insurance plan will be considered in compliance with the statute where the actual amount of payment made, or cost incurred, in behalf of an older workers is equal to that made or incurred in behalf of a younger workers, even though the older worker may thereby receive a lesser amount of pension or retirement benefits, or insurance coverage.

29 C.F.R. § 860.120(a). The regulation containing the "equal benefit or equal cost" rule remained unchanged until Congress amended the ADEA in 1978 to raise the upper age of coverage for the Act from 65 to 70 years of age, while at the same time amending section 4(f)(2) with an express provision outlawing the common practice of mandatory retirement. The principal purpose of the 1978 amendment was to make clear that "the exception (§ 4(f)(2)) does not authorize an employer to require or permit involuntary retirement of an employee within the protected age group on account of age." H. Rep. No. 95-950, at 9 (1978).

During congressional passage of the 1978 amendments, Congress "reaffirmed unequivocally that the employer's burden of proving 'equal benefit or equal cost' under Section 4(f)(2) was consistent with congressional intent when enacting Section 4(f)(2) in 1967." S. Rep. No. 101-263, at 9 (1990). As Congress observed during the 1990 passage of the Older Workers Benefit Protection Act, "[t]he 'equal benefit or equal cost' principle under section 4(f)(2) was repeatedly, and specifically, recited by managers of the amendments and other members of Congress as an employer's exclusive means of proving compliance with the ADEA." Id.

B. The Betts Decision

June Betts, an employee of the Hamilton County Board of Mental Retardation and Developmental Disabilities, suffered from Alzheimer's Disease and at the age of 61, applied for disability retirement. However, under the terms of the Public Employees Retirement System of the State of Ohio (PERS), employees who became disabled after reaching age 60 were not entitled to disability retirement benefits. So, instead of receiving the $355 per month that a younger employee with comparable service and salary would have received, Ms. Betts only received a standard age-and-service pension of $158.50 per month.

Ms. Betts challenged her denial of disability retirement benefits under the ADEA. Relying on the "equal benefit or equal cost" rule, both the district court and the U.S. Court of Appeals for the Sixth Circuit held that the PERS plan qualified for the section 4(f)(2) exception only if any age-related reductions in employee benefits were justified by the increased cost of providing those benefits to older employees. The Sixth Circuit accurately described the case, "Under the disability plan, two employees with the same number of service years and the same final salary are treated identically unless one of the two employees is 60 or older." Bett v. Hamilton County Bd. of Mental Retardation, 848 F.2d 692, 695 (6th Cir. 1988). Because the age-related disparity in benefits was not supported by any cost-justification, the plan was held to violate the ADEA.

The Supreme Court reversed. In Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158 (1989), the Supreme Court ruled that "the general prohibitions of section 4(a)(1) of the ADEA . . . do not apply to employee benefit plans." S. Rep. No. 101-263, at 14. The Court further ruled that the objective "equal benefit or equal cost" rule in effect from the ADEA's enactment could not be reconciled with the "subterfuge" language of the § 4(f)(2) exception for employee benefit plans. The practical effect of the Court's ruling was to permit arbitrary age discrimination in all types of benefit plans except when "intended to serve the purpose of discriminating in some non-fringe benefit aspects of the employment relationship." Id.

C. The Older Workers Benefit Protection Act of 1990

Congress acted swiftly to overrule Betts and "to restore the original congressional intent in passing and amending the Age Discrimination in Employment Act of 1967 (29 U.S.C. § 621 et seq.) which was to prohibit discrimination against older workers in all employee benefits except when age-based reductions in employee benefit plans are justified by significant cost considerations." Older Workers Benefit Protection Act, Pub. L. 101-433, Title I, § 101 (Oct. 16, 1990; 104 Stat. 978) (emphasis added).

