“Retention Raises” May Be Unlawful Employment Discrimination, Says Federal Appeals Court

An opinion from the Ninth Circuit Court of Appeals earlier this year, Freyd v. Oregon, clarifies what may constitute unintentional, but still illegal, discrimination under federal anti-discrimination laws. This ruling on the use of “retention raises” could have a significant impact in many corporate settings as well, particularly since this same analysis should apply to “retention bonuses.”

“Disparate Impact” Claims Under Title VII

Under Title VII of the Civil Rights Act of 1964, a facially neutral employment policy may have an unlawful “disparate impact” if its effects are disproportionately felt by members of a specific sex, race, color, religion, or national origin. 42 U.S.C §2000e-2(k)(1)(A)(i).

To succeed in a Title VII disparate income claim, a plaintiff must:

• establish a prima facie case of disparate impact, and

• show that the policy was not “job-related” or justified by “business necessity.”

Background Of The Freyd Case

Plaintiff Jennifer Freyd is a Professor of Psychology at the University of Oregon. She filed her complaint in court alleging that the University was paying her substantially less – up to $42,000 annually – than four of her male colleagues of equivalent rank and seniority. Freyd’s suit included several causes of action, including a claim under Title VII that the University’s policy had a disproportionate impact on the basis of sex.

In 2016, Freyd’s department conducted a self-study in which it observed that the differential in pay between male and female faculty members was likely the result of “retention raises.” The University had a practice of negotiating a higher salary for professors who were being courted by outside institutions. According to the department’s findings: “Faculty who have not pursued multiple outside offers across time, have fallen progressively and significantly behind in salary. In fact, when we control the number of years since the last major hiring/retention negotiation, the gender difference completely disappears.”

Freyd maintained that out of 20 recent retention negotiations within the department, only four involved female faculty members. Of those four, only one negotiation was successful.

Her suit alleged that the University’s retention negotiation policy had an unlawful discriminatory impact on the basis of sex. She asserted, among other things, that:

• the University enters into fewer negotiations with female faculty members; and

• negotiations with female faculty members are less likely to be successful.

In essence, Freyd claimed that, for reasons related to gender, female faculty members were less likely to seek, receive, or consider outside offers. Consequently, Freyd alleged that the University’s retention negotiation policy disproportionately favored male faculty members, putting female faculty members at a relative disadvantage.

In 2019, the U.S. District Court for the District of Oregon granted the University’s motion for summary judgment on all of Freyd’s claims, which she appealed.

The Appellate Court’s Ruling

On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the District Court’s grant of summary judgment on several key issues, including Freyd’s Title VII disparate impact claim.

Establishing A Prima Facie Case Of Disparate Impact Discrimination

Addressing Freyd’s evidence, the Court reviewed the “four-fifths rule,” a rule of thumb developed by the Equal Employment Opportunity Commission (EEOC). Under this analysis, “a selection practice is considered to have a disparate impact if it has a selection rate for any race, sex, or ethnic group which is less than four-fifths (4/5) (or eighty percent) of the rate of the group with the highest rate.”

The Court also noted that no “bright line” exists which dictates when a sample is large enough to build a case. Despite Freyd’s limited data set, the Court felt it could be sufficient to build a case of disparate impact.

Withstanding The University’s Business Necessity Defense”

The Ninth Circuit also overruled the District Court regarding the University’s affirmative defense.

The Court first addressed whether retention raises were truly a “business necessity.” They overturned summary judgment on this issue for two reasons:

1. the conflicting evidence on whether the policy was needed to retain talented professors, and

2. Freyd was not challenging the practice of retention raises, but rather the practice of giving retention raises without increasing the salary of comparable faculty members.

Additionally, Freyd offered a potentially viable alternative policy. Freyd had proposed that the University provide salary adjustments to similarly-tenured professors when one receives a retention raise. The University disputes the viability of such a program, but the Court nevertheless indicated that it could be decided in Freyd’s favor even if the University establishes a business necessity defense.

Takeaways

Freyd’s case—which is directly applicable in C-suite scenarios as well—illustrates important principles about what is necessary to prevail on a claim of disparate impact under Title VII.

In order to prove disparate impact, a plaintiff must show:

•  that the impact of a policy disproportionately falls on one protected group, and

• that the policy is not “job-related” or not justified by “business necessity.”

When showing that an employer’s policy creates a disproportionate impact, the statistical significance of quantitative evidence is important. However, no established bright line exists for when statistical evidence is sufficient to constitute a prima facie case of disparate impact. Tools like the “four-fifths rule” are helpful in determining whether a disparity is meaningful enough to prove an unlawful adverse impact in spite of a limited sample.

If a prima facie case is met, an employer must prove that the neutral employment policy is:

• job-related, and

• a business necessity

Even if the employer meets this burden, a plaintiff may still prevail by showing that the employer has declined to adopt a less discriminatory alternative policy that would achieve their goals.

This decision should prompt a fresh look at how “retention raises” are used not just in academia but in corporate settings as well.

Oscar Heanue contributed to this article.