Legal Requirements

We begin this part with a discussion of legal issues because there are well-articulated legal and professional guidelines that govern the development of measures that are used to assess job performance in work situations. Equal employment opportunity and fair employment practice laws, such as Title VII of the Civil Rights Act and the Equal Pay Act, make it possible to challenge employment decisions. While litigation related to employment practices has occurred for over 30 years, its incidence has recently proliferated. These challenges can result in jury trials, compensatory or punitive damages, and high-profi le class action lawsuits. Legal requirements are relevant to performance management when appraisals are used as a basis for decision-making, such as pay, bonuses, promotions, or reductions in force. As a result, they can be the subject of employment litigation. Both the results of a performance management process (i.e., the ratings) as well as procedural aspects of performance management systems can be challenged. As examples, challenges can be targeted at the specifi city or subjectivity of performance criteria, standardization of operational procedures, or lack of internal consistency (for example, ratings that do not differentiate well between employees but pay increases and bonus awards that do), among other things.

There are two main types of challenges that can be made against an organization’s performance management system. The first is called a disparate treatment case, the second is the disparate impact case. In a disparate treatment case, the employee is claiming that she or he was treated differently by an employer than other employees who were in a similar situation. For example, assume both Mary and Jim failed to come to work one day, and the employer fires Mary but not Jim. If the reason the employer fired Mary was because she is female, then this is unlawful because the decision was based on the gender of the employee. If Mary was fi red was because she had consistently bad attendance, this could be disparate treatment due to differences in Mary and Jim’s attendance records. However, this would be lawful.

In a disparate impact case, the claim is that the employer has a practice that systematically and negatively impacts an entire group, for example, the employer won’t hire individuals unless they have college degrees. This practice might have a much larger impact on minority candidates as a whole than it has on white candidates as a whole, such that the requirement for a degree results in signifi cantly less minorities being hired than whites. To summarize, then, a disparate treatment challenge concerns how a specifi c individual was treated, while a disparate impact challenge claims that an organization’s system or process systematically discriminates against a protected class of people (e.g., females, disabled persons, people over 40, African Americans, etc.). While disparate treatment has been conceptualized as an individual claim, it has been recognized by the courts in class actions. The payoff to plaintiffs is much higher in disparate treatment claims (i.e., punitive damages) so they have been increasingly weaving these arguments into cases, as early as the 1990s. A recent article from the American Bar Association (http://www. abanet.org/irr/hr/spring04/forced.html) discusses the use of disparate treatment arguments as part of the class actions on age in performance management.

While any type of challenge is time-consuming and can be expensive, class action lawsuits can result in signifi cant monetary damages and can last literally decades. In addition, if a human resources system is found to be faulty as a result of a lawsuit, the organization may be required as part of the settlement to implement signifi cant changes to the system. These are often overseen by court-appointed outside experts. In this situation, organizations can lose control of their own human resources systems and be required to implement what is directed by the outside expert group. Thus, not only can litigation be expensive and time-consuming, but it can result in outsiders playing a signifi cant role in the design and oversight of an organization’s human resources systems and processes.

Organizational leaders sometimes need to be made aware of the potential for legal challenges and their consequences. There are specifi c steps that need to be taken to be able to defend a performance management system if it is challenged. These steps require additional work, time, and resources. Especially when there is a desire to get a new system implemented quickly, there can be pressure to forgo the additional work that is required to address legal concerns, especially if leaders view the chances of being challenged as very small. More than one organization’s leaders have made the decision not to be overly concerned about legal requirements, only to suffer signifi cant legal problems later on. It is therefore important that organizational leaders understand the legal requirements and possible risks so that they can make fully informed decisions about how to develop and use their human resources systems.

Because performance management is a frequent focus in employment litigation matters, it is important to be familiar with the laws and professional guidelines that apply to the design and implementation of these systems. While an in-depth discussion of legal issues and comprehensive review of associated case law is beyond the scope of this book, numerous resources are available for obtaining this information, including :

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Kahn, S. C., Brown, B. B., & Lanzarone, M. (1996). Legal guide to human resources. Boston: Warren, Gorham & Lamont, 6–2 to 6–58. 

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Malos, S. (1998). Current legal issues in performance appraisal. In J.W. Smither (Ed.), Performance appraisal : State of the art in practice (pp. 49–94). San Francisco : Jossey Bass. 

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Malos, S. (2005). The importance of valid selection and performance appraisal : do management practices figure in case law ? In F.J. Landy (Ed.), Employment discrimination litigation (pp. 373409). San Francisco : Jossey Bass. 

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Martin, D. C., Bartol, K.M., & Kehoe, P. E. (2000). The legal ramif i cations of performance appraisal: The growing signifi cance. Public Personnel Management, 29(3), 379–406.

Shown below is a brief summary of guidelines derived from case law and professional practice standards that are important in defending an organization’s performance management practices.

In the legal arena, there are two concepts that are important to understand – adverse impact and validity – as they play a central role in determining the veracity of potential legal challenges an organization might face.

Adverse Impact

Adverse impact means that the outcomes from a human resources system can be associated with employees’ race, gender, age, or other personal factors, such that individuals who belong to certain groups receive systematically less than individuals who belong to other groups. Potential adverse impact is evaluated against protected demographic groups, such as African Americans, Hispanics, females, and individuals over 40. There are different ways to examine adverse impact in a performance management system. If ratings are directly tied to outcomes such as pay increases, bonuses, or stock options, one can examine whether there are systematic and significant differences in the rewards received by different groups. A simple way to examine this involves use of the four fifths rule.

If a human resources system is shown to produce adverse impact and the organization wishes to continue using that system, there are legal requirements that the system must have demonstrated job relevance or validity. The existence of adverse impact without validity leaves the organization vulnerable to challenges against which it will not be able to prevail. While validity can be used as a defense for a performance management system that produces adverse impact, it is wise to minimize adverse impact to the extent possible. This not only decreases the chance that the organization will face costly and time consuming legal challenges, but it also helps to avoid unfavorable views of an organization that can occur when its human resources systems are known to produce adverse impact.

Because adverse impact reflects the proportion of majority versus protected group members who receive desirable outcomes, it cannot be assessed until after the appraisal process is complete and final pay, promotion, etc. decisions have been made. This is obviously late in the game to realize that a system may be producing undesirable levels of adverse impact. For this reason, other analyses can be performed to evaluate the like lihood that a system will produce adverse impact. Specifically, one can examine the average performance rating scores that different groups receive using a statistic called the “Effect Size.

Validity 

If performance ratings are linked to important outcomes and produce an adverse impact against a protected group, the law requires that the system be shown to measure important requirements of the job, or in other words, be a content valid system. Although there are other types of validity, content validity is the most practical and acceptable form of validity for performance management systems. Content validation requires conducting a thorough analysis to identify a job’s critical performance requirements. Job requirements are the important work behaviors or tasks that are performed and the competencies that are required to effectively perform these work behaviors and tasks. The performance management system must focus on measuring how effectively employees perform critical work requirements. Content validity is demonstrated through a series of expert judgments, which document that the performance measures comprehensively assess important job requirements. A brief overview of the validation process is shown below, following steps 1–7, and more detailed guidance for developing valid outcome (i.e., results) and behavioral performance measures is provided in the next two chapters.