When Guidant Corp. decided to lay off more than 700 of its 8,700 employees in 2004, the company no doubt thought it was insulated against potential age discrimination complaints by a severance package that required employees to sign a release of claims.

It didn't turn out that way. In July 2007 the 8th Circuit declined to hear an appeal by Guidant (now Boston Scientific Corp.) of a Minnesota district court decision that invalidated the releases, allowing an age discrimination claim by 59 former Guidant employees to proceed.

The case brought into focus important issues for employers as the collision of two major forces in corporate America–an aging workforce and a wave of restructurings–propels a growing number of age discrimination class actions.

Plaintiffs formerly used the Age Discrimination in Employment Act (ADEA) primarily in individual cases alleging failure to hire or discriminatory disciplinary action–cases that were difficult for them to prove. They're now filing more class actions following Reductions in Force (RIFs), using statistical evidence to demonstrate a disproportionate impact on workers over age 40. And what used to be an employer's best preventative strategy–tying severance benefits to release of claims–is under attack by the plaintiffs' bar.

“These age suits are becoming more prevalent and more difficult to defend,” says Andrew Prescott, partner in Nixon Peabody. “Given the demographic factors of an aging workforce, the potential for a problem of age discrimination arising in a RIF is very likely.”

Uphill Climb

Defense attorneys who try RIF-related age discrimination cases start with an uphill climb because juries sympathize with the plaintiffs. They also recognize that older workers will have a tough time finding new jobs.

“Jurors can identify with the plaintiffs because everyone knows what it means to be old–they see themselves or their father or their grandfather,” says Jane McFetridge, partner in Fisher & Phillips.

Plaintiffs have another edge because demographics work in their favor. Because the median age of the U.S. workforce is over 40, RIFs usually include large numbers of age-protected workers. And because RIFs are driven by the need to cut costs, well-compensated people–usually older workers–often are targeted for layoff.

The ADEA provides an exception if employers can show an employment action was based on “reasonable factors other than age.” The problem is that defense attorneys often have a tough time explaining RIF decisions to juries.

“The employer is put in the position of explaining the complex process behind a RIF in a way that convinces the jury that the decision was not motivated by age but on other factors,” Prescott says. “That's not an easy thing to do.”

Plaintiffs also point to stereotypes that can undermine an employer's defense. For example, older workers become more vulnerable to layoffs if employers don't offer them retraining opportunities because they think “you can't teach an old dog new tricks.”

“That may cause a problem for the defense in explaining why it failed to take steps that would have lessened the impact on older workers,” Prescott says.

Older workers often have a long history of good evaluations, which bolster their case. McFetridge says failure to document performance problems and conduct reviews that distinguish strong from weak performers is a major impediment in defending a RIF age case.

“The employer starts out behind the eight ball in a bunch of ways you can't do anything about,” says Joseph Schmitt, partner in Halleland Lewis Nilan & Johnson. “One thing you can do is get enforceable releases.”

Release Confusion

Schmitt says that's why Guidant probably thought it would be easy to dispose of the lawsuit the severed employees filed.

Joseph Pagliolo, who refused to sign a release of claims in return for severance, filed the suit in March 2006 along with 58 other former Guidant employees who signed the release and received severance benefits. The company provided the dates of birth and job titles of those selected for termination to comply with provisions of the Older Workers Benefit Protection Act (OWBPA). Pagliolo, an electrical engineer who was 56 when the RIF occurred, used the birth dates to claim the RIF disproportionately affected employees over 40.

When Guidant asked the court to dismiss the claims of the plaintiffs who had signed releases and received benefits, the court found the releases violated the OWBPA. Among Judge Donovan Frank's findings: Guidant included in the list of employees selected for termination nearly 200 people who found other jobs within the company after the company generated the RIF materials but before the termination day. In effect the court punished Guidant for allowing employees to transfer into different jobs rather than face unemployment.

“This decision is flat out wrong,” Schmitt says. “The fact that someone decided to hire them for another position doesn't mean they weren't selected for termination. He's created a terrible dilemma for employers.”

Schmitt says that to comply with Frank's interpretation of the OWBPA, employers would have to create a new list of employees every time someone in the initial layoff group accepted a different job–and the rest of the terminated employees would get another 45 days to decide whether to accept the severance agreement.

“Or they could prohibit employees from applying for other jobs in the company, but that's a result no one–not even the plaintiffs' bar–would want,” Schmitt adds.

Frank also ruled that the company erred in defining the group considered for termination to include almost all U.S. employees, rather than only those in specific business units. And he found that providing dates of birth–a common practice among employers–didn't comply with the requirement to list ages.

Sweeten the Pot

The issues raised in the Pagliolo v. Guidant decision are among several arising from recent cases addressing OWBPA requirements for termination release materials. As a first step toward insulating against an age claim, employers should review their release materials through the lens of varying court interpretations of the required information, says Michael Gray, partner in Jones Day.

“A lot of GCs are using old forms that they think are good but are just wrong,” Gray says. “They've got to take a hard look because the law is changing on a monthly or quarterly basis.”

At the same time, employers need to carefully handle the RIF to avoid liability in the event the releases are thrown out in court. Schmitt advises doing an adverse impact analysis early in the process so changes can be made if the analysis shows disproportionate impact on older workers.

“It's astonishing how many employers still don't do that,” he says.

Schmitt also recommends sweetening the pot for older workers, offering extra weeks of severance pay for those 40 and above and even more for those over age 50. The EEOC recently issued new regulations clarifying that it is legal to offer better benefits to older workers, even if the younger workers are over 40 years old.

“The best way to resolve potential claims of discrimination is at the front end,” Schmitt says. “The employee has the money he needs to make the transition, and the employer has the certainty that he won't have to go through the difficulty of a lawsuit.”

