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Defenses to Pay Discrimination Claims Under Section 703(h) of Title VII

Employers frequently design their compensation programs to provide increased compensation to employees based on differences in production or merit. For example, employers in the business of producing widgets quite appropriately will seek to maximize their profits by compensating employees who produce a higher number of widgets more generously than employees who produce fewer widgets. Similarly, employers in service businesses frequently will compensate employees who deliver higher quality service to customers more generously than employees who deliver service of lesser quality. In enacting Title VII, Congress recognized that such merit- or production-based compensation systems are socially desirable, and accordingly immunized such systems from discrimination claims under Title VII with only limited exceptions.

Section 703(h) of Title VII of the Civil Rights Act of 1964 embodies this Congressional intent by providing that “[i]t shall not be an a unlawful employment practice . . . to apply different standards of compensation, or different terms, conditions, or privileges of employment pursuant to a bona fide seniority or merit system, or a system which measures earnings by quantity or quality of production [when] such differences are not the result of an intention to discriminate because of race, color, religion, sex, or national origin.” 42 U.S.C. § 2000e-2(h). Although this provision has been part of Title VII since its enactment in 1964, courts have infrequently addressed the scope of employers’ defenses to claims of discrimination arising from the application of merit- or production-based compensation systems.

Congressional Intent

Congress included Section 703(h) in Title VII in order to exempt merit- or production-based compensation systems from most discrimination claims otherwise available under Title VII. Legislative history reflects that Congress anticipated that legitimate “merit, or other incentive systems[s],” might result in less pay to members of particular protected classes. See 110 Congr. Rec. 10, 12723 (1964). Congress intended to protect these employment practices “unless it is shown that the employer was intending to discriminate for or against one of the [protected] groups.” Id.

The legislative history for a similar provision in the Equal Pay Act (“EPA”), 29 U.S.C. § 206(d), on which Section 703(h) was modeled, confirms that Congress understood that merit- and production-based systems need not result in equal compensation amounts being paid to employees grouped by their respective sexes. “[M]easur[ing] either the quantity or quality of production or performance can result in far greater gross earnings by one person compared to another, even though both are technically doing the same type of work.” S. Rep. No. 88-176, at 4 (1963); EEOC v. Aetna Ins. Co., 616 F.2d 719, 725 (4th Cir. 1980). The legislative history goes on to state that, “obviously, such systems which measure quantity or quality of production or performance will be valid exceptions to the equal-pay requirements.” S. Rep. No. 88-176, at 4.

Unlike its counterpart in the EPA, Section 703(h) does not operate as an affirmative defense. See Lorance v. AT&T Techs., Inc., 490 U.S. 900, 908-09 (1989). Accordingly, plaintiffs must affirmatively establish as part of their prima facie cases that the employer’s practice falls outside the scope of Section 703(h), and an “actual intent to discriminate must be proved.” Id. (quoting Am. Tobacco Co. v. Patterson, 456 U.S. 63, 65 (1982)). Otherwise, there is no claim for discrimination.

Merit- or Production-Based Systems

Section 703(h) defines a production-based system as a system that measures earnings by quantity or quality of production. The statute does not define merit-based systems, but courts have held that a compensation program is merit-based where it consists of an organized and structured procedure with systematic evaluations under predetermined criteria. For example, in Aetna, 616 F.2d at 725, the court held that a mathematical matrix for awarding compensation was a “merit system.” See also, Scott v. Dallas County Hosp. Dist., 2003 U.S. Dist. LEXIS 6744, at *5-6 (N.D. Tex. Apr. 21, 2003). Similarly, in Gerbush v. Hunt Real Estate Corp., 79 F. Supp. 2d 260, 264 (W.D.N.Y. 1999), the court found that tying salaries to branch revenues and awarding bonuses for exceeding predicted revenue levels was a “merit system.” Further, in Urrutia v. Valero Energy Corp., 1988 U.S. Dist. LEXIS 16715 (W.D. Tex. Dec. 12, 1988), the court held that awarding compensation based on objective, job-related criteria and evaluations was a “merit pay system.” See also, Goodman v. Merrill Lynch, 2010 WL 1404155 (S.D.N.Y. Apr. 6, 2010).

Likewise, courts have found that programs that do not meet the guidelines described above are not Section 703(h) merit systems. For example, in Morgado v. Birmingham-JeffersonCounty Civil Def. Corps, 706 F.2d 1184, 1188 (11th Cir. 1983) the Court stated that “a written set of job descriptions, even if those descriptions are regularly evaluated, is not a ‘merit system,’ if the described set of positions present no means or order-“system”-of advancement or reward for merit.” In that case the plaintiff-employee claimed that she had been paid less than men who were similarly situated, despite having different job titles. The defendant-employer sought to defend the wage differential based upon Section 703(h), and pointed to its use of written job descriptions, along with reviews of the descriptions by employees and by independent consulting firms. While the court did not infer from the descriptions any intent to discriminate, the court concluded that the mere existence of written job descriptions, which state the various jobs’ pay, no matter how methodically compiled, did not constitute a merit system, and did not justify the pay differential between job titles. See also, Maxwell v. City of Tucson, 803 F.2d 444, 447 (9th Cir. 1986) (same). In Grove v. Frostburg Nat. Bank, 549 F. Supp. 922, 934 (D.C. Md. 1982), the court held that the system for evaluating employees for raises was not a merit system, because it was neither organized nor structured, and no systematic evaluation using predetermined criteria was made. The decision-maker could not recall whether he had consulted with department supervisors at the end of each year concerning individual employees, and his testimony indicated that the factors that influenced his pay decisions were not uniformly applied, and he admitted that the primary criterion was his “gut feeling” about each employee. Id.

