The Third Circuit Creates a Circuit Split by Recognizing “Subgroups” for Disparate Impact Claims under the ADEA

Paula Lopez, February 10, 2017.

The Age Discrimination in Employment Act (ADEA) protects employees, age 40 and older, against age discrimination.  The Third Circuit, in Karlo v. Pittsburgh Glass Works, 129 Fair Empl.Prac.Cas (BNA) 1461, split from the Second, Sixth and Eight Circuits by holding that employees over the age of 40 can make out a disparate impact claim under the ADEA by showing that an employer’s actions disproportionately impacted a subgroup of employees over 40, within a larger group of employees over 40 years of age, but younger than those in the subgroup.  The Third Circuit’s decision, which has precedential effect over district courts in New Jersey, Pennsylvania, Delaware and the Virgin Islands, reversed a Pennsylvania District Court’s order dismissing the plaintiffs’ disparate impact claims under the ADEA through summary judgment.

The plaintiffs in Karlo are comprised of a subgroup of older workers age 50 and older who claimed that they were disproportionately impacted by the employer’s reduction in force plan as compared to younger co-workers, who were also over 40.  Defendant, PGW, sought to dismiss the disparate impact claim by arguing that “subgroup” disparate impact claims are not cognizable under the ADEA, and that employees “older than forty were, as a class, favored to keep their jobs’ under the employer RIF.”

The Third Circuit relied on the language of the ADEA’s disparate-impact provision, which makes it unlawful for an employer “to adversely affect [an employee’s] status . . . because of such individual’s age.” 29 U.S.C. § 623(a)(2), and the reasoning behind the U.S. Supreme Court’s decisions in the cases O’Connor v. Consolidated Coin Caterers Corp., 517 U.S. 308 (1996) and Connecticut v. Teal, 457 U.S. 440 (1982).

In O’Connor, a 56-year old plaintiff was terminated and replaced by a younger worker who happened to be over the age of 40.  The Fourth Circuit held that to make out a prima facie claim under the ADEA, the plaintiff was required to show that he was replaced with employees under the age of 40.  The Supreme Court reversed the Fourth Circuit’s holding, finding that while the “ADEA protects a class of individuals at least forty years old, it ‘prohibits discrimination on the basis of age and not class membership . . . .” O’Connor at 313. Relying on the Court’s reasoning in O’Connor, the Third Circuit held that “[a] specific, facially neutral policy that significantly disfavors employees over fifty years old supports a claim of disparate impact under the plain text of § 623(a)(2).  Although the employer’s policy might favor younger members of the forty-and-over cohort, that is an ‘utterly irrelevant factor,’ (internal citation omitted), in evaluating whether a company’s oldest employees were disproportionately affected because of their age.”

The Third Circuit also relied on the Supreme Court’s decision in Teal, a case involving a Title VII disparate impact claim.  In Teal, the plaintiffs challenged a two-step process used by a Connecticut state agency to determine eligibility for promotions.  The first step required applicants to take a written test, and only applicants that passed the test were selected for a promotion. The plaintiffs consisted of black applicants who failed the test who alleged that black applicants failed the test at a significantly higher rate than white applicants.  The State of Connecticut argued that because black applicants who passed the test were given preferential treatment at the second step of the process and were promoted at a higher rate than white employees, any discriminatory effect of the written test was canceled out.  The Supreme Court rejected this argument, stating that “Title VII does not permit the victim of a facially discriminatory policy to be told that he has not been wronged because other persons of his or her race or sex were hired. That answer is no more satisfactory when it is given to victims of a policy that is facially neutral but practically discriminatory. Every individual employee is protected against both discriminatory treatment and practices that are fair in form, but discriminatory in operation.”

The Third Circuit relied on Teal, in rejecting PGW’s “bottom-line” defense that sought to focus the court’s attention on the impact of its RIF on the overall class of workers over 40 years of age and not on how it affected the sub-group of workers 50 and older. The Third Circuit stated that the “ADEA, like Title VII, protects individuals who are members of a protected class, not a class itself… Such protection under the statute does not disappear when a plaintiff advances a disparate-impact claim. Teal prohibits the use of a bottom-line statistic to justify ignoring a disproportionate impact against individuals that would otherwise be actionable under the plain text of the statute”.

The Third Circuit’s decision in Karlo splits from the Second (Lowe v. Commack Union Free Sch. Dist., 886 F.2d 1364 (2d Cir. 1989)), Sixth (Smith v. Tenn. Valley Auth., 924 F.2d 1059 (6th Cir. 1991) (table opinion)), and Eighth (EEOC v. McDonnell Douglas Corp., 191 F.3d 948 (8th Cir. 1999) Circuits, who have all held that disparate impact claims under the ADEA did not include subgroups and were limited to comparing the effect of a policy or decision on the class of employees 40 and older to employees outside the protected class.  The Court justified its decision to deviate from the other Circuits because it believed those decisions predate and are “contradicted by O’Connor and Teal, confuse evidentiary concerns with statutory interpretation, and incorrectly assume that recognizing subgroups will proliferate liability for reasonable employment practices.”

The split created by the Third Circuit in deciding Karlo will likely need to be resolved by the Supreme Court.  In the meantime, employers considering implementing neutral policies that may have an impact on workers over the age of 40, should not only evaluate the impact of such policies on workers ages older or younger than 40 but also, on subgroups of workers within the protected class of workers.