Forced Ranking and Age-Related Employment Discrimination

Vol. 31 No. 2

By

Tom Osborne and Laurie A. McCann are senior attorneys with AARP Foundation Litigation.

What do Ford, Goodyear, and Capital One have in common besides being among the largest businesses in the United States? All have been sued recently for age-related employment discrimination arising from a performance evaluation process known as “forced ranking” or, less flatteringly, “rank and yank.” By 2001 forced ranking systems had been adopted by 20 percent of U.S. companies, including as many as 25 percent of the Fortune 500. Although forced ranking is not a new technique, it attracted scant attention until the recent economic downturn spotlighted its use by many employers as a tool in deciding layoffs.

What Is Forced Ranking?

Forced ranking is a performance-based evaluation system in which employees are ranked against each other based on a particular scheme or design. Some companies have used a “totem pole” approach, in which employees in a group are ranked from the top down. Some have imposed quartiles, in which 25 percent of the group is placed in each of four cells and then ranked further in each cell. Others have ranked workers from best to worst along the bell-shaped curve of the normal distribution and established cut-off points for the top, middle, and bottom categories. Typically, the ranking decisions are made by managers who spend hours in meetings haggling with each another to satisfy the distribution requirements.

As implemented in 2000 at Ford, for example, according to the allegations in Siegel v. Ford Motor Co., No. 01-102583-CL (Wayne Co., Mich., Apr. 27, 2001), approximately 18,000 management employees were forceranked into three categories, with A representing the top 10 percent, B the middle 80 percent, and C the bottom 10 percent. The A group was eligible for raises and bonuses, the B’s received smaller raises and bonuses, and the C’s received nothing. A second C in the next evaluation cycle could mean immediate termination.

In 2001 Goodyear implemented a similar 10-80-10 ABC ranking system, which violated the Ohio age discrimination law according to the allegations in Jones v. Goodyear Tire & Rubber Co., No. 02-00-5090 (Summit Co., Ohio, Sept. 12, 2002). The forced ranking system implemented by Capital One, which employs over 17,000 people nationwide, is based on a seven-point performance scale. It was challenged as a violation of the federal Age Discrimination in Employment Act (ADEA) by a group of older workers employed in the company’s Richmond, Virginia, operations. Feltman v. Capital One Services, Inc., No. C.A. 3:02cv894 (E.D. Va. Richmond Division, Dec. 9, 2002).

The common denominator of all three cases is the allegation that older workers were targeted for termination and that they were, therefore, consistently ranked in the lowest category at a disproportionately high rate. By facilitating the actual or constructive discharge of its older employees, the forced ranking system allegedly enabled the employer to fulfill its purpose of achieving and maintaining a relatively younger workforce.

Forced ranking is also used by General Electric, Cisco Systems, EDS, Hewlett Packard, Microsoft, PepsiCo, Caterpillar, and Sun Microsystems, to name only a few well-known employers. The forced ranking age discrimination suits against Ford and Capital One (both of which settled) and Goodyear (which is awaiting an interim appellate decision before proceeding further in the trial court) are likely only the opening salvo in what may become a barrage of litigation by older workers challenging the practice.

Supporters: According to proponents, forced ranking identifies the best and worst performers and, by generously rewarding the top-ranked people and culling the bottom dwellers, ensures that the employer will have a dynamic, continuously improving workforce with strong loyalties to the company. Some businesspeople recommend it as the way to “jumpstart a genuine leadership development process.” Dick Grote, Forced Ranking: Jumpstart Your Development Practice, EXEC. EXCEL., July 2003, at 6. To not “manage out” the C’s, say forced ranking advocates, results in the perception that the company tolerates poor performance, thus giving the A’s an incentive to leave for the greener pastures of employers who do recognize and reward excellence. Besides, the argument goes, forced ranking “discriminates” only “in favor of the talented and energetic and against the lazy and dull. Such discrimination is not illegal.” Id. Ironically, one of the supposed models for the effective use of forced ranking was Enron Corporation.