When Guidant Corp. decided to lay off more than 700 of its 8,700 employees in 2004, the company no doubt thought it was insulated against potential age discrimination complaints by a severance package that required employees to sign a release of claims.

It didn't turn out that way. In July 2007 the 8th Circuit declined to hear an appeal by Guidant (now Boston Scientific Corp.) of a Minnesota district court decision that invalidated the releases, allowing an age discrimination claim by 59 former Guidant employees to proceed.

The case brought into focus important issues for employers as the collision of two major forces in corporate America–an aging workforce and a wave of restructurings–propels a growing number of age discrimination class actions.

Plaintiffs formerly used the Age Discrimination in Employment Act (ADEA) primarily in individual cases alleging failure to hire or discriminatory disciplinary action–cases that were difficult for them to prove. They're now filing more class actions following Reductions in Force (RIFs), using statistical evidence to demonstrate a disproportionate impact on workers over age 40. And what used to be an employer's best preventative strategy–tying severance benefits to release of claims–is under attack by the plaintiffs' bar.

“These age suits are becoming more prevalent and more difficult to defend,” says Andrew Prescott, partner in Nixon Peabody. “Given the demographic factors of an aging workforce, the potential for a problem of age discrimination arising in a RIF is very likely.”

Uphill Climb

Defense attorneys who try RIF-related age discrimination cases start with an uphill climb because juries sympathize with the plaintiffs. They also recognize that older workers will have a tough time finding new jobs.

“Jurors can identify with the plaintiffs because everyone knows what it means to be old–they see themselves or their father or their grandfather,” says Jane McFetridge, partner in Fisher & Phillips.

Plaintiffs have another edge because demographics work in their favor. Because the median age of the U.S. workforce is over 40, RIFs usually include large numbers of age-protected workers. And because RIFs are driven by the need to cut costs, well-compensated people–usually older workers–often are targeted for layoff.

The ADEA provides an exception if employers can show an employment action was based on “reasonable factors other than age.” The problem is that defense attorneys often have a tough time explaining RIF decisions to juries.

“The employer is put in the position of explaining the complex process behind a RIF in a way that convinces the jury that the decision was not motivated by age but on other factors,” Prescott says. “That's not an easy thing to do.”

Plaintiffs also point to stereotypes that can undermine an employer's defense. For example, older workers become more vulnerable to layoffs if employers don't offer them retraining opportunities because they think “you can't teach an old dog new tricks.”

“That may cause a problem for the defense in explaining why it failed to take steps that would have lessened the impact on older workers,” Prescott says.

Older workers often have a long history of good evaluations, which bolster their case. McFetridge says failure to document performance problems and conduct reviews that distinguish strong from weak performers is a major impediment in defending a RIF age case.

“The employer starts out behind the eight ball in a bunch of ways you can't do anything about,” says Joseph Schmitt, partner in Halleland Lewis Nilan & Johnson. “One thing you can do is get enforceable releases.”

Release Confusion

Schmitt says that's why Guidant probably thought it would be easy to dispose of the lawsuit the severed employees filed.

Joseph Pagliolo, who refused to sign a release of claims in return for severance, filed the suit in March 2006 along with 58 other former Guidant employees who signed the release and received severance benefits. The company provided the dates of birth and job titles of those selected for termination to comply with provisions of the Older Workers Benefit Protection Act (OWBPA). Pagliolo, an electrical engineer who was 56 when the RIF occurred, used the birth dates to claim the RIF disproportionately affected employees over 40.

When Guidant asked the court to dismiss the claims of the plaintiffs who had signed releases and received benefits, the court found the releases violated the OWBPA. Among Judge Donovan Frank's findings: Guidant included in the list of employees selected for termination nearly 200 people who found other jobs within the company after the company generated the RIF materials but before the termination day. In effect the court punished Guidant for allowing employees to transfer into different jobs rather than face unemployment.

“This decision is flat out wrong,” Schmitt says. “The fact that someone decided to hire them for another position doesn't mean they weren't selected for termination. He's created a terrible dilemma for employers.”

Schmitt says that to comply with Frank's interpretation of the OWBPA, employers would have to create a new list of employees every time someone in the initial layoff group accepted a different job–and the rest of the terminated employees would get another 45 days to decide whether to accept the severance agreement.

“Or they could prohibit employees from applying for other jobs in the company, but that's a result no one–not even the plaintiffs' bar–would want,” Schmitt adds.

Frank also ruled that the company erred in defining the group considered for termination to include almost all U.S. employees, rather than only those in specific business units. And he found that providing dates of birth–a common practice among employers–didn't comply with the requirement to list ages.

Sweeten the Pot

The issues raised in the Pagliolo v. Guidant decision are among several arising from recent cases addressing OWBPA requirements for termination release materials. As a first step toward insulating against an age claim, employers should review their release materials through the lens of varying court interpretations of the required information, says Michael Gray, partner in Jones Day.

“A lot of GCs are using old forms that they think are good but are just wrong,” Gray says. “They've got to take a hard look because the law is changing on a monthly or quarterly basis.”

At the same time, employers need to carefully handle the RIF to avoid liability in the event the releases are thrown out in court. Schmitt advises doing an adverse impact analysis early in the process so changes can be made if the analysis shows disproportionate impact on older workers.

“It's astonishing how many employers still don't do that,” he says.

Schmitt also recommends sweetening the pot for older workers, offering extra weeks of severance pay for those 40 and above and even more for those over age 50. The EEOC recently issued new regulations clarifying that it is legal to offer better benefits to older workers, even if the younger workers are over 40 years old.

“The best way to resolve potential claims of discrimination is at the front end,” Schmitt says. “The employee has the money he needs to make the transition, and the employer has the certainty that he won't have to go through the difficulty of a lawsuit.”