Navigating Adverse Impact: A Comprehensive Guide for Professionals

Did you know that about 60% of US organizations have faced at least one employment discrimination lawsuit? One key concept that plays a crucial role in understanding employment discrimination is “adverse impact.” In simple terms, adverse impact occurs when a seemingly neutral policy, practice, or procedure has a disproportionately negative effect on a certain group of people, even if it wasn’t designed to be discriminatory.

Understanding adverse impact is essential for both employers and employees. For employers, being aware of adverse impact helps avoid potential lawsuits, maintain a diverse workforce, and create an inclusive work environment. For employees, knowing about adverse impact can empower them to recognize and address potential discrimination in the workplace.

We enact laws to ensure diversity and inclusion in the workplace and that discrimination based on class, gender, nationalities and race, and others are things of the past. So there is significant progress in our fight for equity, equality, inclusion, and diversity. Nevertheless, we must relegate to the dustbin of history all those discriminatory practices.

What is an adverse impact?

Adverse impact, also known as disparate impact, is a legal concept established under Title VII of the Civil Rights Act of 1964. This act prohibits employment discrimination based on race, color, religion, sex, and national origin. Adverse impact occurs when an employer’s policies or practices, even if unintentional, result in a negative effect on a specific protected group. It’s essential to remember that adverse impact focuses on the outcomes of policies rather than the intent behind them.

As the name indicates, adverse impact is the negative effect of a hiring system against a particular class or group of people, what we call “protected class.” They suffer from “adverse impact” if, due to the nature of the selection process itself, companies do not hire sufficient numbers from them as mandated by law.

The threshold is known as the four-fifths rule. It means the group with the lowest hiring rate must not go below 80% of the group with the highest selected rate. Going below the threshold means that there is already an adverse impact.

In itself, it is not problematic or even against the law. However, going under the threshold means that there are some underlying problems regarding inclusion and diversity.

The difference between adverse impact and intentional discrimination

It’s important to distinguish between adverse impact and intentional discrimination. Intentional discrimination, or disparate treatment, occurs when an employer treats an individual or group unfairly based on their protected characteristics. In contrast, adverse impact does not involve intentional discrimination; it is about the unintended consequences of a policy or practice.

Think of it like this: imagine you’re baking cookies for a group of friends. If you intentionally leave out chocolate chips for one friend because you know they dislike chocolate, that’s disparate treatment. However, if you accidentally make all the cookies with nuts, not realizing that one of your friends is allergic, that’s an example of adverse impact.

Identifying common scenarios where adverse impact may occur

There are several scenarios where adverse impact might occur in the workplace. Here are a few common examples:

1. Hiring requirements: A company may have a policy that requires all job applicants to have a specific level of education. While the policy seems neutral, it may disproportionately affect candidates from lower-income backgrounds who may not have had access to higher education.
2. Promotion criteria: An organization may use a performance evaluation system that favors employees who work long hours. This policy could inadvertently disadvantage working parents or individuals with disabilities who may not be able to work the same hours as their colleagues.
3. Dress code policies: A company’s dress code may unintentionally exclude certain religious or cultural groups by prohibiting specific types of clothing or accessories, such as headscarves or facial hair.

By understanding adverse impact and its potential consequences, both employers and employees can work together to create a more inclusive and equitable workplace for everyone.

The importance of adverse impact to talent acquisition

The adverse impact harms companies who want to acquire more talent. The inherent selective bias may preclude the company from hiring those who have talent but belong to the protected class. Some qualifications that may have no bearing in work could discriminate against certain people, precluding the company from using available talents for its benefit.

If it remains unchecked, the adverse impact may affect diversity and inclusion in a company. In addition, it may lead to further discrimination and further exclusion of the members of the protected class. It may severely affect the overall fight for inclusion and diversity and negatively impact company productivity and image.

Therefore, companies must address the adverse impact to gain benefits by hiring people from those belonging to the protected class.

