Discussion - Adverse Impact : Pre-employment Selection

Avoiding Adverse Impact

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12/30/2010

Overview

Adverse impact refers to employment practices that appear neutral but have a discriminatory

effect on a protected group. Adverse impact may occur in hiring, promotion, training and

development, transfer, layoff, and even performance appraisals. It may be found in an overall

procedure or in any step in the overall procedure. A test or selection procedure can be an

effective management tool, but no test or selection procedure should be implemented without a

thorough understanding of its effectiveness and limitations for the organization, its

appropriateness for a specific job, and whether it can be appropriately administered and scored.

Adverse impact is often used interchangeably with “disparate impact”—a legal term coined in a

significant U.S. Supreme Court ruling on disparate or adverse impact. See, Griggs v. Duke

Power Co., 401 U.S. 424, 431-2 (1971).

This article provides a definition of adverse impact and explains the differences between

disparate impact and disparate treatment. It reviews the Uniform Guidelines for Employee

Selection Procedures and the Equal Employment Opportunity Commission (EEOC)

enforcement actions, including several recent cases. A step-by-step process for determining

adverse impact is provided, along with sample calculations. The article closes with best practice

recommendations from the Center for Corporate Equality.

What Is Adverse Impact?

Adverse impact occurs when a decision, practice or policy has a disproportionately negative

effect on a protected group, even though the adverse impact may be unintentional. The Equal

Employment Opportunity Commission (EEOC) guidelines and the Uniform Guidelines for

Employee Selection Procedures define adverse impact as “a substantially different rate of

selection in hiring, promotion or other employment decision which works to the disadvantage of

members of a race, sex or ethnic group.” When adverse impact exists, an organization may be

vulnerable to charges of discrimination.

The agencies have adopted a rule of thumb under which they will generally consider any group’s

selection rate that is less than four-fifths (4/5ths) or 80 percent of the selection rate for the group

with the highest selection rate as a substantially different rate of selection. This “4/5ths” or “80

percent” rule of thumb is not intended as a legal definition, but is a practical means of keeping

the attention of the enforcement agencies on serious discrepancies in rates of hiring, promotion

and other selection decisions. See, Adverse Impact and Disparate Treatment: Two Types of

Discrimination and What are disparate impact and disparate treatment?

Background

The Supreme Court of the United States first described the disparate impact theory in 1971, in

the Griggs v. Duke Power Co., 401 U.S. 424, 431-2. Prior to the passage of the Civil Rights Act

of 1964, Duke Power Co. had a policy of segregating employees according to race. Specifically,

at its Dan River plant, African Americans were only allowed to work in the labor department,

where the jobs were among the lowest-paying positions in the company.

After Title VII of the Civil Rights Act of 1964 was passed, the company changed its policies,

adding a requirement of a high school diploma or a minimum score on an IQ test for positions in

areas other than the labor department, thus eliminating a large number of African American

applicants for positions outside the labor department. The Court found that under Title VII, if

tests disparately impact ethnic minority groups, businesses must demonstrate that such tests are

“reasonably related” to the job for which the tests are required.

Disparate Treatment

Title VII prohibits intentional discrimination based on race, color, religion, sex or national

origin. It also prohibits both disparate treatment and disparate impact discrimination. For

example, Title VII forbids a covered employer from testing the reading ability of African

American applicants or employees when the reading ability of their white counterparts is not

tested. This is called disparate treatment discrimination. Disparate treatment cases typically

address the following questions:

• Were people of a different race, color, religion, sex or national origin treated differently?

• Is there any evidence of bias, such as discriminatory statements?

• What is the employer’s reason for the difference in treatment?

• Does the evidence show that the employer’s reason for the difference in treatment is

untrue and that the real reason for the different treatment is race, color, religion, sex or

national origin?

Disparate Impact

Title VII also prohibits employers from using neutral tests or selection procedures that have the

effect of disproportionately excluding persons based on race, color, religion, sex or national

origin, if the tests or selection procedures are not “job-related and consistent with business

necessity.” This is called disparate impact or adverse impact discrimination. See, What is

“disparate impact”? Disparate impact cases typically address the following questions:

• Does the employer use a particular employment practice that has a disparate impact on

the basis of race, color, religion, sex or national origin? For example, if an employer

requires that all applicants pass a physical agility test, does the test disproportionately

screen out women? Determining whether a test or other selection procedure has a

disparate impact on a particular group ordinarily requires a statistical analysis.

