Disparate Impact Need Not Apply – Merit Based Compensation Systems Can be Exempt Under Title VII

A recent decision by the Seventh Circuit Court of Appeals affirmed a District Court’s judgment in favor of Merrill Lynch on a race discrimination claim involving a performance-based compensation system for Merrill Lynch brokers. This has important ramifications for the financial industry, and perhaps for a number of other employers with similar compensation arrangements.

This is a class action matter and has a number of the usual legal twists and turns. But the most interesting aspect of the case is its reference to a relatively little used section of Title VII of the 1964 Civil Rights Act found at 42 USC 2000e-2(h). That section, usually referenced as Section 703(h) because of the goofy way the law was written, states that it is not unlawful for an employer to apply different standards of compensation or different terms, conditions, or privileges of employment, as part of a “bona fide seniority or merit system, or a system that measures its earnings by quantity or quality of production”, provided that the system is not set up to intentionally discriminate because of race, color, religion, or national origin.

Merrill Lynch was sued by a group of African American brokers, who claimed that its bonus compensation system, based on production credits which reflected commissions earned on client assets managed by the broker, discriminated against them because of their race. As the Court noted, “the production – credit system is about as direct a measure of production as one could have imagined in the financial services industry.”

Under these circumstances, the Court determined that the bonus program at issue compensated brokers on the basis of production and that it did so in a race neutral way. Once that determination was made, the Plaintiffs lose because the statute expressly exempts these types of systems from its scrutiny.

The Plaintiffs tried to avoid this result by arguing the bonus system was biased because it didn’t accurately measure the parties’ true efforts in getting a commission. The Court made quick work of this, noting that the bonus calculations were made directly on their managed assets performance, and nothing else. The Court stated that it would have been different if a broker’s compensation depended on some type of subjective analysis that might be infected with racial animus. But given that the numbers were applied equally to everyone, the Court had no basis to allow the complaint to go forward.

The Plaintiffs next tried to argue that the 703 (h) provision applied only to manufacturing production systems, such as piecework rates, and not the sort of financial  asset production credit system at issue. Again, the Court said that there was no basis for this assertion, that the statute did not make the distinction, and there was no basis for the Court to look at any type of legislative history to make that call.

The decision is important for employers that have the capability to structure a compensation or a promotion decision based on some type of directly measurable qualitative or quantitative product, whether it it’s the number of widgets turned out per hour or the performance of client assets in a stock portfolio. To the extent that employers can characterize their performance systems as qualitative or quantitative measurement-based, they can effectively insulate themselves from discrimination claims under Title VII.

Unemployment Compensation Audits In Illinois

Here's a good article from the Illinois Chamber of Commerce about handling an Illinois Department of Employment Security ("IDES") audit with respect to independent contractor status.

Having been through this process with a number of clients, I wholeheartedly endorse the approach of taking as many opportunities as possible to convince the Department that your independent contractor classification system is sound.

NHL Labour Woes--It's Different in Canada

So you're a big-time hockey team owner and you decide that you simply aren't making enough money.  You look across the street to where your NFL friends run their business, and enviously think about their restructuring their collective bargaining agreement with hard salary caps, reduced revenue percentages for the players, and a relatively streamlined discipline system. You also note that virtually every NFL team is in the black, while a number of your hockey team owning colleagues are either just barely breaking even or actually losing money.

You know the collective bargaining agreement is about to expire with your hockey union, and, taking a page out of the NFL and NBA owners manual, you decide to hardball the players union by threatening to lock out the players and force them to live on their savings for a while.

So far so good right? But there's a small fly in your union busting ointment-namely, that unlike the NFL and NBA, the NHL has a number of teams in Canada. Specifically, the NHL has teams in Québec, Ontario and Alberta, provinces that have their own labour laws that limit unilateral actions by ownership in these cases. In the United States, state laws cannot override or affect federal labor law; so local ordinances like this are not an issue. But not only do our Canadian neighbours spell "labour law" differently, their provincial legal codes are enforceable, even in situations where there is a nationwide, multi-province employer in question.