The Benefits of Addressing Adverse Impact

Legal compliance and avoiding costly lawsuits

By addressing adverse impact, organizations can ensure compliance with employment laws, such as Title VII of the Civil Rights Act of 1964. This not only helps avoid potential legal issues but also saves companies from the financial burden of costly lawsuits. For example, in 2016, the US Equal Employment Opportunity Commission (EEOC) secured over $482 million in monetary benefits for victims of workplace discrimination.

Enhancing diversity and inclusion in the workplace

When organizations actively address adverse impact, they create a more diverse and inclusive work environment. A diverse workforce brings numerous benefits, such as increased creativity, better problem-solving, and access to a broader range of perspectives. A study conducted by McKinsey & Company found that companies in the top quartile for diversity were 35% more likely to have financial returns above their industry median.

Improving employee morale and satisfaction

Addressing adverse impact can lead to higher employee morale and satisfaction. When employees feel that they are treated fairly and have equal opportunities, they are more likely to be engaged, productive, and loyal to their employer. A study by Glassdoor found that organizations with high levels of employee satisfaction outperformed the overall stock market by 122%.

Strengthening the company’s reputation

Taking steps to address adverse impact can also enhance a company’s reputation, making it more attractive to potential employees, customers, and investors. Research by Forbes has shown that 67% of job seekers consider workplace diversity an essential factor when evaluating job offers.

Examples of Adverse Impact in Different Settings

A. Hiring and selection processes

A company may use a pre-employment test that inadvertently disadvantages applicants of a certain race or gender. By identifying and addressing the adverse impact of this test, the company can ensure a fairer hiring process and a more diverse pool of candidates.

B. Performance evaluations and promotions

An organization’s performance evaluation system may unintentionally favor employees who are assertive or outspoken, which could disproportionately affect individuals from certain cultural backgrounds. Addressing this adverse impact can help create a more equitable evaluation process that recognizes the value of diverse communication styles.

C. Compensation and benefits

A company’s compensation structure may inadvertently disadvantage part-time or remote employees, who may be more likely to be women or individuals with disabilities. By examining and adjusting its compensation policies, the organization can promote pay equity among all employees.

D. Training and development programs

An organization may offer training programs that are only available during specific hours or at specific locations, which could disproportionately exclude certain groups, such as working parents or employees with disabilities. By providing flexible training options, the organization can ensure equal access to development opportunities for all employees.

E. Workplace policies and procedures

A company’s policy on flexible work arrangements may unintentionally disadvantage employees who require accommodations due to religious practices or family responsibilities. By revising its policies to consider the diverse needs of its workforce, the company can create a more inclusive work environment.

Avoiding the adverse impact

The company must implement measures to avoid the adverse impact. Among these are the following:

Strict implementation of the four-fifths rule

There is a reason for this rule: to ensure proper representation of the protected class in the workplace. The company must ensure that they implement and they meet the requirement as much as possible. Having the correct numbers and representation is one of the surest ways to avoid the adverse impact.

Consequently, if the company has difficulties meeting the said number, there might be underlying problems regarding the hiring and selection process. For example, there might be a selection bias inherent in the process, which precludes hiring those who belong to the protected class. Or, there might be some discriminatory policies still in place.

Review the hiring process

There is the real possibility that selection bias is inherent in the hiring process itself. If there is an adverse impact on the company for an extended period, the hiring process itself might be responsible and reviewed. Maybe there are some requirements and qualifications that preclude the hiring of those members of the protected class.

The hiring process must be responsive to the company’s needs and comply with hiring those who belong to the protected class.

Properly document the process.

Take a hard look at the process and study it to look for some clues that may indicate some problems and point to some solutions. For example, the hiring process details may reveal the problems that are neglected or barely noticed by the company when hiring applicants.

For instance, some physical qualifications or medical exams might preclude the hiring of women and people with specific disabilities. Therefore, these qualifications must be reviewed and ensure that they must be responsive to the company’s needs and the laws regarding employing those who belong to the protected class.

Take a look at passing rates.

There might be indeed a few applicants from the protected class who passed or qualified. However, having few applicants means fewer people from the protected class that will work in your company. That indicates profound problems that may go beyond the adverse impact.