In order to restore its intent that the ADEA prohibits age discrimination in the provision of employee benefits, Congress enacted several changes to the ADEA. First, Congress added section 11(l) to make it unmistakably clear that "[t]he term 'compensation, terms, conditions or privileges of employment' encompasses all employee benefits, including such benefits provided pursuant to a bona fide employee benefit plans." 29 U.S.C. § 630(l). Second, Congress deleted the "subterfuge" provision in § 4(f)(2) and replaced it with the literal language of the "equal benefit or equal cost" rule, making it unlawful for an employer to "observe the terms of a bona fide employee benefit plan (i) where, for each benefit or benefit package, the actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger workers, as permissible under section 1625.10, title 29, Code of Federal Regulations (as in effect on June 22, 1989) . . ." 29 U.S.C. § 623(f)(2)(B). As Congress noted, "Employers invoking this defense [§ 4(f)(2)] are required to provide equal benefits to, or to incur equal cost for benefits on behalf of, all employees. The [OWBPA] tracks the requirements set forth in ADEA regulations for over twenty years, requirements that had been approved by every federal court of appeals to consider the defense in the 12 years preceding the decision in Betts." S. Rep. No. 101-263, at 5.

In addition, the OWBPA made it clear that the employer bears the burden of proof to rebut a charge of age discrimination in benefits. 29 U.S.C. § 623(f)(2). The standard for determining whether unlawful age discrimination occurs in employee benefits is an objective one, specifically the "equal benefit or equal cost" standard. 29 U.S.C. § 623(f)(2)(B)(i). Congress specifically rejected a subjective standard. The codification of the "equal benefit or equal cost" standard replaced the subjective intent standard articulated by the Court in Betts. In the face of a claim of unequal benefits based on age, the ADEA dictates that the employer's only defenses are to prove (1) equal benefits, or (2) that age-related costs justify the difference in the benefits, 29 U.S.C. § 623(f)(2)(B)(i), or (3) one of the explicit safe harbors contained in 29 U.S.C. § 623(l) of the ADEA. These defenses are technical, objective standards. Thus, the employer's intentions in structuring a benefit or benefit plan, whether good, bad, or indifferent towards older workers, play no role in determining whether there is a violation of the ADEA.

II. The Kentucky Retirement System v. EEOC Decision

A. Background and Facts

The facts of the Kentucky Retirement System v. EEOC, 128 S. Ct. 2361 (2008) case are remarkably similar to those in Public Employees Retirement Sys. v. Betts, 492 U.S. 158 (1989), the decision that precipitated the enactment of the OWBPA. The KRS disability-retirement benefits plan disqualifies employees who are still working from receiving disability- retirement benefits if they have already reached normal retirement age (age 55) at the time they become disabled. The KRS plan also calculates disability-retirement benefits in such a way that an older employee who is eligible to receive disability benefits (i.e., who hasn't reached normal retirement age) receives fewer benefits – in the form of lower monthly benefit payments – than a younger disabled employee receiving disability-retirement benefits who is similar to the older disabled employee in every relevant factor other than age.

The case presented a textbook example of age discrimination - the KRS plan denies an employee benefit based on age and thus is facially discriminatory. The Supreme Court had made clear that an employer's reliance "upon a formal, facially discriminatory policy requiring adverse treatment of employees with that [protected] trait" establishes a prima facie disparate treatment claim under the ADEA. Hazen Paper Co. v. Biggins, 507 U.S. 604, 610 (1993) citing Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 121 (1985).

The KRS plan is facially discriminatory because it categorically excludes still-working employees over age 55 from an employment benefit because of their age. In order to be eligible for disability-retirement benefits, employees must become disabled before they reach age 55. Kentucky's decision to make employees ineligible for disability-retirement benefits simply because they have reached normal retirement age is a "formal, facially discriminatory policy" that discriminates on the basis of age.

B. The Decision

Although the Kentucky Retirement System case involved a plan that denied older workers a benefit that was provided to younger workers , the Court wholly disregarded the OWBPA and announced a new rule that has potential to thwart the purposes of the ADEA. That rule reads:

Where an employer adopts a pension plan that includes age as a factor, and that employer then treats employees differently based on pension status, a plaintiff, to state a disparate treatment claim under the ADEA, must adduce sufficient evidence to show that the differential treatment was 'actually motivated' by age, not pension status.

128 S. Ct. at 2370 (emphasis in original).

The Court cited six factors that caused it to conclude that the differences in treatment between older and younger employees "were not 'actually motivated' by age. 128 S.Ct. at 2367. These factors are:

(1) "age and pension status remain 'analytically distinct' concepts. . . one can easily conceive of decisions that are actually made 'because of' pension status and not age, even where pension status is itself based on age. Id.

(2) The case involved "not an individual employment decision, but a set of complex systemwide rules. These systemic rules involve, not wages, but pension – a benefit that the ADEA treates somewhat more flexibly and leniently in respect to age." Id.

