On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil Action Nos. 83-5457, 84-4799.
Higginbotham, Chief Judge, Scirica and Garth, Circuit Judges.
This appeal arises from an action by the Equal Employment Opportunity Commission ("EEOC") against Westinghouse Electric Corporation based on the Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. §§ 621-634 (1988), which prohibits employers from discriminating on the basis of age with respect to an employee's compensation or the terms, conditions, or privileges of employment. Id. § 623(a)(1). Following a bench trial, the district court found that Westinghouse had willfully violated ADEA through the use of discriminatory severance plans that provided severance benefits solely to laid-off employees who were not otherwise eligible to retire. The district court enjoined Westinghouse from denying severance pay to retirement-eligible employees. E.E.O.C. v. Westinghouse Electric , 632 F. Supp. 343, 350 (E.D. Pa. 1986). On appeal, we affirmed the district court's determination that the plans violated ADEA but we remanded to the district court for reevaluation of the finding that Westinghouse had acted willfully. E.E.O.C. v. Westinghouse Electric, 869 F.2d 696, 699 (3d Cir. 1989) (" Westinghouse II").*fn1
On October 2, 1989, the Supreme Court vacated our decision and remanded this case to us for further consideration in light of Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158, 109 S. Ct. 2854, 106 L. Ed. 2d 134(1989). Westinghouse Electric v. E.E.O.C., 493 U.S. 801, 110 S. Ct. 37, 107 L. Ed. 2d 7 (1989). Upon review, we held that our original decision could not stand in light of the standards announced in Betts. In panel opinions dated July 5, 1990, one pertaining to the Pennsylvania action, No. 86-1226, the other pertaining to EEOC's New Jersey action, No. 87-5174, we entered judgment in favor of Westinghouse on all EEOC claims. E.E.O.C. v. Westinghouse Electric, 907 F.2d 1354 (3d Cir. 1990), vacated, E.E.O.C. v. Westinghouse Electric, 917 F.2d 124 (3d Cir. 1990); E.E.O.C. v. Westinghouse Electric, 907 F.2d 1365 (3d Cir. 1990), vacated, E.E.O.C. v. Westinghouse Electric, 917 F.2d 123 (3d Cir. 1990). We held, inter alia, that EEOC had not established that the Westinghouse Severance Plans were a subterfuge that discriminated against older workers as to recall rights.*fn2
We vacated the July 5, 1990 panel opinions, as noted above, in response to EEOC's Petition for Rehearing, which was based on the ground that the fringe benefits of Westinghouse's 1979 benefit plan were designed to impact on nonfringe terms of employment in an intentionally discriminatory manner.*fn3 Accordingly, EEOC sought a remand for findings that provisions of Westinghouse's 1979 plan concerning severance pay were intended to affect adversely the nonfringe benefits of older employees so as to constitute a subterfuge on the part of Westinghouse to evade ADEA.
We granted panel rehearing, see E.E.O.C. v. Westinghouse Electric, Nos. 86-1226 and 87-5174, Order (3d Cir. September 20, 1990) (unpublished), and, on October 9, 1990, the present panel heard oral argument that focused on EEOC's petition and request for remand.
The facts of this case are fully set forth in our initial 1989 panel opinion. Westinghouse II, 869 F.2d 696 (3d Cir. 1989). In brief, the 1979 Westinghouse severance plan denied severance pay to laid-off employees who were eligible for retirement. We will not discuss the substantive provisions of Westinghouse's 1982 plan, which, together with the 1979 plan was originally at issue, inasmuch as EEOC, in its Petition for Rehearing, has explicitly limited our concerns to whether the 1979 plan was a subterfuge to evade the purposes of ADEA. See supra note 3 (citing EEOC Petition for Rehearing at 3 n.2).
In Westinghouse II, we had held that both the 1979 and the 1982 plans discriminated on the basis of age in violation of ADEA, § 4(a)(1), 29 U.S.C. § 623(a)(1). 869 F.2d at 699. We concluded that the district court had not erred in finding that under each plan, retirement-eligible employees were treated less favorably than younger employees, and that this less favorable treatment was based on age. Id. at 705-09. Moreover, we held that the district court correctly determined that the plans were not part of an integrated company plan to prevent "double-dipping." Id. at 707. Thus, Westinghouse had failed to set forth a legitimate, nondiscriminatory justification for the disparate treatment of retirement-eligible employees.
