In Kentucky Retirement Systems v. EEOC, No. 06-1037, 2008 WL 2445078 (U.S. June 19, 2008), the Supreme Court recently held that “where an employer adopts a pension plan that includes age as a factor” (in determining eligibility for retirement with pension benefits), and the employer subsequently “treats employees differently based on pension status,” the plan does not automatically violate the Age Discrimination in Employment Act (ADEA). Rather, the Court held that the plaintiff challenging such a policy must show that the differential treatment was “actually motivated” by age. In a 5-4 decision — with a rather strange alignment of the justices — the majority, which consisted of Justices Breyer (who authored the opinion), Stevens, Souter, and Thomas and Chief Justice Roberts, reversed the Sixth Circuit’s en banc ruling striking down the pension plan as facially discriminatory.

[This post serves as a follow up to my earlier posts on March 26, 2008 and January 2, 2008 regarding the decision in Erie County Retirees Association v. County of Erie by the Third Circuit upholding the EEOC’s rule allowing employers to coordinate retiree healthcare benefits with Medicare benefits, effectively resulting in equal total benefits between younger retirees and older Medicare-eligible retirees but unequal amounts spent on the two groups’ benefits because a portion of the Medicare-eligible retirees’ payments come from Medicare.]

Under Kentucky’s retirement system for state employees in “hazardous positions” — law enforcement, firefighters, paramedics, and correctional facility workers — an employee could become eligible for “normal retirement” in one of two ways: (1) after 20 years of service or (2) at age 55 after five years of service. The pension benefits are calculated by multiplying years of service by 2 ½% and multiplying that number by pre-retirement pay. The plan also allows for workers in hazardous positions to retire if they become disabled. Under “disability retirement,” the worker is credited with “imputed” years of service equal to the years necessary for the employee to become retirement-eligible under either method. However, no employee may receive more imputed years than the employee’s actual years of service. And no imputed years are awarded for workers who become disabled after becoming retirement-eligible.

The particular employee in this case, Charles Lickteig, was a worker who became disabled at age 61 with 18 years of service. He was retirement-eligible at age 55. Thus, when his benefits were calculated, Mr. Lickteig received no imputed additional years of service. He argued that a similarly-situated employee in his 40s with 18 years of service would have received two additional imputed years of service under the plan, and thus, the plan was discriminatory on the basis of age. The EEOC agreed and brought an age discrimination lawsuit. The District Court held that the EEOC failed to establish age discrimination. A panel of the Sixth Circuit agreed, but the Sixth Circuit, on rehearing en banc, held that the plan violated the ADEA and reversed the decision. The Supreme Court agreed to hear the case because of its widespread impact on pension plans across the country.

Focusing on its prior decision in Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), the Supreme Court held that a dismissal based on pension status was not a dismissal because of age (in violation of the ADEA). In Hazen Paper, the Court had held that, even though years of service (and consequently pension status) typically is linked to age, the two concepts were “analytically distinct.” In Hazen Paper, in contrast to this case, pension status was solely based on years of service. The Court in Kentucky Retirement Systems expanded upon Hazen Paper holding that, even where pension status is a function of both age and years of service, discriminating on the basis of pension status does not automatically equal discrimination on the basis of age unless the difference in treatment is “actually motivated” by age to violate the ADEA.

What does this decision mean for public and private employers going forward? Basically, it means that public workers in Kentucky and states with similar pension plans can continue to rely on the promise of disability retirement benefits if they become disabled. It also means that public and private employers who feared their plans were implicated by the Kentucky Retirements Systems case — a number estimated at 2,700 employers and 25 million affected workers — do not have to cut benefits, increase employer contributions, or otherwise restructure their plans to bring them into compliance with the ADEA. The decision, when coupled with the Supreme Court’s recent decision not to review the Third Circuit’s decision in Erie County Retirees Association, also suggests that, at least in the pension context, the Supreme Court seems inclined to rely more on the underlying purpose of the ADEA rather than strict compliance with the statutory text. This decision also gives employers more leeway in setting up pension plans and makes it easier for employers to allow early (age-based) retirement, in addition to traditional retirement based on years of service alone. It does not, however, mean that the ADEA can be ignored in the pension context. The Court is clear that plans and eligibility decisions based on age-based animus will be struck down.