Distinguishing among Employees Based on Pension Status

[Note to all: what follows are purely personal opinions, in no way attributable to employer or clients.]

The US Supreme Court's decision in Metropolitan Life Ins. Co. v. Glenn (6/19/2008) is commanding a lot of attention from ERISA practitioners. I suspect that is because the decision is expected to shift the odds in contests over disability claims, which provide a lot of grist for ERISA litigation and now are likely to yield richer settlements. For those of us who focus on retirement plan design and benefit policy, Kentucky Retirement Systems v. EEOC, also handed down on 6/19/2008, is the more interesting decision. The headline: it is legal for employers to discriminate against employees based on their eligibility for a pension.

In Hazen Paper Co. v. Biggins (1993), the Court held that an employer did not violate the Age Discrimination in Employment Act (ADEA) by terminating an employee shortly before he would have had 10 years of service and therefore vested in his pension. There the Court held that pension status was not presumptively a “proxy for age”. Since vesting was not explicitly age-related, a termination based on Mr. Biggins’s pension status was not actionable unless he could show that his age – not his closeness to vesting – was the “actual motivating factor.”

To summarize and oversimplify, in Kentucky Retirement Systems the Court held that it was legal to provide lower benefits to police and firefighters who retire on disability at or near retirement age than to those who would have had to wait longer to qualify for regular retirement. Relying on Hazen Paper but moving well past it, the Court held that pension status is not a proxy for age here even though, in the Kentucky case, age is an explicit element of pension eligibility.

At issue was a rule that gave credit to public safety officers retiring on disability pensions for the number of extra years of service they would need to qualify for full retirement. As a result, a younger disabled police officer or firefighter could get more pension credit than an older one who was closer to retirement age and therefore didn't need as much of an eligibility boost. Since the motivation was to give all police and firefighters decent pensions even if they became disabled early in their careers, rather than to treat older public safety officers worse than younger ones, Justice Breyer and his colleagues in the 5-man majority concluded that this pension-based discrimination was as benign as the one alleged in Hazen Paper.

Doesn’t this turn employment discrimination doctrine on its head? What happened to the principle that an employer has a mighty burden to prove that its differential treatment of employees was justified, when it draws a line between categories of employees that appears to be based expressly on age? Compare, for example, Meacham v. Knolls Atomic Power Laboratory, which the Court also handed down on June 19, 2008 and which confirms that employers have that burden even in disparate-impact cases under ADEA.

Cutting through the discussion and legal analysis in the Kentucky case – as perhaps only a non-litigator might dare to do – the answer seems to be that the Supreme Court is uncomfortable with imposing unanticipated costs on pension plans, even if that means living with a little questionable discrimination. The Court describes six circumstances that demonstrate the conclusion that the pension design was not “actually motivated” by an intent to discriminate against older employees, but five of them basically boil down to the fact that, hey, it’s a pension plan.

I suspect another powerful concern was the one the Court gives for granting certiorari: “the potentially serious impact of the Circuit’s decision upon pension benefits provided under plans in effect in many states” along with the point made in Kentucky’s brief and highlighted in the opinion: the “large increase in pension liabilities, potential reduction in benefits for all disabled persons, or both…” The Court was more direct in voicing this concern in Manhart and Norris, where it found that Title VII of the Civil Rights Act outlaws gender-based discrimination but made its ruling prospective only, leaving Ms. Manhart and Ms. Norris without relief. In tone it also calls to mind the raft of lower court decisions rejecting ADEA-based challenges to cash balance conversions, not to mention the Third Circuit’s ultimate Erie County decision.

What does Kentucky Retirement System mean for pension design? Well, it says that employers can take pension eligibility into account in drawing lines. For example, it may give comfort to employers considering phased-retirement type programs under which they would offer a little less in the way of current benefits to employees who are continuing to work while drawing part or all of their pension, or offering active employees a choice between receiving a current pension and continuing to accrue additional benefits. Certainly whatever extra leeway this gives employers will have to be exercised reasonably and without discriminatory intent, including the intent to propel older workers into retirement.

It is refreshing to see Washington institutions opening opportunities for creative benefit plan design, for a change.