Opinion ID: 503763
Heading Depth: 2
Heading Rank: 2

Heading: The MEIT Plan as a Subterfuge

Text: The ADEA makes it unlawful for an employer 32 to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's age.... 33 29 U.S.C. Sec. 623(a)(1). The Supreme Court has construed the ADEA to broadly prohibit[ ] arbitrary discrimination in the workplace based on age. Thurston, 469 U.S. at 120, 105 S.Ct. at 621 (quoting Lorillard v. Pons, 434 U.S. 575, 577, 98 S.Ct. 866, 868, 55 L.Ed.2d 40 (1978)). Employers may not dole out in a discriminatory manner benefits that are part and parcel of the employment relationship--even if the employer has discretion in granting the benefit in the first instance. See Thurston, 469 U.S. at 121, 105 S.Ct. at 621 (citing Hishon v. King & Spalding, 467 U.S. 69, 75, 104 S.Ct. 2229, 2233, 81 L.Ed.2d 59 (1984)). Congress's stated purpose supports this broad construction. The ADEA was enacted to: (1) promote employment of older persons based on ability, rather than age; (2) prohibit arbitrary age discrimination in employment; and (3) promote resolution of age-based employment problems. See 29 U.S.C. Sec. 621(b). 34 Nevertheless, any action in observance of a bona fide employee benefit plan is exempt from the ADEA's broad scope. Section 623(f)(2) states that it shall not be unlawful for an employer 35 to observe the terms of a bona fide seniority system or any bona fide employee benefit plan such as a retirement, pension, or insurance plan, which is not a subterfuge to evade the purposes of this chapter.... 36 Id. By invoking this defense, Mt. Lebanon bears the burden of establishing that it acted in observance of a bona fide plan and that the plan is not a subterfuge to evade the purposes of the ADEA. E.E.O.C. v. Westinghouse, 725 F.2d at 223; see also Potenze v. New York Shipping Ass'n, Inc., 804 F.2d 235, 237 (2d Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 1955, 95 L.Ed.2d 528 (1987). The EEOC concedes that the MEIT plan is a bona fide employee benefit plan and that Mt. Lebanon observes the terms of the plan. The only dispute is whether Mt. Lebanon created the plan as a subterfuge to evade the ADEA prohibition of age discrimination. 6 37 Our task is to determine what Congress meant when it required employers to disprove subterfuge. The ADEA itself offers no further explanation, and the Supreme Court has defined subterfuge only in broad terms, as a scheme, plan, stratagem, or artifice of evasion. United Air Lines, Inc. v. McMann, 434 U.S. 192, 203, 98 S.Ct. 444, 450, 54 L.Ed.2d 402 (1977). Thus, we must turn to the legislative history and the governing regulations for further guidance. 38 In enacting the Sec. 623(f)(2) exemption, Congress recognized the greater expense incurred by employers providing benefit programs for older employees. This factor, it feared, might discourage employers from hiring older workers when they might have hired them under a law granting them a degree of flexibility with respect to such matters. McMann, 434 U.S. at 200, 98 S.Ct. at 449 (citing Hearings on S. 830 before the Subcomm. on Labor of the Senate Committee on Labor and Public Welfare, 90th Cong., 1st Sess., 27 (1967) (statement of Senator Javits)). Thus, the Sec. 623(f)(2) exception was based on the principle that employers should be relieved of the obligation of providing older employees with benefits equal to benefits for younger employees when it would would be more costly to do so. See E.E.O.C. v. Borden's Inc., 724 F.2d 1390, 1396 (9th Cir.1984); accord 124 Cong.Rec. 8218 (March 23, 1978) (statement of Senator Javits) (benefit plans comply with ADEA where cost incurred on behalf of older workers equals cost incurred on behalf of younger workers, even if older workers receive less benefits). 7 39 Consistent with this intent, federal regulations permit employers with bona fide benefit plans to reduce benefit levels for older workers to the extent necessary to achieve approximate equivalency in cost for older and younger workers. 29 C.F.R. Sec. 860.120(a)(1). 8 Benefit plans satisfy the statute whenever the cost an employer incurs in providing benefits to older employees equals the cost incurred in providing benefits to younger employees even though the older worker may thereby receive a lesser amount of benefits.... Id. The regulations describe this process as cost justification 40 Cost data used in justification of a benefit plan which provides lower benefits to older employees on account of age must be valid and reasonable. This standard is met where an employer has cost data which show the actual cost to it of providing the particular benefit (or benefits) in question over a representative period of years. An employer may rely on cost data for its own employees over such a period, or on cost data for a larger group of similarly situated employees. 