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With increasing pressure in the workplace to identify top performers and separate under performers, employers continue to implement or refine performance rating or “forced” ranking systems. While plaintiffs’ employment lawyers initially seemed interested in challenging such systems, their interest appears to have lessened given some good defense decisions and company modifications to ranking procedures. Nevertheless, employers should be vigilant in monitoring their ranking systems to minimize the risk of employment-related claims. HOW THE SYSTEMS WORK Any system that ranks employees against each other based on performance is a relative or forced ranking system. Examples include: � Forced distribution. Employees are ranked in accordance with pre-assigned performance-distribution percentages along the lines of a bell curve, i.e., 20 percent rated “most effective,” 70 percent rated “effective,” and 10 percent rated “needs improvement.” � Peer Ranking. Employees in a particular work group are ranked against each other from best to worst. � Quartile Ranking. Four categories or cells are defined and 25 percent of the employees are placed in each cell. Employees are then further ranked within each cell. No matter how varied the systems, the fundamental purpose is to evaluate and monitor the relative contribution of individual employees. Top-performers are identified and groomed for training and possible promotion and under-performers are given the opportunity to improve performance or face possible termination. Because ranking systems require managers to differentiate between employees in the same group, employers need to monitor the actual impact of the system on the workforce as a whole. If the system has a disparate impact on a protected group, it is vulnerable to challenge under Title VII of the Civil Rights Act of 1991, 42 U.S.C.A. �2000e, or state anti-discrimination laws. While discrimination and class action claims are potential risks of forced ranking systems, proper planning and continued evaluation help minimize the legal exposure. LEGAL CHALLENGES Microsoft implemented a system in which employees were ranked from 1 to 5. According to Microsoft, its employees were largely responsible for developing the ranking criteria, and there were no fixed percentages for ranking level. Microsoft also provided a procedure to appeal ranking decisions. Nevertheless, several discrimination suits attacking the system were filed. In October of 1999, one of Microsoft’s highest-ranking African-American employees filed suit alleging race and age discrimination. Browne v. Microsoft Corp., No. C99-1665C (W.D. Wash. 1999). Browne cited the ranking system as one example of Microsoft’s discriminatory practices, asserting that managers were forced to rate very small groups of employees without objective criteria and the ratings therefore favored those with whom managers socialized and who were most like them, typically, white males. Id. On Microsoft’s successful motion for summary judgment, the court found that “Mr. Browne fail[ed] to come forward with evidence sufficient to show that members of a protected class [had] been disproportionately selected for employment and promotion at Microsoft.” Id., May 8, 2001 Order of Hon. John C. Coughenour, at 2. Specifically, the court determined that Browne failed to establish through statistical evidence that Microsoft’s evaluation criteria created a disparate impact on African American and older workers. Browne’s provision of only “bottom line evidence of racial imbalance” was deemed insufficient. Id. at 5. While Browne appealed to the 9th U.S. Circuit Court of Appeals, he did not appeal the district court’s ruling rejecting his disparate impact claims. See Brown v. Microsoft Corp., 48 Fed. Appx. 620 (9th Cir. 2002). Microsoft was targeted for a second time in October 2000 when a former employee sought to certify a class challenging “a pattern and practice” of race and sex discrimination and retaliation. Donaldson v. Microsoft Corp., 205 F.R.D. 558, 562 (W.D. Wash. 2001). As in Browne, the plaintiff alleged that Microsoft’s forced ranking system was “excessively subjective” and generated evaluations based on the biases of managers who were predominantly white males. Id. The Donaldson court denied class certification. In addition, the court concluded that “Microsoft’s managerial system [was] not inherently flawed,” but rather appeared to be a “well-crafted combination of both objective and subjective measures.” Id. at 566. The court also noted that plaintiffs did not provide statistical evidence demonstrating that Microsoft’s system had a disparate impact on women or African Americans. Id. Plaintiffs appealed. Before decision by the 9th Circuit, the parties reached a confidential settlement. Ford implemented a forced ranking system in January 2000. Shortly thereafter, numerous employees filed lawsuits challenging the system under the anti-discrimination laws. As initially implemented, the Ford system mandated that all management employees be ranked in three categories and that 10 percent in each unit be ranked at the lowest level. Managers in the lowest 10 percent were not eligible for bonuses or raises and were notified that a subsequent 10 percent rating could result in demotion or termination. In early 2001, two class action lawsuits were filed against Ford. The first, Siegel v. Ford, No. 01-102583-CL (Mich. Circ. Ct. Wayne Co. Jan. 23, 2001), alleged that the company’s performance evaluation system had a disparate impact on older workers. The plaintiffs specifically alleged that the grading system was being used to weed out older employees. The second suit, Streeter v. Ford, No. 01-105949-CL (Mich. Circ. Ct. Wayne Co. Feb. 21, 2001), was brought by older white males who alleged that Ford discriminated based on age and gender and that its evaluation system had a disparate