Critics: Opponents of forced ranking believe that the system creates more problems than it solves. They argue that such quota systems don’t work for many reasons, including “flaws in the normal distribution curve approach that is used to identify poor performers, as well as limitations in human judgment. In fact, systems that force managers to cut a certain percentage of their people often don’t reveal the root causes of problems, often do not elevate performance and can ultimately be counterproductive.” The Folly of Forced Rankings, at http://news.com. com/2009-1069-950200.html. A forced ranking system often incorporates the subjectivity of department heads, who can institutionalize bias and devalue older workers. Pamela Williams, The Secret Sacking Tool, AUSTRALIAN FIN. REV., May 4, 2002, at 21. In addition to acting as a crutch for weak managers who are unwilling to confront poor performers, forced ranking can result in low morale because employees are rewarded for competing against one another instead of working collaboratively. The rankings may foster mistrust if employees believe that their rankings depend on their managers’ effectiveness as advocates or the managers’ own relationships with top executives. Even if the company and all of the employees have done well, some workers must be relegated to the lowest category. And then, of course, there is the likelihood of litigation.

Forced Ranking and Age Discrimination

Forced ranking can provide a patina of legitimacy that obscures—perhaps, in some cases, even from the decision makers themselves—the reliance on unfounded stereotypical assumptions about older workers, such as the canard that older workers are resistant to change and innovation and, therefore, cannot adapt to the virtual realities of the computerized twenty-first century workplace, whereas their younger counterparts can do so easily. In cases such as Ford, Goodyear, and Capital One, forced ranking was alleged to have been a purposeful disguise for intentional age discrimination. For example, the Siegel plaintiffs charged that Ford’s forced ranking process “was designed and implemented to eliminate through involuntary separation or constructively discharge its older employees.” Siegel complaint at ¶ 141. The Jones plaintiffs allege that Goodyear’s “use of the ABC Rating System to discriminate against the Class on the basis of age was willful, wanton, reckless and/or malicious. . . . ” Jones complaint at ¶ 115. The Feltman plaintiffs alleged that “age stereotypes which were pronounced in the Capital One culture . . . resulted in older employees being targeted for termination in the forced distributions. . . . ” Feltman complaint at ¶ 100.

In Siegel v. Ford the statistical evidence clearly reflected that older workers were placed in the C category at such an overwhelmingly greater rate than younger workers that it would have been almost impossible for Ford to make the required showing to avoid liability, i.e., that the forced ranking was job-related and consistent with business necessity. “What we’ve seen happen is that a disproportionate portion of older workers are placed in the lowperformance category, employees that have a history of being loyal, good workers,” said Megan Bonanni, a Royal Oak, Michigan, lawyer representing employees. “It’s an invitation for discrimination,” she said. “It’s designed to rid the company of older workers.” See www.freep.com/news/latestnews/pm10936_20020912.htm).

In addition to older workers, other legally protected groups have sued alleging discrimination by forced ranking. For example, in Donaldson v. Microsoft Corp., filed as a class action in U.S. District Court for the Western District of Washington, current and former female and African American employees of the world’s largest software maker alleged disparate treatment and disparate impact violations of Title VII. 205 F.R.D. 558 (2001). In Stemler v. Conoco, Inc., the plaintiffs alleged that Conoco used a forced ranking system as a basis for a 1999 layoff that discriminated against U.S. citizens. C.A. No. H-00-1150, (SD Tex.–Houston, Apr. 3, 2000). At the same time as this litigation was proceeding, two of the Stemler plaintiffs and the Office of Special Counsel of the U.S. Department of Justice brought administrative proceedings before the Executive Office for Immigration Review based on alleged citizenship discrimination and violation of the nondiscrimination provisions of the Immigration and Nationality Act, 8 U.S.C. § 1342b, arising from the same reduction in force.