• If the selection procedure has a disparate impact based on race, color, religion, sex or

national origin, can the employer show that the selection procedure is job-related and

consistent with business necessity? An employer can meet this standard by showing that

it is necessary to the safe and efficient performance of the job. The policy or practice

should therefore be associated with the skills needed to perform the job successfully. In

contrast to a general measurement of applicants’ or employees’ skills, the policy or

practice must evaluate an individual’s skills as related to the particular job in question. If

the employer shows that the selection procedure is job-related and consistent with

business necessity, then anyone who challenges the selection procedure must demonstrate

that there is a less discriminatory alternative available. For example, is another test

available that would be equally effective in predicting job performance but would not

disproportionately exclude the protected group?

Uniform Guidelines on Employee Selection Procedures

In 1978, the Civil Service Commission, U.S. Department of Labor, Equal Employment

Opportunity Commission (EEOC) and U.S. Department of Justice jointly adopted the

Uniform Guidelines on Employee Selection Procedures to establish uniform standards for the

use of selection procedures by employers and to address adverse impact, validation and record-

keeping requirements. The Uniform Guidelines document a uniform federal position in the area

of prohibiting discrimination in employment practices on the basis of race, color, religion, sex or

national origin. The Uniform Guidelines outline the requirements necessary for employers to

legally defend their employment decisions based upon overall selection processes and specific

selection procedures.

The basic principle of the Uniform Guidelines is that a selection process that has an adverse

impact on the employment opportunities of members of a race, color, religion, sex or national

origin group and thus disproportionately screens them out is unlawfully discriminatory unless the

process or its component procedures have been validated in accord with the Guidelines or the

user otherwise justifies them in accord with federal law. This principle was adopted by the

Supreme Court unanimously in Griggs v. Duke Power Co. and was ratified and endorsed by the

Congress when it passed the Equal Employment Opportunity Act of 1972, which amended

Title VII of the Civil Rights Act.

Though the Uniform Guidelines are not legislation or law, they are relied upon by courts as a

source of technical information and are typically given significant weight by the courts. The

Uniform Guidelines apply to most private employers with 15 or more employees for 20 weeks or

more a calendar year and to most employment agencies, labor organizations and apprenticeship

committees. They also apply to state and local governments with 15 or more employees. They

apply through Executive Order 11246 to contractors and subcontractors of the federal

government and to contractors and subcontractors under federally assisted construction contracts.

See, Are all employers with 15 or more employees required to follow the Uniform

Guidelines for Employee Selection Procedures, including adverse impact testing and

applicant tracking?

The Uniform Guidelines provide standards for the proper use of employment testing, including

the definition of discrimination in testing, appropriate means of validating selection procedures

that may be discriminatory, acceptable methods of establishing and implementing cutoff scores

(or pass points) on selection procedures, and the documentation of validity for selection

procedures. The Uniform Guidelines pertain to any and all selection procedures that are used as

the basis for any employment decision, including hiring, promotion, demotion, referral,

retention, licensing and certification, training and transfer.

Further, the Uniform Guidelines define selection procedures to include any measure,

combination of measures or procedure used as a basis for any employment decision. Selection

procedures, as defined by the Uniform Guidelines, include the full range of assessment

techniques, including written exams, performance tests, training programs, probationary periods,

interviews, reviews of experience or education, work samples, and physical requirements.

If the use of a particular selection procedure results in adverse impact, the employer can

eliminate the use of the procedure, thus eliminating the adverse impact. Or, if the employer

wishes to continue to use the procedure, it must demonstrate the “business necessity” of the

selection procedure– that is, a clear relationship between the selection procedure and

performance of the job. This process is known as validation.

EEOC Enforcement Actions

According to the EEOC, there has been an increase in employment testing due, in part, to post-

September 11 security concerns as well as concerns about workplace violence, safety and

liability. In addition, the large-scale adoption of online job applications has motivated employers

to seek ever more efficient ways of screening large numbers of online applicants in a non-

subjective way.

The number of discrimination charges filed with the EEOC relative to employment testing and

exclusions based on criminal background checks, credit reports and other selection procedures

reached a high point in FY 2007 at 304 charges.

Title VII permits employment tests as long as they are not “designed, intended or used to

discriminate because of race, color, religion, sex or national origin” (see, 42 USC Sec. 2000e-

2(h)). Title VII also imposes restrictions on how to score tests. Employers are not permitted to

1) adjust the scores, 2) use different cutoff scores, or 3) otherwise alter the results of

employment-related tests on the basis of race, color, religion, sex or national origin.

Several recent EEOC enforcement actions have specifically focused on testing:

• EEOC v. Ford Motor Co. and United Automobile Workers of America involved a court-

approved settlement agreement on behalf of a nationwide class of African Americans

who were rejected for an apprenticeship program after taking a cognitive test known as

the Apprenticeship Training Selection System (ATSS). The ATSS was a written

cognitive test that measured verbal, numerical and spatial reasoning in order to evaluate

mechanical aptitude. Although it had been validated in 1991, the ATSS continued to have

a statistically significant disparate impact by excluding African American applicants.