It looks like several of the clubs will not be able to lock out their players without either approval by provincial labour boards, or by taking steps to secure what's called a "lockout vote", as well as mediation, in Alberta  (the statute is here, the lockout provisions are in Division 13).  For teams in those provinces, at least, the players will be allowed to show up, and collect compensation. Whether the rest of the owners will collectively fund that arrangement remains to be seen. But it raises an interesting question for multinational sports leagues trying to adopt a consistent position with respect to their clubs and their employees.  Stay tuned.

Why It's Good to Be an Employment Lawyer or HR Manger

Business is trending up for us employment lawyers.

It's one of the few legal areas that is seeing growth.  And that translates into a need for competent Human Resources managers, too.

And, for better or worse, here is why it might be good to be a lawyer.

Seventh Circuit Rewrites the ADA

Two very troubling ADA decisions from the normally solid Seventh Circuit Court of Appeals here in Chicago:

Earlier this summer, the Court reversed a lower court's grant of summary judgment to an employer in a case involving an employee with sleep apnea. The employee's medical problems, which included chronic sleeplessness, resulted in him getting a doctor's recommendation for day shift only work.

The employer had a few dayshift only positions and assigned the employee to one of them, but eventually the position was eliminated and the employee entered the normal shift rotation of day, evening, and overtime shifts. The employee attempted to work these new hours, but ultimately found that fatigue and pain (he also suffered from fibromyalgia) made it impossible to continue. Again, his physician placed him on a medical restriction to work only day shifts. Because it had no positions available that did not require either overtime or flex time (i.e. working outside the shift timeframe), the company laid the employee off. It refused to put him back into other vacant positions, asserting that overtime and flex time were essential job functions of any available position. When a position came open some seven months later that had straight day shifts, the employee bid on the position and the company brought him back to work.

Proving that no good deed goes unpunished, the employee then promptly sued the employer for disability discrimination because it did not reasonably accommodate him by giving him a dayshift only position. The lower court found for the employer.  The Seventh Circuit reversed, and in doing so engaged in some disturbing analysis with respect to the employer's definition of the essential elements of the positions. Although the employer identified working overtime as a requirement for all of its positions, the court found that this was not necessarily so, based, apparently, on the fact that some job descriptions explicitly listed overtime as a requirement, while others did not. The court also questioned whether overtime was an essential qualification if it was rarely required for a few positions.

I find this result problematic-employers have the right to set their own job requirements, and as long as those requirements are applied consistently, the court should not be challenging them. There was no evidence that overtime was not an essential element of all the positions at the facility-the fact that it was only rarely required for some positions does not make it any less essential when the employer needs people to stay at work passed their normal shift time.  The Court noted that employers have the authority to determine which job functions are essential, and that courts should not second-guess those decisions, and then went on to second-guess this employer's decision.  Moreover, the employer's failure to include overtime as an essential element for every single job description should not preclude the employer from proving that, in fact, all positions were required to be overtime capable as the need arose.  The decision effectively means that employers need to break down and fine tune their job descriptions to include every single possible element, something that is typically difficult and impractical. Alternatively, employers could completely eliminate job descriptions, and rely on practice to establish essential elements. I assume that would solve at least part of the problem that surfaced here.


Employers should also be aware of a new decision effectively mandating reassignment of  disabled employees into a vacant position in lieu of more qualified (but not necessarily more senior) applicants.

In a case involving United Airlines, the Court reversed an earlier line of precedents at the urging of the EEOC. United Airlines had a policy that looked to place disabled employees into vacant positions when they were the best qualified applicant, but the Court’s language leaves no doubt that such a competitive type policy will not stand. “…[A]ccommodation through appointment to a vacant position is reasonable. Absent a showing of undue hardship, an employer must implement such a reassignment policy.”

