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Questions (and Answers) About Adverse Impact - Part I

July 17, 2012

A few weeks ago, Baldor Electric was ordered to pay a $2 million settlement for an OFCCP applicant screening discrimination case.  Investigators had determined that the company’s applicant screening process at its Fort Smith, Arkansas, facility had adverse impact on women and minorities.  So I thought it might be a good time to talk about the background of adverse impact, how to measure it, and how to make sure your hiring process is legally defensible.  But we don’t have to tackle it all at once – this is Part I, and you can read Part II right here.

1. What is adverse impact? A logical place to start, right?  The U.S. Government's Uniform Guidelines on Employee Selection Procedures define it as, “A substantially different rate of selection in hiring, promotion, or other employment decision which works to the disadvantage of members of a race, sex, or ethnic group.”  Also referred to as disparate impact, adverse impact occurs when facially neutral employment practices negatively affect some selected groups of people more than others.  Example:  A job description with a minimum height requirement as a selection criterion could adversely impact females and Asian/Pacific Islanders, even though, on the surface, it’s a facially neutral employment practice.

2. What do you have to do to show that adverse impact exists?  Determining the occurrence of adverse impact entails determining whether or not there is a “substantially different rate of selection.”  Several statistical procedures can be used to examine the presence of adverse impact against protected groups. These 2 statistical approaches are commonly used to establish initial proof of adverse impact.

a. 4/5 Rule.  The pass rates for the protected groups are compared with the pass rate for the majority group.  If the ratio is below 80% (or 4/5), indicating a significantly higher percentage of applicants from the majority group are passing the test, there is evidence of adverse impact against the protected group.

b. 2-Standard Deviation Rule.  Recommended in the OFCCP Compliance Manual, this rule serves as the threshold for determining if substantial pass rates between groups truly exist or simply occur by chance.

3. What’s the appropriate sample size for conducting an adverse impact analysis?  Adverse impact results are affected by sample size- with a small sample size, the results are less stable and more like to occur by chance.  In some cases, having one or two more minority applicants pass the test could drastically change the comparative pass ratio from below 80% to above that threshold.  Despite this, U.S. courts have not employed a clear standard to set the minimum sample size.  A recommendation is to have at least 30 individuals in your candidate pool and at least 5 individuals in your expected hire group for the demographic category in question.

4. Is it legal to use a test that has adverse impact?  The presence of adverse impact does not ultimately equal employment discrimination.  Rather, the presence of adverse impact only gives rise to a prima facie case of discrimination.  It is lawful to use a test that has adverse impact, as long as the test is “job related and consistent with business necessity.”

candidate experience report

Matthew O'Connell, Ph.D. Matthew O'Connell, Ph.D. was the Co-Founder and Executive Vice President of Select International, which was acquired by PSI. For more than 20 years, he was a driving force when it comes to designing, evaluating and integrating selection tools into systems that meet the specific needs of Global 2000 organizations. He is the co-author of the business best-selling book, Hiring Great People.