Labor Relations and the Supreme Court

The State of Kentucky Retirement Plan (plan) for employees in hazardous positions, e.g., police officers, permits such employees to retire and receive normal retirement benefits after either working for 20 years or working for five years and reaching age 55. The plan also permits those who become seriously disabled but are not eligible for normal retirement, to retire immediately and receive disability retirement benefits. While the plan calculates normal retirement benefits based on years of service, it calculates disability retirement benefits by adding to an employee's years of service the number of years that the employee would have had to continue working to qualify for normal retirement, adding no more than the number of years the employee previously worked.

Charles Lickteig, a hazardous position employee in a county sheriff's department, continued working after becoming eligible for retirement at age 55, became disabled, and retired at age 61. He filed an age discrimination complaint with the EEOC after the plan based his pension on his actual years of service without adding any additional years. The EEOC filed suit against Kentucky and others under the ADEA, arguing that the plan failed to add years solely because he became disabled after age 55. The district court held that the EEOC could not establish age discrimination. The Sixth U.S. Circuit Court of Appeals first affirmed the district court's judgment, but after granting rehearing en banc, held that the plan violated the ADEA.

In reversing the Sixth Circuit's holding, the Supreme Court relied heavily on Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), in which it previously held that a dismissal based on pension status did not violate the ADEA because although pension status depends upon years of service, and years of service typically go hand in hand with age, the concepts of age and pension status are analytically distinct. Hazen Paper left open the possibility that discrimination based on pension status could violate the ADEA if pension status were used as a proxy for age, i.e., where age actually motivated the employer's decision-making. However, the Kentucky court found that pension status did not serve as a proxy for age in the plan's disability rules because there was a clear non−age-related explanation for the rules, to treat disabled employees as if they had worked until the point they would be eligible for a normal pension. In addition, while the plan placed an older worker at a disadvantage in Mr. Lickteig's case, the Court found that in other instances it can work to the advantage of older workers.

Justice Anthony Kennedy, writing for the dissent, criticized the Court for allowing disparate treatment without applying a specific exemption or defense.

RFOA Defense

In Meacham v. Knolls Atomic Power Laboratory, 128 S.Ct. 2395 (2008), the Court ruled 7-1 that employers defending disparate impact claims under the ADEA with the defense that the decision was based on a reasonable factor other than age (RFOA) bear both the burden of production and the burden of persuasion to demonstrate that the factors the employer relied upon in selecting employees for layoff were reasonable.

When the federal government ordered its contractor, Knolls Atomic Power Laboratories, to reduce its work force (RIF), the company chose employees for layoff based on factors including performance, flexibility and critical skills. Ultimately, 30 of the 31 employees laid off were at least 40 years old. Many of the terminated workers sued, alleging the company violated the ADEA because the RIF had a disparate impact on older workers. The jury awarded over $6 million in damages to the plaintiffs and the Second Circuit initially affirmed.

In 2005, the Supreme Court vacated and remanded the case back to the Second Circuit for further consideration in light of Smith v. City of Jackson, 544 U.S. 228 (2005), which it had decided that term. In Smith, the Court confirmed that a disparate impact cause of action is, in fact, available under the ADEA. However, the Smith Court ruled that an employer need not demonstrate business necessity in order to rebut a plaintiff's prima facie case of disparate impact age discrimination. The Court further held that the claim could be defeated through the use of the RFOA defense.

On remand in Knolls, the Second Circuit concluded that the burden of persuasion on the reasonableness of the RFOA ultimately remains with the employee. In other words, once the employer produces evidence of a RFOA, the burden shifts to the employee to prove unreasonableness. The Supreme Court reversed, however, ruling that the employer must not only produce evidence supporting the RFOA defense, but also must persuade the factfinder of its merit.

The Court reasoned, first, that the RFOA exemption appears alongside the bona fide occupational qualifications (BFOQ) exemption in the text of the ADEA, in a part of the statute that is separate from the general prohibitions. Using principles of statutory construction, the Court reasoned that the RFOA should be deemed an affirmative defense for an employer in an ADEA case, as is the BFOQ. Therefore, the Court concluded that Congress intended the RFOA exemption to be treated differently from the general prohibitions of the ADEA which place the burden of proof squarely on the employee.

Arbitration Awards

Section 10 of the Federal Arbitration Act (FAA) lists specific grounds for courts to vacate an arbitration award, such as corruption or fraud, and ' 11 lists grounds for modifying or correcting an arbitration award, including evident material miscalculations and evident material mistake. In Hall Street Associates v. Mattel Inc., 128 S.Ct. 1396 (2008), the Court ruled 5-3 that these statutory grounds for modification and vacatur are exclusive, and may not be expanded by contract.