In setting this requirement, the Seventh Circuit directs lower courts (and, therefore, employers) to first determine whether mandatorily reassigning a disabled employee to a vacant position for which they are minimally qualified is ordinarily, “in the run of cases”, a reasonable accommodation. In other words, given the job requirements and qualifications of the employee, does it appear logical that the disabled employee could claim assignment to the vacant position as a reasonable accommodation? If so, then the employer can defend against the mandatory reassignment requirement only by showing that there are fact specific considerations particular to its employment circumstances that make a mandatory reassignment an undue hardship.

Courts have long claimed that employment discrimination statutes are not designed to give a preference for employees that are in the protected class, but merely “level the playing field” for those employees so that their protected status is no longer a factor. But this decision, as the Court clearly notes, establishes a definitive preference for disabled employees over their coworkers. Employers are on notice that they must consider vacant positions for reassignment, even in circumstances where the disabled employee is not the most qualified for the position.

One of the reactions to the decision that I would expect to see is that employers will start defining the requirements of their positions as definitely as possible, so that they are not required to put disabled employees with minimal qualifications into key positions that happen to vacant at the time the request for accommodation is made. Short of that, it will become imperative for human resources departments that manage accommodation requests to become acutely aware of every single job vacancy within their organization. Good luck with that.

My thanks to my associate, Liz Winiarski, for her assistance in writing this post.

Not So Fast, Commissioner

The NFL bounty scandal continues to provide worthwhile lessons for unionized employers. The latest development occurred on September 7, when the NFL Collective Bargaining Agreement Appeals Panel reversed an arbitration decision from early last summer, upholding NFL Commissioner Roger Goodell’s ability to discipline players involved in the alleged bounty system used by the New Orleans Saints over several seasons.

Goodell imposed discipline, including fines and suspensions, on four New Orleans Saints players for their “conduct detrimental to the integrity of, or public confidence in, the game of professional football.” Specifically, the players were alleged to have participated in a compensation for injury program by either paying into or accepting money from a pool designed to reward players for injuring opposing team members during a game.

The players' union challenged the Commissioner’s discipline on the ground that he did not have jurisdiction to make such a determination. Instead, the union argued that the conduct alleged was a violation of the collective bargaining agreement clause that prohibits players and clubs from entering into undisclosed agreements involving off-the-books payments. In essence, the issue is whether the conduct involved in the bounty system amounted to conduct detrimental under Article 46 of the collective bargaining agreement, or whether it was an undisclosed compensation agreement under Article 14 or 15 of the CBA. The former can only be addressed by the Commissioner (with limited right to appeal), the latter, only by a grievance before the system arbitrator.

After the initial ruling by the system arbitrator in favor the Commissioner, the matter went to the NFL’s appellate Panel for review. The Panel determined that the bounty system, in fact, violated both the “conduct detrimental” provision and the undisclosed compensation provision. As a result, the Commissioner and the system arbitrator each had jurisdiction to impose penalties; the Commissioner for players' participation in a plan to injure, and the system arbitrator for the agreement to receive payments from the bounty pool.

The Panel was not convinced, however, that the Commissioner was disciplining the players just for their engaging in conduct detrimental to the League. Accordingly, the Panel reversed the initial discipline against the four Saints players and returned the matter to Goodell for reevaluation.

Note that this does not preclude the Commissioner from disciplining the players, even to the extent that they were previously punished. In fact, it opens up a new avenue of discipline for the League, based on the violation of the compensation provision. The players, who were immediately reinstated, may wish that they were subject only to the Commissioner’s discipline by the time this is all over. In any event, it provides an interesting window into the various and fine demarcations drawn when assessing the language of a collective bargaining agreement and its application to employees in a disciplinary environment.

UPDATE:  And, no surprise, the Commissioner kept almost all of the restrictions in place, especially for the people the League views as the principals in the scandal.  it will be interesting to see what happens if this ever gets to a court  although I believe that the union will have serious issues trying to get a judge to intervene in a collectively bargained discipline process.