In addition, we held that the plans were not exempt under § 4(f)(2) of ADEA, 29 U.S.C. § 623(f)(2). 869 F.2d at 711. Section 4(f)(2) exempts, from the otherwise applicable requirements of § 4(a)(1), any bona fide employee benefit plan that is not a subterfuge to evade the purposes of ADEA so long as the plan does not require or permit involuntary retirement.*fn4 An employee benefit plan may qualify for exemption under § 4(f)(2), either if it itself satisfies § 4(f)(2), or if it is part of an integrated benefit scheme that satisfies § 4(f)(2). We found that the plans could not qualify for the § 4(f)(2) exemption because they were not based on age-related cost factors. Id. (citing E.E.O.C. v. City of Mt. Lebanon, 842 F.2d 1480, 1491 n. 9 (3d Cir. 1988), and Westinghouse I, 725 F.2d at 224). We decided, in addition, that the severance plans were not part of an integrated employee benefit scheme because, we concluded, severance pay is a fringe benefit for which early retirement benefits cannot be a substitute. Id. at 710 (citing Westinghouse I, 725 F.2d at 225). Finally, we remanded for the district court to reconsider those factors on which it relied in concluding that Westinghouse had acted willfully. Id. at 714.
In Betts, the Supreme Court addressed the question whether the § 4(f)(2) exemption applied to a disability retirement plan that was available only to employees who retired before reaching age sixty. The Court declined to decide the precise meaning of the phrase "any bona fide employee benefit plan, such as a retirement, pension, or insurance plan," found in § 4(f)(2). 109 S. Ct. at 2865 n. 6. The Court held, however, that the statutory language does not limit the exemption to "plans in which all age-based reductions in benefits are justified by age-related cost considerations." Id. at 2864-65 (rejecting Westinghouse I, 725 F.2d at 224). Moreover, the Court decided that the EEOC regulation, which provides that a plan is "not a subterfuge" only if lesser benefits are justified by age-related cost factors, 29 C.F.R. § 1625.10(d) (1988), was contrary to the plain language of the statute and invalid. 109 S. Ct. at 2863, 2865 (rejecting Mt. Lebanon, 842 F.2d at 1489).
The Court reached several conclusions regarding the precise meaning of "subterfuge" in § 4(f)(2). First, it reaffirmed its holding in United Air Lines, Inc. v. McMann, 434 U.S. 192, 203, 98 S. Ct. 444, 54 L. Ed. 2d 402 (1977), that an employee plan adopted prior to the enactment of ADEA cannot be a subterfuge. 109 S. Ct. at 2861. The Court noted, however, that to the extent a post-ADEA provision of a plan "increased the age-based disparity caused by the pre-Act age limitation, McMann does not insulate it from challenge." Id. at 2862.
Second, the Court reiterated its statement in McMann that "'subterfuge' means 'a scheme, plan, stratagem, or artifice of evasion,' which, in the context of § 4(f)(2), connotes a specific 'intent . . . to evade a statutory requirement.'" Id. at 2863 (quoting McMann, 434 U.S. at 203).
Third, the Court noted that a post-Act plan cannot be a subterfuge unless "it discriminates in a manner forbidden by the substantive provisions of the Act." Id. 109 S. Ct. at 2865-66. Noting that any benefit plan that discriminates against older workers would violate § 4(a)(1) (employers prohibited from discriminating on the basis of age with respect to compensation, terms, privileges of employment), the Court stated that both § 4(a)(1) and § 4(f)(2) could be given effect only if § 4(f)(2) is viewed as exempting bona fide benefit plans that are not "a method of discriminating in other, nonfringe-benefit aspects of the employment relationship." Id. at 2866 (citing 29 U.S.C. § 623(a)(1), (f)(2)). The Court did not define "nonfringe benefit" but its use of the term makes clear that the terms "bona fide employee benefit plan" and "nonfringe benefit" are mutually exclusive. See id. at 2864, 2866.