In this case, landlord Hall Street and tenant Mattel agreed to submit their dispute to arbitration and entered into an arbitration agreement that required the district court to vacate or modify any award “if the arbitrator's conclusions of law [were] erroneous.” The arbitrator first ruled for Mattel, but the district court vacated the award for legal error, expressly invoking the agreement's review standard. On remand, the arbitrator ruled for Hall Street and the district court upheld the award, again applying the parties' agreement. However, the Ninth Circuit reversed, holding that the arbitration agreement's terms fixing the standard of judicial review were unenforceable, given the exclusive grounds for vacatur and modification provided by ” 10 and 11 of the FAA.

The Supreme Court affirmed the Ninth Circuit's ruling and held that parties may not contractually expand the grounds for judicial review of arbitration awards stated in ” 10 and 11 of the FAA. Justices John Paul Stevens and Anthony Kennedy dissented.

ERISA Recovery

In LaRue v. DeWolff, Boberg & Assoc., 128 S.Ct. 1020 (2008), the Court unanimously held that although ' 502(a)(2) of ERISA does not provide a remedy for individual injuries distinct from plan injuries, it does permit recovery for fiduciary breaches that compromise the value of plan assets in a participant's individual account.

James LaRue, who participated in a defined contribution plan, brought suit under ' 502(a)(2) of ERISA, alleging that his employer's failure to follow instructions regarding his account depleted his interest in the plan by approximately $150,000 and amounted to a breach of fiduciary duty. The Fourth Circuit rejected Mr. LaRue's claim, relying on the Supreme Court's ruling in Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), a case initiated by a participant in a defined benefit plan, that ' 502(a)(2) “provides remedies only for entire plans, not for individuals.”

The Court decided in LaRue that the advent of defined contribution plans, which base retirement income on the performance of an individual's personally managed account, demanded a revised standard. It reasoned that while fiduciary misconduct by the administrators of defined benefit plans exclusively impacts the solvency of the entire plan, misconduct relating to defined contribution plans can diminish a particular individual's assets in the plan.

Consequently, the Court expanded its interpretation of ' 502(a)(2)'s language, regarding relief owed to the plan, to authorize individual recovery.

John P. Furfaro is a partner and Risa M. Salins is an associate at Skadden, Arps, Slate, Meagher & Flom. This article originally appeared in the New York Law Journal, an Incisive Media sister publication of this newsletter.

This is the second of two articles examining decisions of the U.S. Supreme Court during its 2007-08 term that impacted the area of labor and employment law. It discusses decisions involving the Age Discrimination in Employment Act (ADEA); the Federal Arbitration Act (FAA); and the Employee Retirement Income Security Act (ERISA).

Pension Status

In Kentucky Retirement Systems v. EEOC , 128 S.Ct. 2361 (2008), the Court ruled 5-4 that where an employer's pension plan includes age as a factor, and that employer then treats employees differently based on pension status, the plaintiff must show that the alleged differential treatment was actually motivated by age ' not pension status ' in order to state a claim under the ADEA.

The State of Kentucky Retirement Plan (plan) for employees in hazardous positions, e.g., police officers, permits such employees to retire and receive normal retirement benefits after either working for 20 years or working for five years and reaching age 55. The plan also permits those who become seriously disabled but are not eligible for normal retirement, to retire immediately and receive disability retirement benefits. While the plan calculates normal retirement benefits based on years of service, it calculates disability retirement benefits by adding to an employee's years of service the number of years that the employee would have had to continue working to qualify for normal retirement, adding no more than the number of years the employee previously worked.

Charles Lickteig, a hazardous position employee in a county sheriff's department, continued working after becoming eligible for retirement at age 55, became disabled, and retired at age 61. He filed an age discrimination complaint with the EEOC after the plan based his pension on his actual years of service without adding any additional years. The EEOC filed suit against Kentucky and others under the ADEA, arguing that the plan failed to add years solely because he became disabled after age 55. The district court held that the EEOC could not establish age discrimination. The Sixth U.S. Circuit Court of Appeals first affirmed the district court's judgment, but after granting rehearing en banc, held that the plan violated the ADEA.

In reversing the Sixth Circuit's holding, the Supreme Court relied heavily on Hazen Paper Co. v. Biggins , 507 U.S. 604 (1993), in which it previously held that a dismissal based on pension status did not violate the ADEA because although pension status depends upon years of service, and years of service typically go hand in hand with age, the concepts of age and pension status are analytically distinct. Hazen Paper left open the possibility that discrimination based on pension status could violate the ADEA if pension status were used as a proxy for age, i.e., where age actually motivated the employer's decision-making. However, the Kentucky court found that pension status did not serve as a proxy for age in the plan's disability rules because there was a clear non−age-related explanation for the rules, to treat disabled employees as if they had worked until the point they would be eligible for a normal pension. In addition, while the plan placed an older worker at a disadvantage in Mr. Lickteig's case, the Court found that in other instances it can work to the advantage of older workers.

Justice Anthony Kennedy, writing for the dissent, criticized the Court for allowing disparate treatment without applying a specific exemption or defense.

