U.S. Supreme Court Decides that Employer Need Not Supplement Seniority Credits of Employees With Reduced Accruals for Pregnancies Before the 1978 Pregnancy Discrimination Act

By Bill Wright

Assume that an employer's policies comply with all current anti-discrimination statutes. When Congress amends one of the laws, the employer immediately modifies its policies going forward, but certain benefits that accrued under the old policy continue in place without change.  Is the employer now violating the law, especially in light of the recent changes to the anti-discrimination laws effected by the Lilly Ledbetter Fair Pay Act?  This is the scenario presented by the recent U.S. Supreme Court case, AT&T Corp. v. Hulteen, Case No. 07-543, --- U.S. --- (May 18, 2009).

In Hulteen, AT&T had a seniority-based pension plan.  Under the plan, employees earned service credit for time worked and for time on disability leave, but employees could earn only 30 days' credit for time on personal leave.  Leaves for pregnancy were treated as personal leave and subject to that 30-day cap (except that in 1977 the company began allowing up to six weeks' service credit for a pregnancy leave).  These policies were perfectly nondiscriminatory until Congress passed the Pregnancy Discrimination Act ("PDA") in 1978. 

The PDA made it a violation of Title VII to treat pregnancy leave differently than other forms of medical leave.  AT&T immediately amended its policies so that thereafter, pregnancy leave was treated the same as other disability leaves.  However, those employees who had accrued service credits under the previous policies were not credited with additional service. 

Twenty years later, current and former AT&T employees, together with their union, pursued sex and pregnancy discrimination claims.  The plaintiffs' accrued service credits, dating from before the PDA, were lower than those of other employees who had not taken pregnancy leave before 1978.  Consequently, they were scheduled to receive reduced pensions and were not eligible, or were only eligible to receive reduced amounts, for other benefits.  The EEOC and lower courts all accepted the plaintiffs' claims. 

Eventually, the U.S. Supreme Court heard the case.  The specific issue presented to the Court was:  "whether an employer necessarily violates the Pregnancy Discrimination Act (PDA) . . . when it pays pension benefits calculated in part under an accrual rule, applied only prior to the PDA, that gave less retirement credit for pregnancy leave than for medical leave generally."  However, the case raised broader questions that concern all employers.  When a law changes, must an employer review compensation and benefit policies to make sure, not just that the policies are correct, but that the old policies do not have any continuing effects in conflict with the new law?  In the Lilly Ledbetter Fair Pay Act, Congress recently expanded the definition of a discriminatory act to include the receipt of a benefit based on a discriminatory act.  Does this mean that it is illegal to continue to rely on a decision that was legal at the time it was made, if an intervening change in the law would have made it illegal?

Most importantly, the Supreme Court observed that the AT&T pension plan was a seniority system.  Under Title VII, seniority systems are protected from claims that accrual rules have a disparate impact on the participants.  Only intentional discrimination in a seniority system is actionable.  As the Supreme Court explained:

Notwithstanding any other provision of this subchapter, it shall not be an unlawful employment practice for an employer to apply different standards of compensation, or different terms, conditions, or privileges of employment pursuant to a bona fide seniority . . . system . . . provided that such differences are not the result of an intention to discriminate because of race, color, religion, sex, or national origin . . . .

The Court then reasoned that AT&T's pre-PDA accrual rule that discounted pregnancy leaves was not intentional discrimination, because the law as it stood at the time permitted that distinction.  The PDA did not make AT&T's policy illegal retroactively. 

The Court also considered whether the Lilly Ledbetter Fair Pay Act of 2009 changed the outcome in this case.  The Lilly Ledbetter Act provides:

For purposes of this section, an unlawful employment practice occurs, with respect to discrimination in compensation in violation of this title, when a discriminatory compensation decision or other practice is adopted, when an individual becomes subject to a discriminatory compensation decision or other practice, or when an individual is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice.

See, Pub. L. 111-2, §3(A), 123 Stat. 5-6 (emphasis added).  The plaintiffs argued that they were affected by application of AT&T's discriminatory compensation policy when they claimed the benefits accrued under the old leave policy.  The Court emphasized again that AT&T's old accrual rule complied with the law at the time that the rule was in effect.  Because there was no "discriminatory compensation decision or other practice," there was no violation of Title VII even after the Lilly Ledbetter Act.

Employers should note the key fact that AT&T's pension plan was a seniority system.  If the plan had been anything other than a seniority system, AT&T might have faced a suit for maintaining a compensation system that affected employees differently because of their protected status - sex or pregnancy.  Likewise, of course, if AT&T had failed to revise its seniority accrual policy to comply with the PDA, when the 1978 amendment was enacted, the plaintiffs might have been successful challenging a compensation practice that was intentionally discriminatory.

As the anti-discrimination statutes evolve, employers should take care that their compensation systems comply with all current laws and regulations.  If employers find a discriminatory element in any compensation system, they should both fix the system going forward and remedy the effects of past discrimination.  Nevertheless, employers are not required to predict or to comply with future changes in the law.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.

© 2009 Sherman & Howard L.L.C.                                                       June 5, 2009