(3) "[T]here is a clear non-age-related rational for the disparity. . . the whole purpose of the disability rules is . . . to treat a disabled worker as though he had become disabled after, rather than before, he had become eligible for normal retirement benefits." Id. at 2368. "The disparity turns upon pension eligibility and nothing more." Id. at 2369.

(4) "[A]lthough Kentucky's Plan placed an older worker at a disadvantage in this case, in other cases, it can work to the advantage of older workers." Id. (emphasis in original).

(5) "Kentucky's system does not rely on any of the sorts of stereotypical assumption that the ADEA sought to eradicate. It does not rest on any stereotype about the work capacity of 'older' workers relative to 'younger' workers." Id.

(6) "The difficulty of finding a remedy that can both correct the disparity and achieve the Plan's legitimate objective . . . ." Id.

The Court suggests that these are the factors a plaintiff "might show to provide that differential treatment based on pension status is in fact discrimination "because of" age. Id.

C. The Kentucky Retirement Decision and the OWBPA

At its core, the Kentucky Retirement System case was about denying older workers a benefit that was provided to younger workers. Yet, the Court deemed the OWBPA to be "beside the point." 128 S.Ct. at 2370. The OWBPA is hardly beside the point. The denial of an employee benefit to older workers based on their eligibility for retirement, when such eligibility is defined by age, is a clear violation of the ADEA, 29 U.S.C. § 623 (a)(1) and 623(f)(2)(B)(i), as amended by the OWBPA. The OWBPA expressly requires employers to provide equal benefits or to incur equal costs in providing benefits to older and younger employees.

Under the OWBPA, the discrimination is the difference in the benefits, plain and simple. In the Court's own words, the KRS plan "treats some of those disabled individuals more generously than it treats some of those who became disabled only after becoming eligible for retirement on the basis of age." 128 S.Ct. at 2364 (emphasis added).

In passing the OWBPA, Congress thoroughly examined the practice of denying benefits to older workers based on pension eligibility and repeatedly declared that the practice violated the ADEA. See H.R. Rep. No. 101-664, at 40 (1990) ("pension benefits are age related. . . Accordingly, it is per se age discrimination to use pension-eligibility as a basis for denying an older worker any other benefits.") (emphasis in original); S. Rep. No. 101-263, at 23 (1990) (same). Representative Clay, one of the leading proponents of the OWBPA, remarked on passage:

We do not permit employers to pay an older workers less than a younger worker solely because of age; employers must also be prohibited from providing older workers smaller benefits or no benefits solely because of their age or other proxies for age for example, pension or Medicare eligibility.

Cong. Rec. H8617 (daily ed. October 3, 1990) (statement of Rep. Clay).

D. Can Kentucky Retirement be Applied Beyond the Pension or Disability Benefits Context?

This decision opens the door for employers to not only deny benefits to older workers based on their age-based eligibility for retirement benefits but to justify all kinds of policies that discriminate based on age. As the dissent explains, "If the ADEA allows an employer to tie disability benefits to an age-based pension status designation, that same designation can be used to determine wages, hours, health care benefits, reimbursements, job assignments, promotions, office space, transportation vouchers, parking privileges, and any other conceivable benefit or condition of employment." 128 S.Ct. at 2376. The Court "create[d] a virtual safe harbor for policies that discriminate on the basis of pension status, even when pension status is tied directly to age and then linked to another type of benefit program." Id. at 2375.

Under Kentucky Retirement System, an employer could offer an early retirement incentive plan that offers a cash incentive – say $20,000 – but limit the incentive to those not already eligible for normal retirement benefits.  They could also offer $10,000 a year beginning say at age 58 – but that stipend would terminate once the individual became eligible for normal retirement – which is almost always going to be defined by age.  An employee's only recourse would be to adduce evidence that the incentive was denied to retirement-eligible workers because of the stereotype that they would be retiring soon anyway – and that is if courts can be convinced that the assumption that retirement-eligible workers will be retiring soon anyway is a stereotype and not a "trueism"   If not, it will be difficult to challenge a hiring policy where the employer refuses to hire individuals within 5 years of normal retirement age – on the theory that they won't be staying long anyway.  Similarly, what would prevent an employer from refusing to promote retirement-eligible employees for the same reason - the decision not to promote them was not based on age – but pension status.

