Adverse Impact 4/5 Rule Overview
The Adverse Impact 4/5 Rule is defined simply as the ratio of selection rates that must be met to satisfy the Federal law: If the selection rate for any racial, ethnic, or gender group is less than 80%, or 4/5ths, of the rate for the group with the highest selection rate, then there is evidence of discrimination through adverse impact.
Here’s an example. If a bank hires 100 white applicants and 75 black applicants, the selection rate for blacks is 75% and for whites it is 100%. Because 75% divided by 100% = .75, we know that there is not adverse impact against the black applicants because .75 is higher than .80 . But what does this mean?
The Adverse Impact 4/5 Rule was devised in employment law as a tool for companies to self-assess whether their use of tests and selection processes creates adverse impact on the basis of race, color, religion, sex, or national origin. In other words, the reason for the rule is to help companies determine if their hiring and selection practices are fair and non-discriminatory.
While the Adverse Impact 4/5 Rule was created as an employment law tool it can easily be translated to other areas of law and can be used to assess impacts other than selection. For example, the Adverse Impact 4/5 rule can be used in much the same way to assess impacts of a policy or law on a certain group. In this way it is a much broader tool than simply a test for employment practices.
How Does the 4/5 Rule Work?
The 4/5 rule is a simplistic statistical test of the adverse impact of a hiring or other employment decision implementation system. The EEOC and several other federal agencies have adopted essentially the same policy in their respective regulations. The regulation states that:
"[t]he selection rate for any race, sex, or ethnic group protected by [the EEO statutes] which is less than four-fifths, (i.e., 80%) of the rate for the group with the highest rate shall be presumed to reflect a substantial under-utilization. The 4/5ths rule is not the only test of adverse impact, but it serves as a guideline where there is no other standard. Other formulas may be used to measure adverse impact under other circumstances."
The 4/5 rule considers only whether the selection rate of the protected group is less than 80% of the rate of the highest group and does not take into account other factors such as the relative number of applicants in each group or the expected occurrence of disparities due to random chance. The rule itself does not contain nor does it incorporate any mathematical calculations. However, EEOC and judicial interpretations provide guidance for applying the rule, and the Agency and the courts have set forth a series of steps for measuring adverse impact, using disparate impact analysis. Most agencies and the courts employ a form of the four-step method that has been used by the OFCCP and ADEA cases.
The formula set forth in the EEOC regulations and used by the OFCCP calculates the ratio of usage by various ethnic, racial and sex groups. The formula is:
r = s/ S
where:
s = selection rate for a protected group
S = selection rate for the group with the highest rate (the "majority")
The resulting percentage is compared to 80%. If r ≥ 80%, the selection may be valid (can still be challenged), but if r is less than 80% this difference may constitute evidence of disparate impact.
Adverse impact is measured by comparing the selection rate for a protected group with that of the group with the highest selection rate (typically white males). The formula for calculation is:
r = s/ S
where:
s = selection rate for a protected group
S = selection rate for the majority or the best performing group
Importance of the 4/5 Rule in the Context of Hiring
The impetus behind a majority of anti-discrimination laws is to ensure that the employment process is a fair one. This is particularly true with regard to hiring practices.
Many people have heard of the 4/5 rule in this context. The law presumes that any selection procedure which has an impact ratio of less than 4/5 of the selection rate for the group of individuals with the highest selection rate is "adverse." To elaborate, let’s say that you have divided your 400 applicants into two groups: one group of applicants who are white and one group of applicants who are black. A company hiring under the lawful Norfolk scope of 100 civil servants would have selected 80 blacks and 100 whites by the 80 percent rule. Under the federal Uniform Guidelines on Employee Selection Procedures, if the company had selected 100 whites, it would be "adverse impact" if the company has selected 79 or fewer blacks. Thus, the purpose of the 4/5 rule is to indicate that the low rate of selection for the second group must be justified, and the hiring company will need to establish that the selection option was necessary for a legitimate business reason (and is not a pretext for racial discrimination). This is important because absent such "job relatedness," the employment process is considered to be discriminatory. As an example of how a company might implement the 4/5 rule in its recruitment process, companies often establish job qualifications that have been designed to have a substantial likelihood of being correlated with the essential functions of the job. Having such a job qualification test could allow a company to extend the 4/5 rule to statistical data revealing that the test selected 80% of male applicants but only 60% of female applicants. Do you think the test adversely impacted the females? Perhaps, but then again, perhaps the test is a legitimate and valid job qualification that should be extended.