Overall, the company might have adverse impact issues but has general issues about discrimination, exclusion, and lack of diversity and inclusion, even as it hires people from the protected class. Again, either the hiring process suffers from a selection bias, or the exams and qualification tests preclude hiring people from the protected class.

The law itself is clear about it. In this regard, the company must justify the reasonableness of the qualifications and hiring process or modify its process and qualifications. A company that is for diversity and inclusion must undoubtedly opt for the second option without being unreasonable.

Review the workforce composition

IF the number of the protected class hovers just around the threshold of above-below 80 percent of the highest number, it may not indicate that much of a problem. More so if you consider the employee turnover rate. However, the threshold is the minimum, and though there may be no problems following the law, it already indicates a deeper issue the company must address.

A company that actively promotes inclusion and diversity must have the minimum requirement and have a far greater representation than what is prescribed by law. Reviewing the current composition of the workforce and its composition in the past will reveal the extent of representation the protected class has in a company.

Judging from it then, the company will know the extent of its compliance in avoiding adverse impact and its overall commitment to diversity and inclusion. A momentary hovering below eighty percent during a specific period is alarming but not indicative of systemic problems. However, a constant hovering below a significant or long period indicates a far, worse, and systemic problem.

We can look at the instances of layoffs, for instance. Though the hiring process itself may not discriminate against the protected class, layoffs may be different. Data and statistics about layoffs then could be a significant indicator that may result in adverse impact. Employee turnover may also indicate discrimination. The company must address those issues.

Training your personnel

Nothing beats having the right people deal with significant problems. It will be best to have personnel that may address the adverse impact and other related problems. Ensure that you have the right people adequately trained and have the expertise to help your company deal with the problem and implement policies to avoid adverse impact.

Measuring the adverse impact

Measuring the adverse impact is as exact as it can be. The four-fifths rule states that in the selection process, among those hired, the ratio of the lowest group to the highest must not go below 80 percent. Going below this means you have an adverse impact against that group.

The need to measure the adverse impact

Companies must measure adverse impact because they must comply with the law and promote diversity and inclusion in the workplace. Finally, adverse impact affects the company, especially in recruiting and having talent. Having an adverse impact will severely affect a company’s pool of talented people and dedicated workforce.

A company must follow the law and promote social good, justice, and harmony if it wants respect from its employees and wants the workforce to be productive. Failure to comply hurts the workforce’s morale, resulting in demoralization, high employee turnover rate, and low productivity.

Conclusion

Addressing adverse impact is of paramount importance for organizations to create a more inclusive and equitable workplace. By understanding the concept of adverse impact and its potential consequences, organizations can ensure legal compliance, enhance diversity and inclusion, improve employee morale and satisfaction, and strengthen their reputation. By identifying and addressing adverse impact in various workplace settings, such as hiring and selection processes, performance evaluations, compensation, training and development programs, and workplace policies, organizations can foster a work environment that embraces diversity and allows all employees to thrive. The commitment to addressing adverse impact requires continuous effort and collaboration among employers, employees, and stakeholders to create a workplace that truly celebrates and benefits from the unique contributions of every individual.

References

US Equal Employment Opportunity Commission. (2016). EEOC Releases Fiscal Year 2016 Enforcement and Litigation Data [Press release]. https://www.eeoc.gov/newsroom/eeoc-releases-fiscal-year-2016-enforcement-and-litigation-data

Hunt, V., Layton, D., & Prince, S. (2015). Why diversity matters. McKinsey & Company. https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters

Chamberlain, A. (2015). Does Company Culture Pay Off? Analyzing Stock Performance of “Best Places to Work” Companies. Glassdoor. https://www.glassdoor.com/research/app/uploads/sites/2/2015/03/GD_Report_2015_03.pdf

Smith, J. (2014). Study: 67% of job seekers consider workplace diversity an important factor when evaluating job offers. Forbes. https://www.forbes.com/sites/jacquelynsmith/2014/01/30/study-67-of-job-seekers-consider-workplace-diversity-an-important-factor-when-evaluating-job-offers/