Since the 1980's, courts uniformly held that the ADEA prohibits the practice of denying benefits to employees because their age (sometimes combined with years of service) makes them eligible for retirement benefits. See EEOC v. Westinghouse Elec. Corp., 725 F.2d 211, 222-23 (3d Cir. 1983) ("If eligibility for . . . retirement can be used to justify the denial [of benefits] to older employees, the purpose of the ADEA will be defeated."); EEOC v. Borden's, Inc., 724 F.2d 1390, 1393 (9th Cir. 1984) (rejecting arguments that a severance policy that denied benefits to retirement-eligible employees "distinguished employees on the basis of their retirement status, and not solely because of age. . . ."). And, the OWBPA's legislative history contains clear and specific language condemning the practice of denying severance benefits to pension-eligible individuals. Yet, the Kentucky Retirement System decision seems to leave the door open to that practice surviving scrutiny. After all, KRS's rationale for denying benefits to older workers was that it was seeking "to provide assistance to members who are unable to continue working, but would not have a source of income through unreduced retirement benefits," Brief of Petitioners at 13. It was merely seeking to "provide a boost" to younger workers. Id. at 23. Yet, the Supreme Court held that rationale was not "because of age."

Another disturbing possibility is courts extending this holding to allow employers to not only discriminate against those already pension-eligible – but those within proximity to eligibility. This is not outside the realms of possibility. Indeed, not everyone harmed by the KRS policy was already pension-eligible – they were just the most harmed – the closer you were to eligibility the less benefits you received.

E. Post- KRS Decisions

a. EEOC v. Baltimore County, 593 F. Supp. 2d 797 (D. Md. 2009)

Under the challenged pension system, the percentage of salary that new hires pay into the pension plan varies depending on the number of years to retirement eligibility. Because participation was mandatory, the result was that older workers had lower take home pay than younger workers. The court ruled that the system did not violate the ADEA because the fact that older new-hires had to pay more into the plan than younger new-hires was not "because of age" but instead was motivated by the permissible principle of time value of money.

b. Schultz v. Windstream Communications, Inc., 2009 WL 1028175 (Apr. 16, 2009 D. Neb)

Defendant's pension plan had a normal retirement age of 65. It also allowed unreduced early retirement for workers with 30 years of experience irrespective of age, or actuarially reduced pensions for workers at least 50 years old with 25 years of experience. Defendant amended its pension plan to allow employees (all under age 50 with more than 25 but less than 30 years of service whose employment was being terminated due to a reduction-in-force, and who were not eligible for but would have qualified for benefits had they been allowed to work until December 31, 2008, to receive unreduced pension benefits immediately upon their termination. The plaintiffs were all over 50 with more than 25 but less than 30 years of service which qualified them for a reduced pension benefit. Had each of the plaintiffs received the same enhancement, i.e., been presumed to work until December 31, 2008, they would have also qualified for an unreduced pension benefit.

Denying the plaintiffs' age discrimination claims, the court held that "[a]t least four of the factors discussed in Kentucky Retirement weigh against the plaintiffs in this case." For one, "[t]he eligibility provisions of the Plan and the Early Retirement benefits created and assigned [by the plan amendment] are not based on stereotypical assumptions that older workers have less work capacity. . . Rather, Windstream assumed all employees nearly early retirement eligibility, but release [as part of the reduction-in-force] would have continued working until they were eligible for early retirement." Significantly, but ignored by the court, the plaintiffs were not given the benefit of the same assumption.

c. Walker v. Monsanto Co. Pension Plan, 2009 WL 1651378 (S.D. Ill. June 11, 2009)

Plaintiffs challenged the manner in which the employer converted its defined benefit pension plan to a cash-balance plan. Specifically, at issue was a section of the plan which directed that "interest credits" be awarded at a rate of 8.5% per year until the participant reached age 55, at which time the interest credit awards ceased. Defendant argued that interest credits did not cease "because of age" but because the early retirement discount had been fully restored which happened to coincide with the participant reaching age 55. Holding for the defendant, the court ruled that "Nothing in the record indicates the early retirement discount reversal designed to provide a fully subsidized early retirement benefit at age 55 was 'based on a 'prohibited stereotype' of older workers, produce[d] any 'attendant stigma' to those workers, [or was] 'the result of an inaccurate and denigrating generalization about age,'" the evils age discrimination statutes were designed to remedy." 2009 WL 1651378 at * 8 quoting Kentucky Retirement System, 128 S. Ct. at 2366-67.