Legal Consequences of Noncompliance with the 4/5 Rule
Violating the 4/5 Rule carries with it the potential for liability under both federal and state discrimination laws. Since the 4/5 rule of thumb is not codified, the question of whether or not violating the 4/5 rule amounts to unlawful disparate impact discrimination is evaluated on a case by case basis. Title VII of the Civil Rights Act of 1964 is one of the primary federal laws used to prohibit employment discrimination. Section 703(k) of the Act mandates that the EEOC "shall be responsible for coordinating the implementation of [Title VII]." The EEOC is the agency primarily responsible for prosecuting discrimination suits at the federal level. With over 50 years of Title VII case law, including a voluminous array of regulations and EEOC Guidelines, there is ample precedent to establish the 4/5 rule as a standard of proof when evaluating facially neutral employment selection practices, such as pre-employment testing. To explain how the 4/5 rule is applied in litigation, the Tenth Circuit Court of Appeals analyzed the rule in the context of a loss mitigation screening process adopted for borrowers with mortgage loans that were not in timely repayment status. In that case, the EEOC challenged a lender’s use of a screening tool that apparently operated as a sales tool and allowed homeowners with nontraditional mortgage loans to apply for workouts through a short sale, or repayment plan modification, at a lower cost than those who did not qualify pursuant to the screening.
The trial court found that the screening had a half-adverse impact on minority homeowners because the screening process failed the four-fifths rule. It considered the Four-Fifths rule to be appropriate, but felt justified in declining to follow it because it would have resulted in an inappropriate remediation measure and was not designed as, nor intended to prevent, discrimination. The Tenth Circuit reversed the district court’s decision. It evaluated the four-fifths rule applied to the facts of the case. According to the court, the statistical evidence provided the basis for a jury to find the existence of systemic discrimination in favor of non-White borrowers. A jury could reasonably conclude that the already high rates of inspection were so skewed against Hispanic borrowers because it depressed their rate of adherence to short sale and loan modification plans. The prevalence of the Four-Fifths rule in Title VII disparate impact litigation provides strong support for its continued use in evaluating Title VII claims pursuant to tests of disparate impact. The 4/5 rule is a perfect example of "systemic" discrimination. In this regard, the tester model of enforcement is especially useful. The EEOC uses this model, which is based on pairing (with or without "testers") persons of similar qualifications, except for the difference being targeted by the tester model. The availability of this model and its advantages and accuracy when predicting adverse impact have been discussed elsewhere on this blog. In sum, the potential legal implications of violating the 4/5 rule are significant. Federal and state agencies responsible for protecting against discrimination in the workplace are very familiar with 4/5 of the disparate impact test. While the 4/5 rule is not codified, there is a mature body of case law available to prove its legitimacy and utility in terms of disparate impact claims under Title VII.
Issues and Critiques of the 4/5 Rule
The 4/5 rule is not without its critics. Although it is commonly used to show if a selection process has an adverse impact on any particular group, there is criticism that it can be too rigid in its interpretation. As a practical matter, the EEOC and courts have held that the 4/5s rule can or should be more of a guideline to be meted with some common sense and good judgment.
Any number of statistical analyses and variety of tests are available, many with a much smaller "p-value" than .05 – meaning the results are statistically significant at a higher level of significance. However, for many employers, they do not have access to the kind of statistical expertise that is necessary to properly compute effect size". These smaller "p-values" would only add to the costs for employers in labor and resources to test for adverse impact.
However, an employer may not have access to a "qualified" statistician with the requisite knowledge in assessing the complex rules, limitations, and weaknesses in the various methodologies available for more sensitive evaluations. Nor will it have the resources to provide a team of HR professionals trying to fit employees into the statistical "box" so that it ultimately meets the 4/5 rule or any of the other statistical tests that they take years to become proficient. It may not be worth the resources for many employers to put so much money and effort into these analyses simply to tell them something that’s not necessary or legally required by the statutes.
It is possible that the EEOC and courts can recognize the 4/5 rule must recognize these limitations. After all, the EEOC itself concedes the following "Strengths" to the 4/5’s rule: The prediction generally is that the rule is biased against the minority group, that a permissible hit for an adverse impact would be in the .80 rule range for example. If you give 1 more "hit" points to the minority group for the rule the prediction becomes that they will generally have a statistical hit of about .72, instead of .70. The courts also sometimes rely on other analyses of this kind to determine whether there has been any adverse impact, such as the disparate standard, which asks whether there was "some indirect discrimination on a group of employees or applicants" . Under disparate impact, a neutral policy, practice or selection criteria will be deemed to have an adverse impact on any particular group of applicants if their selection rate is at least statistically significantly less than the group’s representation in the labor market. The standards and burden shifting methodologies may vary from circuit to circuit or from court to court.