Less discriminatory selection procedures were subsequently developed that would have

served Ford’s needs, but Ford did not modify its procedures. In the settlement agreement,

Ford agreed to replace the ATSS with a selection procedure to be designed by a jointly

selected industrial psychologist. The new procedure would predict job success and reduce

adverse impact. In addition, Ford paid $8.55 million in monetary relief.

• In EEOC v. Dial Corp., women were disproportionately rejected for entry-level

production jobs because of a strength test. The test had a significant adverse impact on

women: prior to the use of the test, 46 percent of hires were women; after use of the test,

only 15 percent of hires were women. Dial defended the test by noting that the test

closely resembled the job and the use of the test had resulted in fewer injuries to hired

workers. However, through expert testimony, the EEOC established that the test was

considerably more difficult than the job and that the reduction in injuries occurred two

years before the test was implemented, most likely due to improved training and better

job rotation procedures. On appeal, the U.S. Court of Appeals for the 8th Circuit upheld

the trial court’s finding that Dial’s use of the test violated Title VII under the disparate

impact theory of discrimination.

Determining Adverse Impact

The Uniform Guidelines have adopted a practical means of determining adverse impact in a

selection procedure. This “rule of thumb” established by the Uniform Guidelines is known as the

“4/5ths” or “80 percent” rule. To determine whether a selection procedure violates the “4/5ths”

or “80 percent” rule, the selection rate (or passing rate, where applicable) for the group with the

highest selection rate is compared to the selection rates for the other groups. If any of the

comparison groups do not have a passing rate equal to or greater than 80 percent of the passing

rate of the highest group, then it generally is held that evidence of adverse impact exists for the

particular selection procedure.

Four-step process

A four-step process determines adverse impact.

1. Calculate the rate of selection for each group (divide the number of persons selected from a

group by the number of applicants from that group).

2. Determine which group has the highest selection rate. For positive personnel transactions, the

highest rate is the most advantageous. For negative personnel transactions, the most favored

group has the lowest rate.

3. Calculate the impact ratios by comparing the selection rate for each group with that of the

highest group (divide the selection rate for a group by the selection rate for the highest group).

4. Observe whether the selection rate for any group is substantially less (i.e., usually less than

4/5ths or 80 percent) than the selection rate for the highest group. If it is, adverse impact is

indicated in most circumstances.

Calculations examples

For example:

EEO

Group

Applicants Hires Selection Rate

and Percent

Hired

Caucasian 80 48 48/80 or 60%

Latino 40 12 12/40 or 30%

A comparison of the Latino selection rate (30 percent) with the Caucasian selection rate (60

percent) shows that the Latino rate is 30/60, or one-half (50 percent) of the Caucasian rate. Since

one-half (50 percent) is less than 4/5ths (80 percent) adverse impact is usually indicated. Further

examples of how to calculate impact ratio are shown below for both hiring and termination.

Step 1: Impact Ratio for Hiring—Calculate the Rate of Selection

EEO

Group

Applicants Hires Percent

Hired

African

American

108 25 23

Latino 78 24 31

Caucasian 325 114 35

The group with the highest selection rate is Caucasian, with 35 percent. Next, calculate the

impact ratio.

Step 2: Impact Ratio for Hiring—Calculate the Impact Ratio

EEO

Group

Percent

Hired

Divide Impact

Ratio

Adverse

Impact?

Caucasian 35

African

American

23 23/35 66% Yes; it is

less than

80%

Latino 31 31/35 88% No; it is

more

than 80%

Adverse impact is determined first for the overall selection process for each job. If the overall

selection process has an adverse impact, the adverse impact of the individual selection procedure

should be analyzed. If the employer continues to use any selection procedures that have an

adverse impact, the employer is expected to have evidence of these procedures’ validity

satisfying the Guidelines.

In the next example, the impact ratio for termination is calculated for a group of terminated

employees.

Step 1: Impact Ratio for Termination—Determine the Group With the Lowest Rate of

Selection

EEO

Group

Employees Selected for

Termination

Percent

Selected

Males 162 12 7

Females 178 33 19

Clearly, the group with the lowest selection rate is male, with 7 percent. Next, calculate the

impact ratio. Remember, for negative actions, place the most favored group’s rate in the

numerator position.

Step 2: Impact Ratio for Termination—Calculate the Impact Ratio for Each Group

EEO

Group

Percent

Selected for

Termination

Divide Impact

Ratio

Adverse

Impact?