III. "Because of Age" or "Because of Age-Related Stereotypes?"

In Hazen Paper co. v. Biggins, the Supreme Court observed that, "Congress' promulgation of the ADEA was prompted by its concern that older workers were being deprived of employment on the basis of inaccurate and stigmatizing stereotypes." 507 U.S. 604, 610 (1993). See also EEOC v. Wyoming, 460 U.S. 226, 231 (1983) ("Although age discrimination rarely was based on the sort of animus motivating other forms of discrimination, it was based in large part on stereotypes unsupported by objective fact, and was often defended on grounds different from its actual causes."). In the wake of the Hazen Paper decision, numerous lower courts have seized upon that observation to argue that the ADEA prohibits only discrimination based on inaccurate stereotypes.

There is no basis in the language of the ADEA to restrict its reach to employment decisions based on stereotypes. The language of section 4(a)(1), which prohibits discrimination in the "terms, conditions and privileges of employment," is not conditioned by any language such as "only if the discrimination is based on 'inaccurate and stigmatizing.'" Section 4(a)(1) makes it unlawful for an employer to discriminate "because of such individual's age . . . ." 29 U.S.C. § 623(a)(1). The ADEA's legislative history, which was the basis of Justice O'Connor's dicta regarding stereotypes in the Hazen Paper opinion, cannot revise and limit the ADEA's statutory prohibitions.

The purposes of the ADEA also speak in much broader terms than just inaccurate and stigmatizing stereotypes. The purposes of the ADEA are to prohibit arbitrary discrimination, to promote the employment of older workers, and to help workers and employers find ways of meeting problems arising from the impact of age on employment. 29 U.S.C. § 621(b). In McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 357 (1995), a unanimous Supreme Court emphasized that the ADEA "reflects a societal condemnation of invidious bias in employment decisions . . .[that is] part of a wider statutory scheme to protect employees in the workplace nationwide." This strong language contradicts attempts to limit the reach of the ADEA to stereotypical thinking alone. To the contrary, the ADEA is a broad, remedial statute and should be construed liberally in order to further its purposes. See Oscar Mayer U Co. v. Evans, 441 U.S. 750, 765-66 (1979) (Blackmun, J. concurring); see also Thurston, 469 U.S. 111, 121 (1985) quoting Lorillard v. Pons, 434 U.S. 575, 577 (1978) ("The ADEA 'broadly prohibits arbitrary discrimination in the workplace based on age.'").

Moreover, in City of Los Angeles, Dep't of Water and Power v. Manhart, 435 U.S. 702 (1978), the Supreme Court held that even reliance on stereotypes that were accurate and nonstigmatizing violated Title VII. Since the prohibitions of the ADEA and Title VII are identical, Lorillard v. Pons, 434 U.S. 575, 584 (1978) ("the prohibitions of the ADEA were derived in haec verba from Title VII"), liability under either statute clearly does not depend on whether the employer is motivated by inaccurate stereotypes or accurate facts about the protected class. Indeed, the ADEA prohibits an employer from denying or reducing employee benefits based on age, despite the fact that when it enacted the ADEA, Congress was aware of the fact that the cost of providing certain benefits to older workers can be higher than providing the same benefits to younger workers. S. Rep. No. 90-723, at 14 (1967). Denying an employee benefit based on age, even if motivated by accurate cost data and not unfounded stereotypes, violates the ADEA unless the employer's actions meet the strict requirements of § 623(f)(2)(i).

In sum, although Congress may have been "prompted by its concern that older workers were being deprived of employment on the basis of inaccurate and stigmatizing stereotypes," Hazen Paper, 507 U.S. at 610, when it actually came time to draft the statutory language it chose to prohibit all forms of arbitrary age discrimination. Requiring age discrimination victims to prove that in discriminating against them, the employer was motivated by stereotypes severely limits the ADEA's effectiveness to fight discrimination against older workers. After all, as the Supreme Court has recognized, "[t]here will seldom be 'eyewitness testimony' as to the employer's mental processes." United States v. Postal Serv. Bd. of Governors v. Aikens, 460 U.S. 711, 716 (1983).