“Intent” Under Section 703(h)

If the application of a merit- or production-based compensation system results in a disparity between the compensation paid to employees in a protected category as compared to other employees, employees have argued that the disparity alone may provide the basis of a cause of action for employment discrimination under Title VII. Courts generally have rejected such claims, and have held that to sustain a claim under Title VII, a plaintiff must demonstrate that the employer adopted the system with an intent to discriminate.

Courts have routinely rejected at least two types of evidence offered by plaintiffs in assessing whether there exists a reasonable inference of intent to discriminate in the adoption of a merit or production based compensation system: (1) past discrimination or discrimination in other practices that the plaintiffs argue are “inputs” to the merit- or production-based system; and (2) alleged knowledge of a disparate impact caused by a bona fide merit- or production-based system.

Allegedly Discriminatory Inputs

When examining whether a Section 703(h) system has a discriminatory purpose, courts distinguish between challenges to the system itself and “challenges to other discriminatory conduct that in turn manipulates the system to the detriment of” protected class members. Larkin v. Pullman-Standard Div., Pullman, Inc., 854 F.2d 1549, 1576 (11th Cir. 1988), vacated on other grounds by Pullman-Standard, Inc. v. Swint, 493 U.S. 929 (1989). A Section 703(h) system cannot be attacked merely because it allegedly perpetuates discrimination in other employment practices. Int’l Brotherhood of Teamsters v. United States, 431 U.S. 324, 347-48 (1977). When other practices, such as “hiring, assignment, transfer and promotion policies,” are allegedly discriminatory, plaintiffs may obtain “all appropriate relief as a direct remedy for [that] discrimination.” Id.

To meet the requirements of Section 703(h), a plaintiff must establish “that the [§703(h)] system itself was negotiated or maintained with an actual intent to discriminate.” Larkin, 854 F.2d at 1576. Any purported evidence regarding other practices does not relate “directly to [the employer’s] intent regarding the system,” but “tends to prove instead that [the employer] engaged in a number of other, separate discriminatory practices, and . . . the Supreme Court has required us to keep such distinctions in mind.” Id. at 1577. For example, if an employer uses a commission-based system to compensate its employees, but discriminates on the basis of a protected category in terms of the customers it steers to its employees, the commission-based system itself is protected under Section 703(h), but the affected employees would have a claim for discrimination in the steering of customers, which lowered the commissions they could earn under the terms of the Section 703(h) protected system. The application of the Section 703(h) system may be a measure of damages for discrimination in terms of the alleged steering of customers, but existence and application of the commission-based system itself would not be grounds for liability.

Accordingly, allegations of past discrimination and the “inputs” into a merit- or production-based bonus program cannot serve as the basis for an attack against a Section 703(h) protected pay system.

Knowledge of a Disparate Impact

Employees have sought to surmount the bar of Section 703(h) by arguing that an employer’s mere awareness of a disparate result caused by a merit- or production-based system is sufficient to establish the necessary intent to discriminate in the adoption of the system itself that would meet the requirements of Section 703(h). The Supreme Court and several circuit courts have rejected the argument that knowledge of a disparity is tantamount to intentional discrimination. In Personnel Administrator of Massachusetts v. Feeney, 442 U.S. 256, 279 (1979), the Supreme Court held that a veterans-preference program, which bestowed 97% of its benefits on men, did not constitute discrimination because knowledge that a program disfavors women is not akin to an intent to disfavor women. The Court further stated that “intent” means doing something because of, rather than in spite of or with indifference to the prohibited characteristic. Numerous courts have reached the same conclusion in scrutinizing plaintiffs’ claims under Section 703(h). See NAACP v. Detroit Police Officers Ass’n, 900 F.2d at 909 (6th Cir. 1990) (holding that an employer who “knew that enforcement of the seniority plan would have a discriminatory impact on newly hired black officers” could not be liable under Title VII because application of the seniority plan was “congressionally immunized by §703(h) and by the decisions of the Supreme Court.”); Shelford v. N.Y. State Teachers Ret. Sys., 889 F. Supp. 81, 88 n.2 (E.D.N.Y. 1993) (“The only factual allegations offered by plaintiffs in their complaint deal with the system’s purported disparate impact on women which, of course, is not sufficient to foreclose recourse to the protection afforded to facially neutral seniority systems afforded under § 703(h).”).

The Seventh Circuit has explained that “intent as awareness of consequences” cannot suffice, because demonstrating a discriminatory purpose requires more. Am. Nurses’ Ass’n v. Ill., 783 F.2d 716, 722 (7th Cir. 1986) (internal quotes and citation omitted). Instead, the “particular course of action” must have been “selected or reaffirmed. . .at least in part because of, not merely in spite of, its adverse effects on an identifiable group.” Id. (internal quotation marks omitted); see Day v. Patapsco & Back Rivers R.R. Co., 504 F. Supp. 1301, 1310 (D. Md. 1981) (applying this standard to §703(h)).

Conclusion Many employers use merit- or production based systems to evaluate and reward employees, and frequently are sued based on the application of such systems. In the past, employers may have overlooked the possibility of relying on Section 703(h) in defending against claims of employment discrimination based upon the application of such systems. Employers should consider arguments for dismissal of such claims based on Section 703(h).

Section 206(d) precludes employers from paying wages at a rate less than is paid “to employees of the opposite sex . . . for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions, except where such payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex.” 29 U.S.C. §206(d)(1).

Weil, Gotshal & Manges LLP was one of two law firms representing Merrill Lynch in this matter.

Reprinted with permission from August 3, 2009 edition of the New York Law Journal © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

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