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Guest Article

(From the June 30, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Supreme Court Narrowly Upholds State's "Imputed Service" Formula for Disability Pensions

In a 5 to 4 decision, the Supreme Court held that a state's retirement system does not violate the Age Discrimination in Employment Act (ADEA) by providing disability benefits based on years of service imputed to normal retirement. _____ v. Equal Employment Opportunity Commission, 554 U.S. ____ (June 19, 2008). After the Sixth Circuit Court of Appeals held that the state's plan violated the ADEA, this case has been closely watched by other state and local governments which similarly utilize imputed service formulas in calculating disability pensions.

Court Agrees with the State

The lynchpin of the Supreme Court's decision was its interpretation of Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), which involved a 62-year old employee who claimed he was unlawfully discharged by the employer in order to avoid the payment of pension benefits that were about to vest. In Hazen, the Supreme Court found that, without evidence of intent, a dismissal based on pension status was not a dismissal because of age.

Carrying that analysis a step further in this case, the Supreme Court interpreted Hazen to require a plaintiff claiming age-related "disparate treatment" to prove that age actually motivated the employer's decision.

[T]he rule we adopt today for dealing with this sort of case is clear: 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.

[Emphasis original]

The Supreme Court cited six reasons which convinced it that the differential treatment under the state's plan was not "actually motivated" by age:

Age and pension status are analytically distinct concepts.
Pension status does not serve as a proxy for age in this case. Complex pension rules allow eligibility to turn on age, and every employee who is hired is promised a disability benefit if he becomes disabled prior to normal retirement. (In fact, Congress has approved programs which calculate disability benefits using a formula that expressly takes account of age -- for example, Social Security disability benefits.)
There is a clear, non-age-related rationale for the disparity here. The purpose of the disability benefit is to treat disabled workers as though they had become disabled after -- rather than before -- reaching normal retirement eligibility. Age factors into the disability calculation only because the normal retirement rules permissibly include age as a consideration.
Although the state's plan places an older worker at a disadvantage in this case, in other circumstances it can work to the advantage of older workers. (For example, a disabled worker who is age 45 with 10 years of service would receive more imputed years than one age 40 with 15 years of service. The 45 year old would receive 10 additional years, while the 40 year old would receive only 5 additional years, since the formula imputes to the earlier of 20 years of service or age 55 with 5 years of service.)
The state's plan does not rely on any of the stereotypical assumptions that the ADEA sought to eradicate. It does not rest on stereotypes about the work capacity of older workers relative to younger workers.
Unless the state's plan were to severely cut benefits to disabled workers who are not yet pension eligible, it would have to increase benefits to disabled workers who are pension eligible, while lacking any clear criteria for doing so (i.e., criteria for determining how many extra years to impute for those who are already pension eligible). The difficulty of finding a remedy that can both correct the disparity and achieve the plan's legitimate objective of providing each disabled worker with a sufficient retirement benefit suggests that the retirement income objective, and not age discrimination, is the motivation.

Dissent Finds Straightforward Age Discrimination

Justices Kennedy, Scalia, Ginsberg and Alito joined in a dissent which argued that the majority's opinion undercuts the basic framework of the ADEA. While sympathetic with the desire to provide younger disabled workers with a pension, the dissent found clear age discrimination:

As a threshold matter, all should concede that the paradigm offered to justify the statute is a powerful one: The young police officer or firefighter with a family is disabled in the heroic performance of his or her duty. Disability payments are increased to account for unworked years of service. What the Court overlooks, however, is that a 61-year-old officer or firefighter who is disabled in the same heroic action receives, in many instances, a lower payment and for one reason alone: By explicit command of [the state's] disability plan age is an express disadvantage in calculating the disability payment.

Whether intended or not, the dissent argues that the state's benefit formula compensates otherwise similarly situated individuals differently on the basis of age. The dissent goes on to conclude that the plan is "facially discriminatory" and, as such, in violation of the ADEA.

Hazen Paper makes quite clear that no additional proof of motive is required in an ADEA case once the employment policy at issue is deemed discriminatory on its face.

The dissent warns that the majority's reading of Hazen creates 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.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.