Male 7

Female 19 7/19 36% Yes; it is

less than

80%

Drawbacks to the use of the impact ratio

A major drawback to using the impact ratio is that it is subject to sampling errors when the

sample size and selection rates are small. Employers should note that there is language in the

Uniform Guidelines that allows for more rigorous statistical tests (e.g., Chi Square or Fisher’s

exact test). In addition, depending on the distribution of the data, one method may yield evidence

of adverse impact while another may not. Another key point to remember is that after first

applying the adverse impact analysis to the overall selection process, it may be applied to each

individual step in the process as well if adverse impact is found in the overall selection process.

The analysis may be applied to any groups, such as male/female, over/under age 40, etc.

Requirement for validation and continuous test monitoring

Employers should ensure that employment tests and other selection procedures are properly

validated for the positions and purposes for which they are used. The test or selection procedure

must be job-related and its results appropriate for the employer’s purpose. While a testing

vendor’s documentation supporting the validity of a test may be helpful evidence, the employer

is still solely responsible for ensuring that its tests are valid under the Uniform Guidelines.

If a selection procedure screens out a protected group, the employer should determine whether

there is an equally effective alternative selection procedure that has less adverse impact and, if

so, adopt the alternative procedure. For example, if the selection procedure is a test, the employer

should determine whether another test would predict job performance but not disproportionately

exclude the protected group.

Best Practice Recommendations

The Center for Corporate Equality issued a 98-page Technical Advisory Committee Report

on September 15, 2010, containing recommendations on best practices in how to conduct

adverse impact analyses based on input from 70 of the nation’s top experts in adverse impact

analyses. It has been suggested that any HR professional who performs affirmative action plans

and adverse impact analyses can use the report as a “field manual.” See, Report Reviews Best

Practices in Adverse Impact Analyses.

Among its numerous findings, the report concluded that the 80-percent rule is not a very good

analysis “and may only be computed today because the Uniform Guidelines on Employee

Selection Procedures still exist.”

Legal and policy issues

The following themes emerged from the report’s section on legal and policy issues related to

adverse impact analyses:

• When internal and external job seekers apply together for the same requisition, it is

reasonable to analyze them together to evaluate the impact of the selection process.

However, if they are not being considered simultaneously, it is reasonable to keep them

as two different pools for analysis.

• Although the statistical methodologies used for a disparate impact and disparate

treatment or practice may be the same, the material facts of the case and the ultimate

burden of proof are very different.

• Actionable adverse impact is difficult to define in the abstract. Context has to be taken

into account before one can feel confident that the observed differences in selection rates

are actionable under the law.

• Context always matters when making a decision on whether applicant data can

reasonably be aggregated. Aggregating data across multiple locations may be appropriate

if the selection process is standardized and applied consistently from one location to

another.

• A statistically significant disparity for the “total minority” aggregate without a statistical

indicator for a particular protected class (e.g., black, white, Hispanic, Asian) is not legally

actionable impact in most situations.

Keep in mind that anything used to make a selection decision may be considered a test and

should be monitored for adverse impact. If impact is identified, the selection process should be

validated in accordance with the Uniform Guidelines.

Other recommendations

Other recommendations from the report include:

• Organizations should not guess the gender or race of applicants who do not self-identify

their race and/or gender. To be considered an applicant in an adverse impact analysis, a

job seeker must meet the following five criteria: express an interest in an open position

with an organization, follow an organization’s rules for applying properly, meet the basic

qualifications for the position, actually be considered by the organization and not

withdraw from the application process.

• Applicants who submit more than one application for an open position should be counted

only once in the adverse impact analysis.

• Applicants who are offered a job should be counted as a selection regardless of whether

they accept the offer.

• Measures of statistical and practical significance should be included in determining the

existence of adverse impact.

• There are several measures of statistical significance that can be used to determine

adverse impact. The appropriateness of any method is a function of the way in which

employment decisions are made.

• The decision to aggregate data across jobs, locations or requisitions should be made after

considering the degree of structure in the selection process as well as the numerical and

demographic similarity of the locations and requisitions.

There are important differences in pattern or practice scenarios and adverse impact. Disparity

analyses may play important roles in both scenarios, but care should be taken to understand the

employment process being analyzed.

Acknowledgement— This article was prepared for SHRM Online by the SHRM Knowledge

Center staff.

Publication Note—This treatment was first published in December 2010. SHRM staff will

update it periodically as developments in the Staffing Management Discipline warrant. For the

most recent developments, see the Staffing Management Discipline and articles archived under

specific Affirmative Action and Equal Employment Opportunity topics. Notify SHRM of

broken links or concerns about the content by e-mailing [email protected].