No ADEA Liability for Terminating Retirees Because of Benefit Costs

October 17, 2017

The U.S. 7th Circuit Court of Appeals (whose rulings apply to all Wisconsin employers) recently decided an interesting and complex case involving allegations of age discrimination. Retirees who continued to work part-time for an Indiana county argued the county violated the Age Discrimination in Employment Act (ADEA) when it terminated them to save money on health insurance benefits. The 7th Circuit found the county hadn’t engaged in any form of discrimination, including disparate impact or disparate treatment discrimination.

This case is instructive for Wisconsin employers. As the workforce ages, you will be faced with similar difficult choices that may provide the impetus for individual or class-based age discrimination claims.


During the recession of the late 2000s, Lake County, Indiana, experienced an emergency cash shortage. The county’s positive cash flow declined from $51 million in 2007 to $9.9 million in 2008. By 2009, the county was operating at a deficit, and by 2013, its general fund was more than $1 million in the red. During the same period, the county’s self-insurance fund, which it used to cover employee healthcare costs, collapsed. The fund had a balance of more than $10 million in 2007; that balance was wiped out by 2013.

In an attempt to stanch its financial bleeding, the county offered retirement incentives to employees who were 65 or older. One incentive package entitled retirees to five years of supplemental health insurance (secondary to Medicare coverage) through Aetna. Retirees who selected the package were also permitted to return to work on a part-time basis, although their employment remained at will.

The incentive package was attractive, and a number of employees took advantage of it. But the county had miscalculated. In 2013, Aetna informed the county that current employees were ineligible for the supplemental insurance coverage. If retirees who had been rehired as part-time employees remained on the plan, it would no longer qualify for special exemptions under federal law. In that case, the county’s insurance costs would skyrocket.

The county was in no position to absorb those added costs. It therefore notified all rehired retirees who were covered by both Medicare and the Aetna supplement that their employment would end effective October 1, 2013. A much larger group of employees who were 65 or older but weren’t enrolled in the Aetna supplement continued their employment with the county. As of November 2015, between 150 and 200 active employees, or roughly 10 percent of the county’s workforce, were 65 or older.

A group of rehired retirees who were fired in October 2013 filed suit, alleging the county had discriminated against them on the basis of their age in violation of the ADEA. The district court granted summary judgment in favor of the county (i.e., it dismissed the case without a trial).

Purpose of the ADEA

Congress enacted the ADEA in 1967 to promote the employment of older people based on their ability rather than their age, prohibit arbitrary age discrimination in employment, and help employers and workers find ways to solve problems arising from the impact of age on employment. The ADEA, which extends its protections to workers who are 40 or older, makes it unlawful for an employer “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.”

By its terms, the ADEA proscribes disparate treatment, or adverse decisions that are actually motivated by the employer’s bias against older employees. The U.S. Supreme Court has held that disparate impact claims are also cognizable under the ADEA. Disparate impact claims involve employment practices that are facially neutral in the way they treat different groups but have a harsher effect on members of one group compared to others and cannot be justified by business necessity. The Lake County retirees made both disparate treatment and disparate impact claims.

Court of Appeals’ Decision

The retirees first argued that the county’s termination decision was discriminatory on its face—i.e., there was direct evidence of age discrimination. Because all the part-time employees who were terminated were 65 or older and age was one of the criteria listed in the termination letter, the retirees asserted that age was a “but-for” cause of the adverse action, meaning their age was a necessary condition of the county’s decision to terminate them. However, the 7th Circuit found that while being older than 65 was a characteristic common to all of the terminated employees, it wasn’t the impetus for the county’s decision.

The employees affected by the county’s decision shared four characteristics: They were (1) 65 or older and (2) enrolled in Medicare for their primary health insurance coverage, but they also were (3) rehired retirees and, (4) most important, enrolled in the Aetna supplemental policy. The court found that the county didn’t terminate the employees because of their ages. It terminated them because they were enrolled in a retiree-only insurance plan in which current employees couldn’t participate.

If the rehired retirees had kept their jobs and remained on the Aetna supplemental health insurance plan in violation of federal law and the county’s insurance contract, they would have blown the plan apart. The court found there was no evidence that the county engaged in any prohibited stereotyping. It didn’t suppose a correlation between the retirees’ Medicare status and their age and act accordingly. Rather, it fired only the employees who were enrolled in the Aetna supplement, leaving a large number of older employees who hadn’t enrolled in the supplement unaffected.

The combination of current employment and supplemental insurance participation—not age—was the decisive factor that distinguished the terminated employees from the larger county workforce. The undisputed facts showed that economic and regulatory pressures—not generalizations about the capabilities of elderly employees— drove the county’s decision.

When there is no explicit evidence that an employer was improperly motivated by age, an employee must use circumstantial evidence to prove discrimination. That’s done using a burden-shifting approach in which the employee must come forward with evidence that (1) she is a member of a protected class, (2) she was meeting her employer’s legitimate expectations, (3) she suffered an adverse employment action, and (4) similarly situated employees who aren’t members of her protected class were treated more favorably. If the employee establishes that prima facie, or minimally sufficient, case, the burden shifts to the employer to articulate a legitimate nondiscriminatory reason for the adverse employment action. The burden then shifts back to the employee to submit evidence that the employer’s explanation was pretextual, or an excuse for discrimination.

The court rejected the retirees’ circumstantial claim for similar reasons. A small group of rehired retirees who were employed part-time and insured under Medicare and the Aetna supplement were fired. All the employees who remained employed by the county weren’t enrolled in the Aetna supplement, regardless of their age. All the retirees who benefited from the supplement were no longer employed by the county. The court found that without an appropriate comparator group, the retirees couldn’t make a prima facie case of age discrimination.

Finally, the court rejected the retirees’ disparate impact claim. The crux of their claim was that they were the victims of an impermissibly discriminatory policy. But to establish a claim for disparate impact, the retirees had to show that a specific facially neutral employment practice caused a significantly disproportionate adverse impact based on age. They would have to proffer statistical evidence that the policy caused a significant age based disparity, which they didn’t do.

To the contrary, the court found that the undisputed facts showed that the county took an adverse action against a subset of older workers, not because of their age but because it wanted to preserve its supplemental insurance plan and comply with federal law. Carson v. Lake County, Indiana, Case No. 16-3665 (7th Circuit, July 26, 2017).

Bottom Line

There is an adage that bad facts make bad law. The 7th Circuit, like the county, was faced with a sad state of affairs that superficially pointed to blatant age discrimination. Thankfully, the court was able to peel away the layers and appreciate the circumstances the county found itself in and exonerate its nondiscriminatory actions.

Significantly, the county could have avoided much of the aggravation of defending its actions in court if it had taken the time to understand the ramifications of its plan before implementing the retirement incentives. Similar factual situations may pose difficult and challenging problems for employers that could lead to more viable ADEA claims. When you’re dealing with older employees—especially groups of older employees— it’s imperative to consider and vet all the possible legal implications before you take any adverse action.

This article, slightly modified to note recent updates, was featured in the September 2017 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.