Risks to Employers - Damages, Reputational Harm and Federal Lawsuits

What are the potential risks to the employers and the testing companies?

Potential risks include:

Scale/scope of potential damages

a) Tens of millions of assessments administered each year – some companies have several million applicants per year

b) If the pre-assessment tests are determined to be a medical examination, then every applicant has a claim – not just those with a mental disability

c) If the pre-assessment tests are determined not to be a medical examination, but the assessments are discriminatory, there are still millions of potential claims (according to the Census Bureau, approximately 16.5% of working age population has a disability)

d) Costs of defense and the potential of having to pay legal fees and costs of plaintiff’s lawyers

Reputational damage/lost sales (revenue)

a) Companies with discriminatory tests compete against companies who do not use tests

• Some of the companies receive substantial revenue from persons, and families of persons, with mental illness (e.g., pharmacy companies and their dispensing of prescription drugs)
• Customers have choices – the ability to shop elsewhere – which can result in lost sales/revenue to companies utilizing illegal pre-employment assessments

b) Business partners, employees and shareholders may be affected by association with company that discriminates

Privacy/Medical Information Claims

a) If the pre-assessment tests are determined to be medical examinations, the information collected by the tests would be considered confidential medical information, subject to a variety of statutory and regulatory safeguards.

b) The failure by the companies to treat the assessment responses as confidential medical information creates another line of damage claims against those companies.

c) The number of claims for violations of medical information safeguards is exponentially greater than the number of claims for unlawful medical examinations. The statute of limitations on claims for violations of medical information safeguards is longer than that for unlawful medical examinations. In addition, the potential claimants include employees, past employees and applicants not hired.

Are companies aware of these risks?

Yes. The Americans with Disabilities Act (ADA), with its restriction on pre-employment offer medical examinations, was enacted in 1990. Since the ADA’s enactment there have been a number of courts that have been asked to rule on whether an assessment is an illegal medical examination.

The risk is also known to the testing companies. Kenexa, for example, which was recently acquired by IBM, included the following disclosure in the “Risk Factors” section of its annual report (10-K):

The failure of our solutions to comply with employment laws may require us to indemnify our customers, which may harm our business. Some of our customer contracts contain indemnification provisions that require us to indemnify our customers against claims of non-compliance with employment laws related to hiring. To the extent these claims are successful and exceed our insurance coverages, these obligations would have a negative impact on our cash flow, results of operation and financial condition.

Further, the Equal Employment Opportunity Commission (EEOC) has been litigating with Kroger and Kronos for the past five years over the pre-employment assessment used by Kroger and provided and administered by Kronos, and the EEOC has included pre-employment assessments in its top national priority for its Strategic Enforcement Plan (2012-2016).

Are companies aware of the legal requirements relating to testing and assessment?

Rocket-Hire, a consultancy that provides expert advice and solutions in all areas related to pre-employment screening, testing, and assessment, states in its Assessment Usage Survey for 2009:

• Our survey results seem to indicate that legal issues are not a primary concern for all organizations using assessment and that many organizations do not have a deep internal knowledge of legal issues related to assessment. …
• Legal action against organizations in relation to assessment usage seems low. … One wonders if increased EEOC investigations and regulations will lead to an increase in this area.
• The fact that knowledge levels related to legal issues seems to be low may indicate that lack of concern is caused by lack of knowledge or understanding of what should be done to ensure compliance.
• We hope that the future brings more concern from users around fully understanding legal issues for the proper use of assessment tools and that this concern helps to ensure the adoption of proper compliance strategies.

The risk/reward calculus for companies that fail to invest the necessary time and resources to meet their legal obligations is discussed in the Rocket-Hire “Hot, Warm and Cold Trends in Pre-Employment Assessment for 2012,” which states:

At the end of the day, the threat of investigation by the Feds is pretty low given the resources they have available, so most companies continue to play the odds rather than invest the time and money in ensuring compliance.

Sadly, I do not predict that there will be any changes to this in the coming year. It troubles me that there is silence around how the new sophisticated data modeling tools and matching products meet government standards.

Damages and Indemnification Challenges for Employers

Claims by Individuals

An employer using a personality assessment as part of its recruiting and hiring process may be subject to a variety of legal claims and charges by applicants and employees. These include claims based on alleged violations of Title 1 of the Americans with Disabilities Act, 42 U.S.C. § 12112 (ADA), including, without limitation:

• The assessment is a pre-offer medical examination that is prohibited by 42 U.S.C. §12112 (d)(2);
• The assessment screens out or tends to screen out an individual with a disability or a class of individuals with disabilities and the Assessment is neither job-related nor consistent with business necessity, violating 42 U.S.C. § 12112(b)(6);
• The employer fails to select and administer the assessment in the most effective manner to ensure that the assessment results accurately reflect the skills, aptitude or whatever other factor that the assessment purports to measure, rather than reflecting an applicant’s impairment, and, as a result, violates 42 U.S.C. § 12112(b)(7); and,
• The employer fails (i) to maintain the information collected from the assessment regarding the medical condition or history of the applicant on separate forms and in separate medical files and (ii) to treat such information as a confidential medical record, violating 29 C.F.R. § 1630.14(b)(1).

Damages available under Title I of the ADA include claims for back pay, front pay, compensatory damages and injunctive relief. Punitive damages may also be available if the employer has engaged in intentional discrimination against a protected class and has done so with reckless indifference to the federally protected rights of persons in that class (Please see the PunitiveDamages post).

If the assessment is determined to be a medical examination, each applicant (not just those who have a mental disability) who took the assessment has a claim against the employer under Title I of the ADA. Courts have repeatedly held that claims of improper disability-related inquiries or medical examinations, improper disclosure of confidential medical information, or retaliation may be brought by any applicant or employee, not just individuals with disabilities. As noted in the WhatAre the Issues post, some companies have more than one million applicants each year.

Indemnification Challenges

Any employer that continues to use pre-employment personality tests should seek indemnification from the testing company whose product it uses. If the employer is currently indemnified by the testing company, the employer should review the limits, restrictions and conditions of that indemnity.

The success of the testing companies in marketing employment personality tests over the past twenty years has created "systemic risk" for its customers. If one employer has violated the law and subjected itself to significant liability as a consequence of its use of an assessment provided by a testing company, then all customers of that testing company are similarly at risk.

Even if testing companies were willing to provide indemnification to all customers, those customers will have to determine whether the testing companies and their insurers have adequate resources to indemnify all customers. As Kenexa, an testing company now owned by IBM), consistently noted in its annual 10-K risk factor disclosures:

The failure of our solutions to comply with employment laws may require us to indemnify our customers, which may harm our business. Some of our customer contracts contain indemnification provisions that require us to indemnify our customers against claims of non-compliance with employment laws related to hiring. To the extent these claims are successful and exceed our insurance coverages, these obligations would have a negative impact on our cash flow, results of operation and financial condition.