41 Id. Sec. 860.120(d)(1). 42 The regulations expressly require cost justification for reduced long-term disability benefits, id. Sec. 860.120(f)(iii) (long-term disability benefit reductions are justifiable only on the basis of age-related cost considerations as set forth elsewhere in this section.). Employers may also comply with the ADEA by providing benefits up to age sixty-five for disabilities occurring before age sixty; or by providing benefits up to age seventy, or five years after disablement, whichever occurs first, for disabilities occurring after age sixty. Sec. 860.120(f)(iii)(A), (B). Cost data may be produced to support other patterns of reduction as well. Id. Sec. 860.120(f)(iii)(B). 43 In support of the reduced benefit schedule in the MEIT plan, Mt. Lebanon submitted a one-page memorandum from its insurer, Cigna, stating in general terms that the cost of providing disability insurance increases as employees grow older. See App. at 43. In addition, Mt. Lebanon offered an affidavit from Paul Mockenhaupt, whose firm set up the MEIT plan. App. at 37-38. Mockenhaupt stated that the schedule used in the MEIT plan is applied by most disability insurers in the United States and that the Cigna cost data shows that the cost of insuring against disability increases with age. Id. paragraphs 5, 6. The city contends that this evidence establishes a sufficient business reason for the MEIT plan, and disproves that the plan was a subterfuge to evade the purposes of the ADEA. 44 The EEOC does not dispute the underlying facts. Instead, it questions the legal standard used to evaluate Mt. Lebanon's showing of no subterfuge. The EEOC claims Mt. Lebanon's data without more information does not explain the schedule of benefit duration, [i.e., why older employees receive benefits for a shorter period]. In order to definitively state the schedule [the MEIT plan] is cost justified[,] a nexus between the schedule and the general data must be shown. App. at 142-43 (affidavit of Milton Wollman). The city must establish a nexus, the EEOC maintains, because it simply does not make common sense that an economic purpose for a specific graduated benefit reduction schedule [the MEIT plan] can be shown through general data that is not in anyway connected with the specific reductions mandated by the schedule. Brief of Appellant, at 30. 45 The district court declined to apply the EEOC's nexus requirement. It held that no authority supported the EEOC's position that Mt. Lebanon's failure to supply cost justification, as required by the regulations, establishes subterfuge as a matter of law. E.E.O.C. v. City of Mt. Lebanon, 651 F.Supp. at 1263. Instead, the court held, Mt. Lebanon need only prove an economic or business purpose or valid reason for the challenged terms even though every detail of the cost-justification regulations is not met. Id. 46 In declining to follow the EEOC regulations' cost justification requirement, the district court relied on the Second Circuit's decision in Cipriano v. Board of Education, 785 F.2d 51 (2d Cir.1985), as refusing to endorse every detail of the regulations interpreting the ADEA. E.E.O.C. v. Mt. Lebanon, 651 F.Supp. at 1263. Acccordingly, the court read Cipriano as permitting employers to show their plan is not a subterfuge by offering any legitimate business reason for the reduced benefits. See id. On appeal, Mt. Lebanon cites the Second Circuit's subsequent decision in Potenze, 804 F.2d 235, as further support for the district court's holding. 47 We do not read those cases so broadly. Because neither the Supreme Court nor this court had addressed the subterfuge issue, the district court understandably turned to the Second Circuit for guidance. We disagree with the standard set forth, however, and for the reasons that follow, we will vacate the district court's grant of summary judgment. Specifically, we conclude that to disprove subterfuge, Mt. Lebanon must demonstrate why general age-related cost factors required it to reduce benefits for older workers to the extent and in the manner prescribed in the MEIT plan. Because the district court reached a contrary holding based on the Second Circuit's reasoning in Cipriano, we first turn to an examination of that decision. 