Class Action

The class action litigation spawned by forced ranking systems has taken various forms. For example, Siegel v. Ford was filed in Michigan state court as a class action and alleged both disparate treatment and disparate impact age discrimination claims under Michigan’s Elliott-Larsen Civil Rights Act (ELCRA). Similarly, Jones v. Goodyear is filed as a class action in state court in Ohio and alleges both disparate treatment and disparate impact age discrimination in violation of Ohio statutory and common law. Feltman v. Capital One was filed as a collective action in federal district court in Richmond, Virginia, and alleged both disparate treatment and disparate impact violations of the ADEA. ADEA “class action” claims are filed as and must conform to the requirements for collective actions under the Fair Labor Standards Act, 29 U.S.C § 216(b). See 29 U.S.C. § 626(b).

To succeed on a disparate treatment claim under federal or state law, the plaintiff must prove that the defendant employer intentionally discriminated against him or her. In a disparate impact case, on the other hand, discriminatory intent is not an issue. Instead, the plaintiff must prove that a facially neutral employment policy or practice disproportionately affected a protected group of which he or she is a member—such as older workers in the case of the ADEA—and that the policy or practice is not justified by business necessity. Disparate treatment claims can be proved directly, like any other civil case, if the evidence is sufficient to satisfy each element of the standard civil prima facie case. Since in most cases direct evidence of discriminatory intent is lacking, plaintiffs usually invoke the McDonnell Douglas indirect method of proof to attempt to prove their case with circumstantial evidence. McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). In contrast, a disparate impact claim is generally proven by statistics showing that the facially neutral practice disproportionately affected the protected group of which the plaintiff is a member and that the protected characteristic played a statistically significant role in the termination decision. See Wright v. Southland Corp., 187 F.3d 1287 (11th Cir. 1999), which includes a detailed explanation of the proof requirements in a disparate treatment case.

Although the disparate impact theory seems ideally suited for litigating employment discrimination claims arising from forced ranking, which is, of course, statistically based, older workers (individuals age forty and older) may not bring a disparate impact claim under the ADEA in seven of the twelve federal circuits that have jurisdiction over such cases. The First, Fifth, Seventh, Tenth, and Eleventh Circuits have held that a disparate impact claim is not cognizable under the ADEA; both the Third and the Sixth Circuits have expressed “considerable doubt” regarding the viability of disparate impact claims under the ADEA. The Second, Eighth, and Ninth Circuits hold that disparate claims are cognizable under the ADEA; neither the Fourth nor D.C. Circuit has addressed the issue. Consequently, in those circuits that do not permit ADEA claims based on disparate impact, plaintiffs who feel they have been victimized by forced ranking and want to proceed under federal law are restricted to bringing their ADEA suit on the disparate treatment theory. Doing so may place the plaintiffs at a distinct disadvantage: although the statistical evidence reflecting the adverse impact of the forced ranking process on older workers may be overwhelming, the evidence of discriminatory intent, even when combined with the statistics, may be insufficient to prove the disparate treatment claim.

On the other hand, age discrimination victims in those circuits that forbid bringing disparate impact claims under the ADEA may forgo federal law claims and rely exclusively on state law, as did the Ford and Goodyear plaintiffs. The Ford plaintiffs filed their class action in Michigan, alleging both disparate treatment and disparate impact claims under the ELCRA. In its oral order denying Ford’s motion to dismiss the lawsuit, the court specifically held that disparate impact age discrimination claims are within the scope of the ELCRA. Had the Ford plaintiffs elected to file suit under the ADEA in federal (or state) court in Michigan, however, they would have been confronted with the Sixth Circuit’s decision in Lyon v. Ohio Education Association, 53 F.3d 135 (6th Cir. 1995). Although the court conceded that a disparate impact theory of age discrimination under the ADEA might be possible, it concluded that “incidental discriminatory effects arising from facially age-neutral policies are not redressable.” Given the Sixth Circuit’s considerable doubt, plaintiffs alleging such a claim likely would have faced dismissal. The Ford plaintiffs instead were able to maintain their disparate impact cause of action by relying on state law. Similarly, the trial judge in the Goodyear class action denied the defendant’s motion to dismiss the state law disparate impact claim.