Fourth, the Court stated that § 4(f)(2) does not establish a defense to liability under ADEA; rather, the section "redefines the elements of plaintiff's prima facie case." Id. at 2868. Thus, an employee who challenges a provision of a benefit plan under ADEA "bears the burden of proving that the discriminatory plan provision actually was intended to serve the purpose of discriminating in some nonfringe-benefit aspect of the employment relation." Id. at 2868.
The Betts Court held that an employee plan adopted prior to the enactment of ADEA cannot be a subterfuge to evade the purposes of the Act. 109 S. Ct. at 2861 (citing McMann, 434 U.S. at 203). As a threshold matter, we must determine whether this rule precludes a finding that the challenged provisions of the 1979 severance plan were a subterfuge to evade the purposes of ADEA.
ADEA was enacted on December 15, 1967 and became effective in June 1968. See Pub. L. No. 90-202, § 15, 81 Stat. 602, 607 (1967). Westinghouse adopted the severance pay plan that excluded retirement-eligible employees in 1960.
Westinghouse contends that the district court erred in its subterfuge analysis because it failed to identify any post-ADEA provision that increased the age-based disparity already present in the challenged plans. EEOC argues that post-ADEA changes in the pension plan expanded the group of retirement-eligible employees.*fn5 Thus, the group of employees ineligible for full participation in the severance plans has also expanded because the severance plans excluded or limited the participation of retirement-eligible employees. At issue is whether the post-ADEA expansion of the class of retirement-eligible workers "increased the age-based disparity caused by the pre-Act limitation" in the severance plans within the meaning of Betts. 109 S. Ct. at 2862. We believe that it does. The factual circumstances of Betts and the cases cited therein are instructive.
In Betts, the Supreme Court held that a pre-ADEA plan provision, which limited disability retirement benefits to those who retired before reaching age 60, was insulated from challenge as a subterfuge. Id. (citing McMann, 434 U.S. at 203). The Court noted, however, that the plaintiff had not challenged the plan's age-60 rule, but rather, had challenged a post-ADEA amendment that guaranteed disabled retirees a minimum of 30% of their final average salary, but did not extend that automatic minimum to disabled employees who retire after age 60. Id. The Court held that to the extent the amendment increased the age-based disparity, "the automatic rule of McMann [was] inapplicable." Id. The amendment at issue in Betts qualitatively improved the benefits available to those eligible for disability retirement, that is, those retiring before age 60. Thus, the change clearly increased the age-based disparity in available benefits.
In E.E.O.C. v. Home Insurance Co., 672 F.2d 252, 253 (2d Cir. 1982), cited in Betts, the EEOC challenged a post-ADEA modification that lowered the mandatory retirement age in the company's pension plan from 65 to 62. The Second Circuit concluded that the existence of a pre-Act plan which arguably complied with ADEA could not "validate the post-Act modification to introduce new age-discriminatory terms." Id. at 259 n. 9. The Betts Court also cited E.E.O.C. v. County of Orange, 837 F.2d 420 (9th Cir. 1988), in which the EEOC challenged a pre-ADEA pension plan, rather than its post-ADEA amendments. Participation in the plan was limited to public safety employees who were under age 36 when hired. Id. at 421. The Ninth Circuit held that post-ADEA amendments, which added juvenile hall counselors to the list of eligible employees and exempted certain law enforcement personnel from the age requirement, did not convert the pre-ADEA plan into a subterfuge. Id. at 423 & n. 3. According to the court, post-ADEA modifications may convert a benefit plan into a subterfuge only if they are "significant or at least relevant to the challenged discriminatory practice." Id. at 423; see also E.E.O.C. v. Cargill, Inc., 855 F.2d 682, 686 n. 4 (10th Cir. 1988) (although plan has been amended since 1967, EEOC does not claim that amendments relate to challenged provisions; amendments do not convert plan into subterfuge).