48 In Cipriano, the court focused on a New York pension plan that provided incentives to teachers who volunteered for early retirement. The court addressed two questions concerning the requirements of Sec. 623(f)(2). First, it rejected the employees' argument that an employer must demonstrate actuarially based cost considerations to prove that the plan was bona fide. Cipriano, 785 F.2d at 54, 55. Cost considerations, the court noted, are immaterial in determining whether a plan is bona fide and thereby covered under Sec. 623(f)(2). Id. at 55. The court concluded that the way the plan is structured affects only whether it might be a subterfuge. Id. Here, the EEOC does not contend that Mt. Lebanon's plan is not bona fide. Thus, this aspect of Cipriano is inapplicable. 9 49 Next, the Cipriano court considered whether the employer had met its burden of disproving that its plan was a subterfuge. It is this aspect of Cipriano that is relevant here. The court concluded that the employer must disprove subterfuge even though participation in the plan was voluntary. Cipriano, 785 F.2d at 58. In reaching this conclusion, the court recognized the governing federal regulations on the subterfuge requirement. It then noted that the regulations 50 seem to put a fairly heavy burden on the employer to justify any age-based distinctions in employee benefit plans on the basis of age-related cost justifications. While we would not wish to be understood as endorsing every detail of the regulations, we cannot simply disregard them. All that we decide is that even in the case of voluntary early retirement plans the employer ... must come up with some evidence that the plan is not a subterfuge to evade the purposes of the ADEA by showing a legitimate business reason for structuring the plan as it did. 51 Id. The district court apparently construed this quoted passage as rejecting the cost-justification requirement set forth in the regulations. Yet the court in Cipriano tempered its statement by adding that it cannot simply disregard the regulations. Moreover, by requiring the employer to demonstrate a legitimate business reason for the structuring plan as it did, id., the court in Cipriano simply restated the general proposition it had previously set forth in E.E.O.C. v. Home Insur. Co., 672 F.2d at 258-59. 10 52 In addition, Cipriano was decided in the context of a voluntary early retirement plan. Cipriano, 785 F.2d at 58, 59. The court observed that evidence of business reasons required to disprove subterfuge for a voluntary plan would almost necessarily be less than what was required to make such a showing in the case of a mandatory plan. Id. at 59. Here, we are confronted with a mandatory benefit reduction plan, which, under Cipriano, would require a more stringent showing. 53 Nor are we persuaded, as Mt. Lebanon urges, that the subsequent decision in Potenze supports its position. In Potenze, the Second Circuit held that to the extent age-related cost considerations must be established to show that a plan is bona fide, appellants had met this burden. Potenze, 804 F.2d at 237 (citing Cipriano, 785 F.2d at 54). With respect to the relevant issue, i.e., whether a retirement plan that offset Social Security income was a subterfuge, the court held the district court had erred by holding the offset plan was a subterfuge simply because better alternatives were available. Id. at 238. Significantly, the court followed the federal regulations in concluding that the offset was adopted for non-age-based reasons. Id. Relying on Sec. 860.120(e) and Sec. 860.120(f)(ii)(A), which discuss the cost justification requirement, the court determined that the offset was in line with the theme of regulations adopted by the Department of Labor in implementation of the ADEA with respect to offsets of Medicare benefits.... Id. Thus, neither Cipriano nor Potenze reject the EEOC's cost-justification regulations. 54 Here, the district court concluded, as a matter of law, that Mt. Lebanon demonstrated its MEIT plan was not a subterfuge by producing a generic schedule illustrating that, as a general rule, the cost of providing benefits increases with age. The court held that the city need not comply with every detail of the EEOC cost-justification regulations, and must show only that the reduced benefit schedule was based on an economic or business purpose or valid reason. See E.E.O.C. v. City of Mt. Lebanon, 651 F.Supp. at 1263, 1264. 