Age Discrimination Legal Update

December 2007

Federal courts continue to rule on the legality of Employee Retirement Income Security Act (ERISA) and Age Discrimination in Employment Act (ADEA) provisions and practices.

by Paul J. Siegel, Esq.
Jackson Lewis LLP

Following are four recent cases dealing with age discrimination and how the various federal courts rule on the issue.

Supreme Court To Rule on "Me Too" Testimony by Former Employees

The U.S. Supreme Court agreed, on June 11, 2007, to review a federal appeals court decision permitting trial courts to allow testimony of non-party former employees about their own discrimination experiences, including those involving conduct by supervisors who played no role in the action challenged by the plaintiff. The testimony was introduced to show that discrimination against older workers pervaded the workplace and to persuade jurors that plaintiff's layoff was discriminatory. Sprint/United Management Company v. Mendolsohn, No. 06-1221 (cert. granted June 11, 2007). The risk of jury confusion and prejudicial testimony makes this case crucial for defense of discrimination claims.

The Tenth Circuit issued a decision last year which made it more difficult for employers to obtain exclusion of testimony of non-party former employees asserting that their terminations also resulted from bias. This evidence, in effect, forces employers to rebut the allegations of non-claimants through a series of mini-trials within the primary trial, distracting from the real issue of plaintiff's treatment. No doubt, the "me too" testimony could greatly increase the risk of jury confusion and litigation costs.

The Tenth Circuit's decision is limited to reductions-in-force and conflicts with contrary rulings by the Second, Third, Fifth, and Sixth Circuits. The Tenth Circuit rejected that proposition that evidence related to actions taken by the "same supervisor" is appropriate in the context of discriminatory disciplinary actions. It did so because of its conclusion that the case "is not about individual conduct but about a companywide policy of which all [of the employer's] supervisors were allegedly aware."

Employers' Ability To Coordinate Retiree Health Benefits with Medicare Benefits Affirmed

In 2003 the Equal Employment Opportunity Commission (EEOC) issued proposed rules that would have excluded from the prohibitions of the Age Discrimination in Employment Act (ADEA) the practice of reducing or eliminating employer-sponsored retiree health benefits when retirees become eligible for benefits under Medicare or a similar state-sponsored program. The EEOC sought to allow this practice in an effort to fight a trend toward termination of retiree medical plans due to mounting costs. Before the proposed rules could take effect, however, the American Association of Retired People (AARP) obtained an injunction preventing implementation. On June 4, 2007, the Third Circuit upheld the EEOC's authority to issue the rules and vacated the injunction, holding that the proposed exemption was consistent with the purposes and intent of the ADEA and properly encouraged employers to provide the greatest possible health benefits to all retirees. The Third Circuit's decision allows the EEOC to finalize the 2003 proposed rules.

AARP has indicated that it will appeal this decision to the Supreme Court. In the meantime, the Third Circuit's decision eliminated a split in the Circuits and allows plan sponsors to adopt or maintain retiree healthcare programs that coordinate with Medicare. This decision is especially important to employers who wish to coordinate prescription drug coverage for retirees with Medicare Part D. Companies may now opt to provide Medicare-eligible retirees with reduced healthcare or prescription drug benefit coverage.

Court Finds Cash Balance Plans Do Not Violate ERISA's Age Discrimination Provision

Joining the Third and Seventh Circuits, on August 27, 2007, the Sixth Circuit Court of Appeals held in Drutis v. Rand McNally & Co., 2007 WL 2409762 (6th Cir. 2007), that defined benefit plans employing a cash balance formula do not violate the Employee Retirement Income Security Act (ERISA). A cash balance plan is a defined benefit plan in that it is required to offer payment of an employee's benefit in the form of a series of payments for life. However, a cash balance plan is like a defined contribution plan in that it defines the benefit in terms of a stated account balance.

A prior decision of the Third Circuit offered explanation as to how cash balance plans operate:

A feature of most cash balance plans is that the hypothetical account, which tells the employee how much the retirement benefit is worth, has two parts: (1) "pay credits" or "earnings credits", which are hypothetical contributions an employer usually expressed as a percentage of wages and salary and may vary with employee tenure; and (2) "interest credits", which are hypothetical earnings… on the account balance. Employers design cash balance plans so that when a participant receives a pay or earnings credit for a year of service, he also receives the right to future interest credits projected out until normal retirement age.

Register v. PNC Fin. Servs. Group, Inc., 477 F.3d 56 (3d Cir. 2007).

The Sixth Circuit rejected the argument that cash balance plans are discriminatory because younger workers who receive the same pay credit and interest rate contribution as older workers would be entitled to a greater annuity at retirement. The Sixth Circuit, however, like the Third and Seventh Circuits, held that so long as the rate of benefit accrual, i.e., the employer's contributions, is not discriminatory on the basis of age (i.e., "any difference in output as a result of time and compound interest does not violate ERISA"), the plan is lawful.

All three appellate courts that have now considered these claims have ruled that cash balance plans do not violate ERISA; appeals remain pending in the Second and Ninth Circuits.

EEOC Amends ADEA Regulations To Reflect General Dynamics v. Cline

On July 6, 2007, the Equal Employment Opportunity Commission (EEOC) issued amended regulations interpreting the Age Discrimination in Employment Act (ADEA) to reflect the Supreme Court's 2004 ruling in General Dynamics Land System, Inc. v. Cline, 540 U.S. 581 (2004). In Cline, the Supreme Court held that employers can make employment decisions that favor older employees over younger employees covered by the Act (i.e., over 40 years of age). It had been the EEOC's position that employers could not favor older workers over younger covered ones. The EEOC has now deleted the language from its regulations barring discrimination against "relatively" young individuals. The revisions clarify that employment practices that favor older individuals at the expense of younger individuals are not unlawful discrimination under the ADEA.

The amended regulations retain language prohibiting employers from including language in "help wanted" notices or advertisements which would deter older individuals from applying for employment. The amended regulations also retain language that allows employers to place help wanted notices or advertisements that express a preference for older workers by using such terms as "over age 60," "retirees," or "supplement your pension."

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