Two of the cases discussed in this article have settled. On March 14, 2002, the Michigan court approved the settlement of both Siegel v. Ford and a second class action arising from Ford’s forced ranking system for $10.5 million. Six months after the Feltman complaint was filed, the suit settled, and the dismissal order was entered on June 10, 2003. Subsequently, on August 8, 2003, Krane v. Capital One Services, Inc., another ADEA action challenging Capital One’s forced ranking system and alleging age discrimination claims similar to those in Feltman, was filed by five more Richmond, Virginia, employees of Capital One. Like Feltman, the Krane plaintiffs alleged that Capital One designed its performance evaluation to “manage out a minimum of 6 percent to 10 percent of the workforce for performance reasons.” Krane v. Capital One Services, Inc., No. 3:03CV675 E.D. Va., (Richmond 2003). Further trial court proceedings in Jones v. Goodyear await appellate resolution of issues, which may dispose of the claims of some but not all plaintiffs.

The Future of Forced Ranking

Several companies that had adopted forced ranking systems in the hope that they would ameliorate the shortcomings of their previous performance evaluation systems and act as a catalyst for productivity have scrapped them in the wake of court challenges. For example, in the late 1980s, General Motors used a forced ranking system to determine who received pay raises, but abandoned it. GM, like Ford, was hit with a class action age discrimination suit. F. Alan Smith, head of Human Resources for GM at the time, recalls that its forced ranking system created ten problems for every one it solved. “It was just a mess, so we dropped it.” Mark Truby, Forced Ranking Stirs Fierce Debate, DETROIT NEWS, Apr. 29, 2001, at 10A. In July 2001, prior to the settlement of two class actions arising from its forced ranking system, Ford announced that it was abandoning the method. Similarly, in September 2002, Goodyear also ended its two-year experiment with forced ranking for salaried employees on the eve of the filing of the class action age discrimination suit.

GM and Ford are not the only companies to have abandoned forced ranking evaluation methods. A survey by Pittsburgh-based Development Dimensions International, Inc. (DDI) suggested that the use of forced ranking systems had decreased more than 300 percent since 1993. www.ddiworld.com/pdf/CPGN43.pdf. DDI found that only 39 percent of companies using forced ranking systems found them even moderately effective. Kim Clark, Judgment Day, U.S. NEWS AND WORLD REP., Jan. 13, 2003, at 31. Adding the risk of litigation arising from the use of forced ranking systems to this poor performance ought to give pause for thought to any business considering implementing such a system.

Nevertheless, about 34 percent of firms still make frequent use of forced ranking, up from 13 percent in 1997, according to DDI. www.usatoday.com/money/workplace/2003-07-22-reviews_x.htm. Despite the settlements in forced ranking cases such as Siegel and Feltman, some companies are not abandoning forced ranking, but rather taking extra precautions regarding how it is applied. Companies are reviewing the rankings to be sure there is no disparate impact on statutorily protected groups of employees. They are being careful because “plaintiffs lawyers have found the systems discriminatory (based on) age or gender,” says James Brown, a Pittsburgh-based employment lawyer, adding that “there’s no problem with ranking if it’s neutral.” www.usatoday.com/money/workplace/2003-07-22-reviews_x.htm

Although the current economy has underlined the need for businesses to place a high priority on worker performance and productivity, the prudent CEO ought to think long and hard about implementing such a performance evaluation system. Jacques Nasser, former CEO of Ford, discovered the dangers of implementing a forced ranking system the hard way. After announcing in July 2001 that Ford was abandoning its two-year experiment with forced ranking, on October 30, 2001, he became the highest-ranking older worker at Ford to be sacked.

Stats: Employment
• Number of seniors working or actively seeking work in 2000: 4.2 million (approximatley 2.5 million men, 1.8 million women)
• Percent increase in the number of age discrimination charges filed with Equal Employment Opportunity Commission, 1999 to 2003: 41%
Source: Admin. on Aging, www.aoa.gov

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