11 55 This standard disregards the cost justification rationale that pervades the regulations, and also overlooks an employer's obligation to somehow relate that justification to its plan. In order to cost justify a reduced level of benefits for older employees, and thereby disprove subterfuge, an employer must establish a connection or nexus showing how general cost savings data supports the extent of reductions in its particular plan. Without this requirement, an employer could implement a bona fide benefit plan, but then evade the ADEA's purposes by reducing benefits for older workers beyond the level necessary to achieve approximate equivalency in the cost of providing benefits to older and younger workers. The EEOC's regulations properly implement this concept. 56 An agency's interpretation is especially important where its specialization is a significant factor supporting the issuance of the regulations. See generally 2 K. Davis, Administrative Law Treatise Sec. 7.22, at 107 (1979). That fact, however, is not dispositive. Although courts must not disregard an agency's long-standing and contemporaneous interpretation of a statute, EEOC v. Associate Dry Goods Corp., 449 U.S. 590, 600 n. 17, 101 S.Ct. 817, 823 n. 17, 66 L.Ed.2d 762 (1980); Griggs v. Duke Power Co., 401 U.S. 424, 433-34, 91 S.Ct. 849, 854-55, 28 L.Ed.2d 158 (1972); Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965), deference to an agency's regulation is unjustified where the interpretation lacks support in the statutory language or legislative history. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844-45, 104 S.Ct. 2778, 2782-83, 81 L.Ed.2d 694 (1984); Griggs, 401 U.S. at 434, 91 S.Ct. at 855; Department of the Navy, Military Sealift Command v. F.L.R.A., 836 F.2d 1409, 1410 (3d Cir.1988). Here, however, the EEOC's cost justification requirement constitutes the type of long-standing and contemporaneous agency interpretation deserving recognition. More importantly, based on our independent examination of the statutory scheme, requiring an employer to cost justify its decision to reduce benefits for older workers is consistent with the statute's requirement that the plan cannot be a subterfuge to evade the ADEA's anti-discriminatory purpose. By adding Sec. 623(f)(2), Congress intended to relieve employers of the burden of providing equal benefits to all employees only when the cost of providing lower benefits to older workers is approximately equal to the cost of providing greater benefits to younger workers. See Hearings on S. 830, supra, at 27; 124 Cong.Rec. at 8218; E.E.O.C. v. Borden's, 724 F.2d at 1396. Thus, by allowing reduced benefits to older workers when necessary to achieve approximate equivalency in cost for older and younger workers, see Sec. 860.120(a)(1), the regulations are consistent with the statutory scheme. 12 By viewing cost justification, i.e., the need to achieve approximate equality in benefit cost for older and younger workers, as somehow inconsistent with business purpose, the district court erred. 57 The business purpose requirement was set forth as a general means of allowing employers to disprove improper motive for reducing older workers' benefits. See Home Insur. Co., 672 F.2d at 258. Yet, merely proffering a business reason for reducing benefit levels, e.g., it saves the employer money, does not necessarily mean an employer was not also using its benefit program to evade the ADEA's purposes. Requiring an employer to cost justify its reduced benefit schedule to disprove subterfuge gives meaning to the legitimate business purpose showing. The United States Court of Appeals for the Seventh Circuit recently recognized as much when it interpreted Sec. 623(f)(2) as requiring employers to prove a close correlation between age and cost whenever they use age as a basis for reducing retirement benefits. Karlen v. City Colleges of Chicago, 837 F.2d 319 (7th Cir.1988) (citing 29 C.F.R. Sec. 1625(a)(1), (d)(1)-(3)); see also Henn v. National Geographic Soc., 819 F.2d 824, 827 (7th Cir.) (discussing sound business purpose test in terms of 29 C.F.R. Sec. 860.120(a)(1)), cert. denied, --- U.S. ----, 108 S.Ct. 454, 98 L.Ed.2d 394 (1987). 