RFOA Defense

In Meacham v. Knolls Atomic Power Laboratory , 128 S.Ct. 2395 (2008), the Court ruled 7-1 that employers defending disparate impact claims under the ADEA with the defense that the decision was based on a reasonable factor other than age (RFOA) bear both the burden of production and the burden of persuasion to demonstrate that the factors the employer relied upon in selecting employees for layoff were reasonable.

When the federal government ordered its contractor, Knolls Atomic Power Laboratories, to reduce its work force (RIF), the company chose employees for layoff based on factors including performance, flexibility and critical skills. Ultimately, 30 of the 31 employees laid off were at least 40 years old. Many of the terminated workers sued, alleging the company violated the ADEA because the RIF had a disparate impact on older workers. The jury awarded over $6 million in damages to the plaintiffs and the Second Circuit initially affirmed.

In 2005, the Supreme Court vacated and remanded the case back to the Second Circuit for further consideration in light of Smith v. City of Jackson , 544 U.S. 228 (2005), which it had decided that term. In Smith, the Court confirmed that a disparate impact cause of action is, in fact, available under the ADEA. However, the Smith Court ruled that an employer need not demonstrate business necessity in order to rebut a plaintiff's prima facie case of disparate impact age discrimination. The Court further held that the claim could be defeated through the use of the RFOA defense.

On remand in Knolls, the Second Circuit concluded that the burden of persuasion on the reasonableness of the RFOA ultimately remains with the employee. In other words, once the employer produces evidence of a RFOA, the burden shifts to the employee to prove unreasonableness. The Supreme Court reversed, however, ruling that the employer must not only produce evidence supporting the RFOA defense, but also must persuade the factfinder of its merit.

The Court reasoned, first, that the RFOA exemption appears alongside the bona fide occupational qualifications (BFOQ) exemption in the text of the ADEA, in a part of the statute that is separate from the general prohibitions. Using principles of statutory construction, the Court reasoned that the RFOA should be deemed an affirmative defense for an employer in an ADEA case, as is the BFOQ. Therefore, the Court concluded that Congress intended the RFOA exemption to be treated differently from the general prohibitions of the ADEA which place the burden of proof squarely on the employee.

Arbitration Awards

Section 10 of the Federal Arbitration Act (FAA) lists specific grounds for courts to vacate an arbitration award, such as corruption or fraud, and ' 11 lists grounds for modifying or correcting an arbitration award, including evident material miscalculations and evident material mistake. In Hall Street Associates v. Mattel Inc. , 128 S.Ct. 1396 (2008), the Court ruled 5-3 that these statutory grounds for modification and vacatur are exclusive, and may not be expanded by contract.

In this case, landlord Hall Street and tenant Mattel agreed to submit their dispute to arbitration and entered into an arbitration agreement that required the district court to vacate or modify any award “if the arbitrator's conclusions of law [were] erroneous.” The arbitrator first ruled for Mattel, but the district court vacated the award for legal error, expressly invoking the agreement's review standard. On remand, the arbitrator ruled for Hall Street and the district court upheld the award, again applying the parties' agreement. However, the Ninth Circuit reversed, holding that the arbitration agreement's terms fixing the standard of judicial review were unenforceable, given the exclusive grounds for vacatur and modification provided by ” 10 and 11 of the FAA.

The Supreme Court affirmed the Ninth Circuit's ruling and held that parties may not contractually expand the grounds for judicial review of arbitration awards stated in ” 10 and 11 of the FAA. Justices John Paul Stevens and Anthony Kennedy dissented.

ERISA Recovery

In LaRue v. DeWolff, Boberg & Assoc. , 128 S.Ct. 1020 (2008), the Court unanimously held that although ' 502(a)(2) of ERISA does not provide a remedy for individual injuries distinct from plan injuries, it does permit recovery for fiduciary breaches that compromise the value of plan assets in a participant's individual account.

James LaRue, who participated in a defined contribution plan, brought suit under ' 502(a)(2) of ERISA, alleging that his employer's failure to follow instructions regarding his account depleted his interest in the plan by approximately $150,000 and amounted to a breach of fiduciary duty. The Fourth Circuit rejected Mr. LaRue's claim, relying on the Supreme Court's ruling in Massachusetts Mutual Life Ins. Co. v. Russell , 473 U.S. 134 (1985), a case initiated by a participant in a defined benefit plan, that ' 502(a)(2) “provides remedies only for entire plans, not for individuals.”

The Court decided in LaRue that the advent of defined contribution plans, which base retirement income on the performance of an individual's personally managed account, demanded a revised standard. It reasoned that while fiduciary misconduct by the administrators of defined benefit plans exclusively impacts the solvency of the entire plan, misconduct relating to defined contribution plans can diminish a particular individual's assets in the plan.

Consequently, the Court expanded its interpretation of ' 502(a)(2)'s language, regarding relief owed to the plan, to authorize individual recovery.

John P. Furfaro is a partner and Risa M. Salins is an associate at Skadden, Arps, Slate, Meagher & Flom. This article originally appeared in the New York Law Journal, an Incisive Media sister publication of this newsletter.