However, in some circuits, if the plaintiff employee can establish an adverse impact and the employer has no lawful justification for such practice, the court will hold it illegal without the defendant ever having the opportunity to demonstrate a business necessity (though some of these courts still follow the four-fifths (4/5s) rule). For example, in the Eleventh Circuit, once a plaintiff has proved a prima facie case of discrimination, the burden then shifts to the defendant to show an affirmative defense, ie: whether its policy or practice was not job-related and consistent with business necessity, or whether it had a bona fide occupational qualification. In short, the burden of proof may be borne more heavily on the employer, depending on the jurisdiction.
In addition to some courts interpreting the "business necessity" and other defenses any employer may raise to defeat a claim of discrimination more narrowly, there are other limitations found in the statutes themselves. Title VII, for example, expressly prohibits employers from using selection procedures or tests that "denies or tends to deprive any individual of employment opportunities or otherwise adversely affects his status as an employee" UNLESS validated by criteria set out in the applicable provision of Title VII. This limitation is expressly stated in the applicable provisions of age discrimination, pregnancy discrimination, and disability discrimination, albeit phrased somewhat differently in each statute.
The adage, "what goes up, must come down" applies to employment law as it does to anything else in life. Just as the EEOC has begun to expand its data collection activities to cover any layoff that may affect only one employee, for example, courts are also becoming concerned over any disparate impact on any group. It is thus wise to remember that perhaps the only way to avoid any disparate impact is to have a single selection criteria that ensures zero disparate impact for any one racial, ethnic, or other group.
Tips for Complying with the 4/5 Rule
Best practices to remain in compliance with the 4/5 rule include monitoring data prior to administering any assessments or conducting any selection procedures. The internet and Amazon.com or Google searches can be helpful, however, there is a difference between general web searches and targeted statistical analysis and monitoring. Companies should start by monitoring their pass/fail rates and compare them to their hiring and/or promotion numbers. Consistent information collected from applicants can be useful in analyzing the selection results.
The 4/5 rule is a tool to use to identify possible adverse impact and should therefore be applied at the process level and not the individual level. Employers should regularly review selection processes for statistical significance and should not wait until they have consolidated test results across all users. A company can conduct descriptive statistics on its test results annually, semi-annually or quarterly, depending on the number of users it has or the number of times its making selection decisions. Companies that have a modest number of users will benefit from analyzing their data fairly frequently since the number of users is not large enough to smooth out any impact over time. An alternative to conducting periodic statistical analyses, is to create an adverse impact alert system to monitor all results that come from the company’s tests. Using both pre-affirmative action plan rejection rates and a statistical model can provide an accurate picture of adverse impact. Employers should alert their HR personnel, who conduct applicant testing, what the 4/5 rule means and how it should be applied. Training about adverse impact should also be offered to managers and supervisors. It is the responsibility of the human resources personnel to report bad news when it comes to adverse impact so HR personnel should be trained to proactively monitor and analyze the data as well as explain remedial measures.
Wrap Up: The 4/5 Rule and the Future of Employment Law
The future of the 4/5 rule in employment law remains uncertain. As organizations strive to improve their diversity and inclusion efforts, a renewed focus on the impact of employment testing on underrepresented groups is likely to continue shaping the conversation around the 4/5 rule. However, the legal parameters for employment testing remain murky and challenging to navigate, and there is no indication that a new consensus will emerge.
One potential outcome could be the development of more detailed and prescriptive regulations. With the rapid advancement of technology in pre-employment testing, regulators may move to establish clearer guidelines for when and how testing can be utilized to help ensure that adverse impact does not disproportionately affect underrepresented groups. These regulations may aim to close any existing loopholes and ensure consistent application of the 4/5 rule in all circumstances.
Alternatively , there may be an evolution of how regulatory authorities interpret and apply the 4/5 rule. As companies continue to find innovative ways to address concerns about the disparate impact of testing on protected groups, the EEOC may seek to extend greater deference to employer’s best practices and the use of predictive analysis in testing in its charge resolution process. Additionally, courts may be more willing to permit the use of test results if employers are able to articulate a clear and compelling business justification that outweighs any potential adverse impact.
Regardless of the outcome, regulatory agencies, courts, and employers have made it clear that they are committed to addressing the challenges of personnel testing under the 4/5 rule. As diversity initiatives continue to evolve in workplaces across the country, employers and candidates will both benefit from make strides toward fair treatment.