impact on Caucasians, males and older workers. In late 2001, the class actions were consolidated for purposes of settlement and, without admitting liability, Ford agreed to a class award of $10.5 million. Notably, Ford’s system was later revised so that only 5 percent of managers were ranked at the lowest level and the limitation on bonus eligibility for the lowest ranked managers was lifted. According to Ford, the revisions were not prompted by the litigation but rather, by the need to improve employee morale. Conoco used a forced ranking in the context of a lay off in 1999. During this reduction in force, employees were ranked from one to four. The Justice Department sued Conoco, alleging that the rankings were simply a pretext to further Ford’s preference to employ foreigners rather than American citizens. Bendig v. Conoco, Inc., Office of the Chief Administrative Hearing Officer, Case No. 20B00033. The Administrative Law Judge granted Conoco’s motion for summary judgment, stating that “no reasonable fact finder could infer from the evidence presented that [the employees] citizenship status was a factor in the employment decisions.”Nevertheless, several former Conoco employees filed a private lawsuit alleging national origin discrimination in April 2000. Stemler v. Conoco, Inc., C.A. No. H-00-1150 (S.D. Tex. Apr. 3, 2000). Notably, Conoco filed a motion for summary judgment that was denied by the Texas court. Shortly thereafter, the case was settled. In 2001, Capital One implemented a forced ranking system based on a seven-point performance scale. In two separate class action lawsuits, older employees challenged the Capital One system alleging it violated the Age Discrimination in Employment Act, 29 U.S.C.A. �621 et seq. Specifically, in Feltman v. Capital One Services, Inc., No. 02-894 (E.D. Va. Dec. 9, 2002), workers alleged both disparate treatment and disparate impact violations of the ADEA. Plaintiffs alleged that “age stereotypes which were pronounced in the Capital One culture � resulted in older employees being targeted for termination in the forced distributions.” Feltman Complaint at �100. Six months after the complaint was filed, the parties reached a confidential settlement. Shortly after Capital One’s initial settlement, five more employees sought relief under the ADEA, alleging that Capital One designed its evaluation system to “manage out” a minimum of 6 percent to 10 percent of middle managers by categorizing their performance as unacceptable. Krane v. Capital One Services, Inc., 314 F.Supp.2d 589, 592 (E.D. Va. 2004). Capital One moved to dismiss the ADEA claim. The court allowed plaintiffs to proceed with the disparate impact claim, Krane, 314 F.Supp.2d at 603, and shortly thereafter, a stipulation of dismissal was filed. WHAT WAS LEARNED? Clearly, some variation of employee ranking is used by a large number of employers in their performance management systems. Forced ranking systems are also alive and well in 2005. While critics of these performance management systems continue to point to problems, the noted issues are similar to those that arise out of any evaluation procedure, namely, that the rankings are based on subjective factors, reflect the biases of individual managers, and may not take into account the particular talents or weaknesses of an individual, especially if that individual is a member of a particularly strong or weak unit. Despite the criticism, performance evaluations used in tandem with a ranking system can actually assist companies in defending against discrimination lawsuits. In fact, good performance management procedures should provide companies with documentation to justify legitimate, nondiscriminatory employment decisions. There are several ways to protect against legal attacks. These include: � Review the current performance management procedures to ensure consistency and to identify any issues of disparate treatment or impact; � Recommend changes to the system only after taking into account how managers actually have implemented the system; � Consider “suggesting” bell-curve rankings rather than “forcing” such rankings, leaving discretion to managers with a group of above-average performers; � Develop clear criteria and consistent forms to be used by all managers to avoid subjectivity; � Make sure the evaluations include at least some objective criteria; � Conduct training sessions on the use of the evaluation forms and the suggested ranking percentages to ensure understanding and consistency; � Communicate the purpose of the process and how evaluations and rankings will be used. Employees should be informed of the consequence, if any, of a low ranking and reminded that a top grade does not change their at-will status; � Consider providing employees with some avenue to challenge their performance ranking; � Create a team consisting of counsel, management and human resources to develop and monitor the evaluation process and ensure it is implemented in a nondiscriminatory manner; � Consider running a statistical analysis through counsel to be certain that there is no disparate impact as the process is actually implemented over time; and � Request and obtain feedback from employees regarding their perceptions of the effectiveness of the process. Many employers find value in forcing managers to differentiate between members of their staff. To avoid liability, a careful approach to the implementation and maintenance of such systems should be undertaken to minimize the risks that are inevitable in this litigious environment. Christine A. Amalfe , a director of Gibbons, Del Deo, Dolan, Griffinger & Vecchione of Newark, is chair of the employment and labor practice group and a member of the litigation department. Eileen Quinn Steiner is a member of the litigation department and the products liability and labor and employment practice groups.

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