Mass layoffs and smaller reductions in workforces are causing an astonishing uptick in the volume of age discrimination lawsuits filed against employers. While companies must cut expenses in the current economic environment, reducing head count without assessing the potential liability may actually add to costs instead. The most recent statistics from the U.S. Equal Employment Opportunity Commission (EEOC) indicate a 28.7% increase in age discrimination claims in 2008 from the year before.
A record 24,582 claims alleging age discrimination were filed against employers last year. With companies shedding millions of jobs and unemployment figures rising by the week, more claims are likely this year. Adding fuel to this fire are recent court rulings making it easier for plaintiffs to file such claims and the Obama Administration's pro-labor agenda.
"The bottom line is there will be much more employment liability litigation," says John B. Lewis, head of the employment and civil rights class action team at Cleveland-based law firm Baker & Hostetler.
Laying off a worker based on age has been illegal since the 1967 passage of the Age Discrimination in Employment Act, which protects workers 40 years and older from employment discrimination based on age. Since older workers often earn more money than their younger peers, they are attractive candidates for the proverbial ax. Firing a disproportionate number of older workers, on the other hand, virtually guarantees a lawsuit. "While the intent may not be to discriminate against older workers, oftentimes there is a disparate impact against older workers because they are the people making the most money and receiving the greatest benefits," says Adeola Adele, national employment practices liability insurance leader at broker Marsh. Everyone these days knows someone in his or her fifties who has been let go. Most have been provided decent, if not lucrative, severance packages. But when the severance fails to live up to the former employee's expectations, a phone call to a labor attorney is often the next step. "We have received a significant increase in 'demand letters' from plaintiff attorneys [seeking more severance money], which is usually the precursor before these cases hit the courts," says Howard Daniel, co-manager of employment practices liability at Ogletree, Deakins, Nash, Smoak & Stewart, an Atlanta-based law firm. "That tells me that the EEOC numbers ... may be much worse in the year ahead."
Already this seems to be the case. The law firm monitors federal dockets to ascertain the number of employment liability claims based on age. In the first quarter, it identified a 10% increase in age discrimination lawsuits nationally compared with the first quarter of 2008. "The numbers had been flat for several years before jumping 10% in the first quarter of last year, and now we see another 10% increase on top of that," says William Steinhaus, the firm's other co-manager of employment practices liability.
In March alone, 30,000 jobs were lost each workday, according to the Bureau of Labor Statistics, propelling unemployment to 8.5%, the highest rate in more than a quarter century. The difference between then and now from an age discrimination standpoint is that unemployed older workers have greater leeway to file claims.
The Lilly Ledbetter Fair Pay Act that President Obama signed in January does away with the statute of limitations for filing a discrimination claim. And the U.S. Supreme Court's 2005 ruling in Smith v. City of Jackson, Miss., held that regardless of an employer's actual motivation or intent, it can be liable for establishing policies or practices that create a statistical imbalance adversely affecting older workers.
"The ruling basically says that you only need to allege disparate impact in an age discrimination claim, meaning if an employer makes a decision that adversely affects a specific group of workers, in this case, older workers, you can sue for discrimination," Adele says. "Since then, several court decisions working off the Supreme Court's ruling have made it a lot easier to bring claims."
Once a case enters the courtroom, there is a strong bias toward the laid-off worker, Daniel asserts. "Age discrimination is one of the worst cases [for a defendant employer] to take before a jury because we all fear getting older and being forced out of a job," he explains. "Everyone is worried about being in their fifties and losing their jobs. Even a 30-year-old will identify with the plaintiff, thinking in terms of his or her mom or dad. From a trial standpoint, juries are sympathetic in these cases to the plaintiff, which is why a settlement is the preferred legal course."
To reduce employment liability risks, companies are advised to avoid mass layoffs unless absolutely necessary and determine instead whether furloughs, benefit reductions or other measures will meet the cost-cutting objective. If layoffs are required, Daniel says to use a scalpel when paring the workforce. "If 18% of your workforce is over the age of 50, then you want 18% of the workforce to be over the age of 50 after the layoff," he adds. "Same goes with race, gender, national origin and other discriminatory factors." The EEOC statistics for 2008 show sex discrimination charges were up 14%, race discrimination charges were up 11.2%, and disability charges were up 9.7%.
While companies shed some of this risk to the insurers that provide their employment practices liability policies, expectations are for this market to tighten its contract terms, conditions, financial limits and pricing as a result of the rapid increase in claim filings.
"We're already beginning to see the risk retentions for policies covering class action discrimination claims double in some cases, going up from $2.5 million to $5 million, for example," says Trudy Hardin, vice president and employment practices liability manager at Aon Financial Services Group, an insurance broker. "That means companies will be absorbing more of the risk on their own balance sheets."
Insurers are still providing high dollar limits of financial protection, although Aon finds in some cases that it must put more insurers in the program to provide these limits. "Zurich Insurance, for example, would put up $25 million in limits on the primary layer of coverage but has scaled that back now to $15 million in many cases," Hardin says. "Nevertheless, there is still enough insurance capacity out there to meet client needs."
Regarding cost, Marsh's Adele says annual premium decreases in prior years of as much as 10% for clients with excellent loss experience are giving way to smaller decreases. Those may soon turn into increases. "With the number of claims rising, carriers won't feel the losses until after this year; at that point I think we'll see the market really begin to tighten," she explains. "We're telling clients if they need or want to increase their limits of financial protection on their policies, now is the time because the market remains relatively soft. Next year will likely be a different ball game."