Discrimination Law Suite

Case Study I/O Psychology

CASE STUDY 6.1: AN EMPLOYMENT DISCRIMINATION SUIT

The Mortgage Company of America (MCA) had started as a small local mortgage broker in California. Over a period of 10 years, it had grown from five brokers and two administrative assistants in a small office in downtown Sacramento to a firm with 37 offices in 14 states, 260 brokers, 58 managers and executives, and an administrative staff of 112. MCA had expanded by acquiring small mortgage companies in urban environments and by opening branch offices.

Early in the expansion of MCA, an I-O psychologist had been retained to develop a hiring system. She was on the faculty of a college near the corporate headquarters and a speaker at an area conference on human resources for small companies that MCA’s CEO had attended. MCA had not had the time or expertise to develop an in-house support system, so many staff functions such as HR and accounting had been outsourced. Although an accounting department was eventually created, HR remained an outsourced function. Since the major staffing need was going to be brokers, the I-O psychologist developed a structured interview and work sample test for screening. She also recommended a personality test. She had spent several days in one of the firm’s larger offices and had concluded that two of the most important functions of the broker were the ability to actually find lenders (usually banks) to match the home buyer’s situation and to negotiate with those lenders to close the deal. The biggest problem in the negotiation was dealing with the underwriter for the lender. Underwriters tend to be overly cautious and demanding in terms of background information about the prospective borrower and are continually asking for additional bits of information, often as late as 72 hours before a loan is to be closed (i.e., agreed upon).

As a result of the I-O psychologist’s observations, the work sample test involved the use of the web to track down potential lending institutions for a hypothetical client. The structured interview included questions about methods of negotiation, conflict resolution, and past experiences with demanding colleagues. The personality test was based on the Big Five model. She recommended that particular attention be paid to the scales of conscientiousness and agreeableness.

Two years previously, a complaint had been filed with the EEOC charging MCA with race discrimination in hiring with respect to African American applicants for broker positions. The initial complaint came from a single African American employee who had been denied a broker’s position. When the charge was filed with the EEOC, the media covered it, and it received both local and national news attention. As a result, a rash of similar complaints surfaced in other cities in which MCA had done hiring. Among other allegations, the plaintiff charged that the work sample was biased against African Americans, who were less familiar with the use of the Internet for getting information quickly. He further argued that web-based skills could be easily picked up in a one-or two-day orientation/training program and were inappropriate for entry-level screening. He also alleged that all the interviewers who administered the structured interview were white males and that their interview scores were influenced by negative stereotypes they had concerning African Americans. Finally, the plaintiff contended that the personality measures were scored using predominantly white norms; as a result, black candidates were adversely treated.

The employee handbook and company policy clearly stated that MCA was an equal opportunity employer and would not tolerate any form of discrimination. The EEOC sent several letters to company lawyers asking for information relevant to the charge: data about the number of applicants in the past three years, the race of those applicants, the decision about each applicant, and a description of the procedure used to make hiring decisions. Company screening and hiring data were culled from the files, and the I-O psychologist provided a narrative description of the screening devices and process.

After this information was provided to the EEOC, the local EEOC office issued a right-to-sue letter to the employee. The EEOC had applied the 80 percent rule and concluded that there was evidence of adverse impact against African American applicants. The employee took the letter to a local lawyer, who proceeded with the case. In the meantime, the EEOC regional office also entered the suit on behalf of not only the single African American employee but also other African American employees who worked in other MCA offices and had filed similar individual charges. After further information requests and analyses, the EEOC concluded that evidence of adverse impact against African Americans in hiring had occurred in 16 of the 37 offices of MCA.

The EEOC had initiated mediation discussions between the plaintiffs and the company, but not much progress had been made. Then MCA was informed by a large employment law firm that it would ask the court to certify a class of African American applicants and employees who would charge the company with systematically discriminating against African Americans in virtually all aspects of employment—recruiting, hiring, pay, training, performance evaluation, promotions, and discipline. The class was expected to include not only the 43 black employees but also 26 black former employees and 322 black applicants for positions with the company over the past three years. Company lawyers estimated that if the company lost at trial, the award might be in excess of $10 million. Since the plaintiffs were now represented by an experienced and effective private law firm, the EEOC dropped out of the suit for budgetary reasons. The private law firm filed suit in federal district court and asked for the certification of a class.

This was the first time that Mortgage Company of America had faced such a threat. As a result, the in-house company lawyer suggested that they retain an outside law firm to handle the case. The outside law firm recommended that the I-O psychologist who had developed the screening system be retained as an expert in the case. She was contacted and agreed to serve in that role.

Over the course of discovery, the company produced papers that filled approximately 17 cardboard boxes. These included personnel records, applicant flow data, details of company policy, and various administrative memos. In addition, the CEO, vice presidents of human resources and operations, two regional managers, and six office managers were deposed by lawyers for the plaintiffs. Lawyers for the company deposed 16 plaintiffs. In a hearing following this phase of discovery, the judge considered class certification and ultimately granted the designation of two classes: one class that included applicants and a second class that included past and present employees. Class certification is a process that allows the different plaintiffs to present a common complaint. The judge also set a date for trial and a schedule for additional discovery, including reports from and sworn testimony (called depositions) of expert witnesses. The plaintiffs also retained a statistician and an I-O psychologist, as well as an economist who would testify about monetary issues such as lost wages.