58 When an employer produces evidence to disprove subterfuge, the fact finder must assess whether the stated business or economic purpose reasonably justifies the reduced benefits. See Crosland v. Charlotte Eye, Ear & Throat Hosp., 686 F.2d 208, 215 (4th Cir.1982). Cost justification, in a practical sense, demonstrates or quantifies a non-age-based reason for an employer's decision to provide lower benefits to older employees. If the cost of a reduced duration of benefits for older workers is approximately equal to the cost of providing the same type of benefits to younger workers, the employer's benefit plan is not a subterfuge. 59 Thus, in order to establish that reduced benefits are justified by the approximate equality rule, employers must link the general data allowing some type of reduction to the specific level of reductions set forth in their plan. Here, Mt. Lebanon relied solely on the general principle that, in most disability plans, the cost of providing benefits increases as employees grow older. This is a generally accepted and reasonable conclusion; indeed, it is usually self-evident in an insurance context because of the increased risks that accompany age. What Mt. Lebanon failed to establish is how this increased cost theory applies to the MEIT plan reductions. 60 The general conclusions that: (1) the cost of providing benefits increases with an employee's age; and (2) that reducing benefits serves a valid business purpose by saving money, will always apply if the plan is bona fide. In order to establish that its benefit schedule is not a device to evade the the ADEA's purpose of prohibiting arbitrary age discrimination, Mt. Lebanon must show that it reduced older employees' benefits no more than necessary to compensate for the higher cost of insuring older workers. If, for example, an employer must spend fifty percent more to provide the same benefits to older workers that it provides to younger workers, then it could not reduce an older employee's benefits by seventy-five percent. See generally Karlen, 837 F.2d at 319-20. Congress did not intend to allow employers to use the Sec. 623(f)(2) exemption to discriminate based on an employee's age. 61 We recognize, of course, that the subterfuge inquiry normally requires examination of an employer's subjective purpose or motive. EEOC v. Westinghouse Elec. Corp., 725 F.2d at 224 n. 9; accord McMann, 434 U.S. at 203, 98 S.Ct. at 450. Although evidence of cost justification usually provides a straightforward method of ascertaining an employer's motive by demonstrating whether benefits for older workers were reduced no more than necessary to compensate for the higher cost of insuring older workers, it may not be conclusive if the employer can establish that it acted in good faith. For example, we do not believe Congress could have contemplated holding an employer liable for evading the ADEA when the employer made a good faith effort to implement a bona fide plan with no intention to evade the purposes of the ADEA, but its legal counsel or insurer erred or misrepresented 13 the true extent of the needed reductions and thereby reduced benefits beyond the level necessary to compensate for the increased cost of insuring older employees. 62 This good faith defense does not permit an employer to close its eyes or ignore actions by its insurer or legal counsel that it knows will result in the plan violating the ADEA. Nor does it relieve an employer of its obligation to inquire into the lawfulness of the plan. It does, however, allow an employer to show that despite its good faith attempt to provide benefits in conformity with the ADEA, errors or misrepresentations by its insurer caused it to provide unlawfully low benefits to its older employees. Thus, an employer cannot satisfy its burden by merely producing a conclusory certification from its insurer that the benefit schedule is lawful. There must be cost data proving a correlation between age and cost, which allows an employer to assess the insurer's benefit schedule. 63 Therefore, we will remand for consideration whether Mt. Lebanon can reasonably justify its plan in view of the proper standard, which incorporates the cost-justification requirement and good faith principle set forth above. Unless the city explains its legitimate business purpose in this manner, either at the summary judgment stage or at trial, it cannot establish that it did not use the plan as a subterfuge to evade the anti-discriminatory purposes of the ADEA. 64 For these reasons, the judgment of the district court will be vacated and we will remand for proceedings consistent with this opinion. 65