Formula-Based Comp Systems Protected from Title VII Disparate Impact Claims

Last week, there was a new ruling affecting the financial services industry with respect to claims of compensation discrimination. A federal judge in the Southern District of New York recently held that a pay system that compensated people on the basis of actual production is protected from disparate impact claims under Title VII, irrespective of whether the pay system has a disparate impact on minorities or women and irrespective of whether the employer knows that it will have a disparate impact.

According to information provided by Weil Gotshal:

The case involved a transition "stay bonus" program that Merrill Lynch adopted in connection with the Bank of America merger. The program provided payments only to Merrill Lynch's most productive Financial Advisors, and those payments were tied in various ways to the amount of the FA's production. Plaintiff argued (a) that the protections in Title VII for production and merit-based programs do not apply if the production is infected with discrimination, because for example leads are given to men but not to women, or (b) under the express language of the statute the protection does not apply if the program is adopted with "intent to discriminate", and plaintiff argued that such intent can be inferred if the employer adopts a program knowing that there is underlying discrimination that infects the production on which the program is based."

In response to plaintiff's first argument, the court held that "a merit, seniority, or production-based compensation system is 'bona-fide' if it applies equally to all employees in the same way. Even if the compensation system perpetuates the effect of other acts of discrimination that clearly violate Title VII, as long as the compensation system itself was adopted without discriminatory intent, it is immunized under section 703(h) [of Title VII]... To the extent that other acts of discrimination in violation of Title VII affect the 'inputs' into a bone fide merit, seniority, or production-based compensation system, a plaintiff's remedy lies in challenging those other violations directly." In addressing plaintiff's second argument, the court held that "knowledge of past and even present discrimination alone does not make it plausible that defendants actually adopted the [stay bonus program] with discriminatory intent."

There are some important implications. Under the reasoning of this decision, employers would be protected from general attacks on formula-driven compensation systems. Plaintiffs would have to show that the inputs into the compensation formula were discriminatory. This changes the nature of the statistical inquiry in these matters. Rather than simply examining "compensation", the processes and metrics determining compensation would need to be studied with respect to disparate impact.