Discovery

Process in which lawyers are given access to potential witnesses who will be called by the other side, as well as any documents relevant to the complaints.

Class certification

Judge’s decision based on several criteria that determine whether individual plaintiffs can file together under a class action suit.

Deposition

Interview under oath taken by an opposing attorney in a lawsuit.

Although the I-O psychologist had been involved in the development of the screening system, she had not been consulted on issues related to compensation, training, performance evaluation, discipline, or promotion. She discovered that the policies regarding these practices had not yet been fully established and that each office had developed its own methods for making these decisions. In contrast, the screening system she had developed was being used consistently in each office, and hiring decisions were ultimately made by the vice president of HR using an equation she had developed when creating the screening system.

The plaintiffs’ expert reports were filed, and 30 days later the defendant’s expert replied with a rebuttal report. The I-O psychologist for the plaintiffs had made a number of criticisms of the hiring policies of the defendant company. His major points were that there had been no formal job analysis, that the structured interview was subjective and influenced by stereotypes, that the interviewers were not adequately trained, that the work sample was inappropriately influenced by speed factors, and that no criterion-related validity study had been performed to justify the use of the personality test.

In the rebuttal report submitted in response to these criticisms, the company I-O psychologist answered that even though she had not administered and scored questionnaires, a job analysis had been done. She further contended that since she had developed the interview questions along with the scoring scheme for answers to those questions, the interview was not subjective. She pointed out that speed was a factor in the job and that brokers needed to get preliminary information to a potential client about the availability of loans within hours. Finally, she identified several meta-analyses that concluded that conscientiousness and agreeableness were valuable predictors in sales positions, and the broker job was a type of sales position. In the midst of the expert discovery process, the original African American employee was fired for refusing to accept an assignment, and the lawsuit was amended to include charges of retaliation for having filed the original suit.

As the trial date approached, the judge required the company to have settlement discussions with the plaintiffs. Settlement discussions are attempts to reach a mutually acceptable resolution rather than have a trial. The company offered to settle the case for $1 million without any admission of wrongdoing. The plaintiffs’ lawyers countered with a request for $13 million and agreements to replace the current hiring system and to provide opportunities for training and development for current African American employees. The company I-O psychologist argued strongly that the current hiring system was defensible and effective. It had identified successful brokers, was fast and efficient, and had never been the source of complaints prior to this recent charge.

Settlement discussions

Discussions conducted by the parties in a lawsuit in an attempt to reach a mutually satisfying resolution of the complaint before proceeding with all of the other steps that lead to a trial.

Three days before trial, the company lawyers and the plaintiffs’ lawyers reached a settlement agreement. The plaintiff class would be given a total of $4 million, of which $1.3 million would go to the plaintiffs’ law firm. In addition, the HR department would modify the screening program as follows:

The work sample test time limit would be increased from 30 minutes to one hour.
A criterion-related validity study of the personality test would be initiated (although the current test and cut scores would continue to be used until that study had been completed).
Interviewers would be brought to corporate HR for training.
The I-O psychologist for the plaintiffs would collaborate with the I-O psychologist for the company in developing the validity study and the interviewer training.
The company would establish a budget of $100,000 for this work and would pay the fees of the plaintiffs’ psychologist as well as the fees of their own expert from this fund.

The agreement was presented to the judge, who approved it without comment. The litigation process from initial complaint to approved settlement lasted 27 months. The cost to the company for outside counsel, expert witnesses, and administrative expenses was approximately $1.7 million. This figure did not include the salaries of company staff members who worked in various phases of the defense. Although the company had been considering going public at the time the initial complaint was filed with the EEOC, it postponed the public offering until after the settlement was approved. The initial public offering was well received by the investment community, and the company continues to grow. The cost of the settlement as well as the direct costs for defense (excluding salary costs) were paid by an insurance policy held by the company. The company recognized its vulnerability in areas related to promotional systems, compensation, training, and discipline. With the help of the I-O expert, the company recruited and hired a full-time I-O psychologist to assist in the development of the additional HR systems stipulated in the settlement agreement.

MODULE 6.4: SUMMARY

Although discussions of employment litigation often revolve around a practice (e.g., performance appraisal) or an assessment device (e.g., a test or an interview), employment discrimination charges result not from practices or devices but from decisions about whom to hire, promote, or lay off.
I-O psychologists commonly serve as expert witnesses in employment discrimination cases filed in federal courts. These cases are most often filed by groups of individuals claiming violations of Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age Discrimination in Employment Act.
The law and the courts recognize two different theories of discrimination. The adverse treatment theory charges an employer with intentional discrimination. The adverse impact theory acknowledges that the employer may not have intended to discriminate against a plaintiff, but a practice implemented by the employer had the effect of disadvantaging the group to which the plaintiff belongs.
In an adverse impact case, the burden is on the plaintiff to show that (1) he or she belongs to a protected group and (2) members of the protected group were statistically disadvantaged compared to majority employees or applicants. The Uniform Guidelines suggest using an 80 percent, or 4/5ths, rule to demonstrate evidence of adverse impact.

Reference:

(2013). Work in the 21st Century: An Introduction to Industrial and Organizational Psychology, 4th Edition. [Kaplan]. Retrieved from https://kaplan.vitalsource.com/#/books/9781118819876/