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EEOC And Age Discrimination: A New Threat To The Independence Of State And Local Retirement Plans?
Earlier this year, the California Public Employee Retirement System (CALPERS) entered into a $250 million settlement with the Equal Employment Opportunity Commission (EEOC) to settle a long standing case alleging age discrimination in the disability retirement provisions of the plan. Shortly, thereafter, however, the United States District Court in Lexington, Kentucky dismissed an action against the Commonwealth of Kentucky and the Kentucky Retirement Systems finding that the EEOC had failed to meet its burden of proof in an age discrimination case. In a related matter, the EEOC prevailed in the U. S. Court of Appeals on an age discrimination case on health care benefits against Erie County, Pennsylvania. The resulting uproar from employers threatening to drop retiree health care benefits led the EEOC to walk away from enforcement of the decision and issue rules to guide employers on the ability to make reasonable distinctions in benefit plans, even if age is a qualification for benefit.
While the results were different, the problem facing retirement systems is the same; does the EEOC have the right to regulate the design and operation of state and local government plans? In recent years, the United States Supreme Court has taken an expansive view of the rights of state government to be free from lawsuits in both state and federal courts over discrimination claims on the basis of age and disability. The court found that individuals lack the ability to sue a state under the 11th amendment of the U. S. Constitution unless the issue fell within the enforcement powers of the equal protection clause of the 14th amendment. The EEOC as a governmental entity is apparently not subject to the same limitations. Thus, where individuals could not sue plans on their own, the EEOC can act as their proxy.
In addition to 11th amendment issues, these cases also present important federalism issues under the 10th amendment. Federal courts have increasingly restricted Congress' ability under the Commerce Clause of the Constitution to regulate traditionally local activities. By finding an increasingly larger realm of local control which Congress cannot regulate, the Supreme Court seems to provide some insulation to public retirement plans from unwarranted suits. This is the reason Congress declined to include public plans under ERISA-these retirement plans represent an exercise in state sovereignty that Congress thought inappropriate under the constitution to attempt to regulate.
The EEOC, however, has taken the position in these various actions that any time age is a factor in retirement, it violates the federal age discrimination laws. This presents an on-going problem to many public retirement plans. Any time retirement issues arise, age is necessarily a factor. Many plans, for example, grant years of service in disability cases to insure a member has the equivalent of a full service disability. The closer one is to retirement, the less years of imputed service would be needed. Those closer to retirement are also usually the older employees. This is precisely what the EEOC challenged when it sued the Kentucky Retirement Systems for age discrimination. Like Erie County, the plan design was intended to provide full coverage to injured workers to enable them to receive the pension they would have received had they worked until normal retirement. The suit, however, threatened to push the employer to amend the plan for new employees to eliminate the equalization of benefits, leaving workers less protection than before.
The age discrimination laws treat disability benefits as if they were an insurance policy rather than as part of a comprehensive retirement program. As a result, governmental plans do not fit within the narrow strictures set forth in EEOC regulations. This lack of understanding of the nature of governmental plans and the ambiguities in the federal laws and regulations unduly expose plans to claims such as Kentucky faced.
Kentucky prevailed because the court recognized the benevolent nature of the plan design and found an absence of any motive to discriminate, a critical element of proof for an age discrimination claimant. As the court noted, age is a necessary part of any discussion on retirement. The next retirement system, however, may not be as fortunate.
The age discrimination laws were designed to prevent older workers from being fired because of age and to ensure opportunities to enter the labor market in mid and later life. State and local retirement plans substantially enhance the quality of those lives. Plans are open to all employees who enter the public workforce. The fiscal health of the plans, however, is at risk if well intentioned plan designs are invalidated or dropped because of fear of litigation, despite the absence of any intention to discriminate on the basis of age.
Boards of Trustees are well advised to review their plans for vulnerability to age act claims. At the same time, it is important to use the political process to encourage the EEOC to develop Erie County type regulations for retirement plans that take into account the structure and mission of those plans rather than simply targeting plans because of perceived inequity.