EEOC contends here, however, that post-ADEA changes in the pension plan, under which employees became eligible for retirement at a younger age in certain circumstances, increased the age-based disparity caused by Westinghouse's severance plans.*fn6 One effect of the changes has been to expand the class of older employees who are ineligible for full participation in the severance plans. We believe that not all modifications which alter the pool of eligible employees will convert a pre-ADEA plan into a subterfuge. A plan provision that changes the pool on a basis unrelated to age is unlikely to increase the age-based disparity caused by the pre-ADEA plan. See, e.g., County of Orange, 837 F.2d at 423 & n. 3 (amendment adding juvenile hall counselors to list of eligible employees does not convert pre-ADEA plan into subterfuge). In this case, however, the post-ADEA changes in the class of eligible employees are clearly age-based. This is so, not because the actual number of older employees excluded from full participation in the severance plans has increased, but rather because the modifications have progressively lowered the age at which older employees become ineligible for full participation in the severance plans. We believe that these progressive age-related changes in the pension plan have increased the age-based disparity caused by the severance plans within the meaning of Betts. See Robinson v. County of Fresno, 882 F.2d 444, 445 (9th Cir. 1989) (post-ADEA, age-related change in pre-ADEA retirement plan not insulated from ADEA challenge); Home Insurance Co., 672 F.2d at 259 & n. 9 (post-ADEA amendments lowered mandatory retirement age from 65 to 62; pre-ADEA plan cannot validate this modification to introduce new age-discriminatory terms).
We do not find it significant in this case that the modifications did not alter the terms of the severance plans directly. The definition of retirement eligibility contained in the pension plan determines whether an employee qualifies for participation in the severance plan. Thus, modifications to the definition directly affect the availability of severance pay. Under the circumstances, therefore, we conclude that the post-ADEA modifications to the pension plan increased the age-based disparity in the severance plans and that the plans may be challenged as a subterfuge to evade ADEA.
Even though we believe the Westinghouse plans may be challenged, we find that under the standards announced in Betts, the plans qualify for the § 4(f)(2) exemption for "any bona fide employee benefit plan such as a retirement, pension, or insurance plan, which is not a subterfuge to evade the purposes of [ADEA]." 29 U.S.C. § 623(f)(2). It is not disputed that Westinghouse observed the terms of the plans and that the plans are "bona fide" in that they exist and pay benefits. See Betts, 109 S. Ct. at 2860.*fn7
While the Supreme Court declined to define the precise meaning of "bona fide employee benefit plan such as a retirement, pension, or insurance plan," id. at 2865 n. 6, it stated that the inclusion of the terms "retirement, pension, or insurance" suggests an enumeration rather than an exclusive listing of plans that qualify for the exemption. Id. at 2864. The Court rejected the "age-related cost factor" test, upon which we relied in Westinghouse II to identify exempt plans, reasoning that the costs of many plans that fall within the listed categories do not increase with the age of the employee, citing defined contribution pension plans as an example. Id. The Court noted that a Department of Labor regulation, defining an employee benefit plan as one "which provides employees with what are frequently referred to as 'fringe benefits,'" was broad enough to encompass a variety of fringe benefits, regardless whether the cost of those benefits increased with age. Id. (quoting 29 C.F.R. § 1625.10(b) (1988)). Moreover, the Court stated that "Congress left the employee benefit battle for another day, and legislated only as to hiring and firing, wages and salaries, and other nonfringe-benefit terms and conditions of employment." Id. at 2866.
Unlike wages and salaries, which are contingent on job performance, severance pay is linked to an employee's length of service and the occurrence of a layoff. Companies establish severance plans to provide short-term financial assistance during the transition period following layoff. Severance plans are available as a benefit to employees who remain with the company for a specified period. See Westinghouse II, 869 F.2d at 707. In light of the broad definition of "bona fide employee benefit plan" endorsed by the Court in Betts, we must conclude that the plans are "bona fide employee benefit plans" and thus may qualify for the § 4(f)(2) exemption so long as they are not intended as a subterfuge to avoid the purposes of ADEA.
In rejecting a cost-justification requirement, 109 S. Ct. at 2863-64, the Supreme Court held that an employee who challenges a plan provision as a subterfuge has the burden of proving that the provision "actually was intended to serve the purpose of discriminating in some nonfringe-benefit aspect of the employment relation." Id. at 2868. In the original district court action, EEOC contended that the severance plans discriminated against older workers with respect to recall rights, a nonfringe benefit,*fn8 and required older workers to retire involuntarily.*fn9 Westinghouse argued that the district court ruled against EEOC on ...