Supreme Court Holds that Pension Plan May Apply a Benefit Formula That Treats Pre-Pregnancy Disability Act Pregnancy Leave Less Favorably Than Other Medical Leave

by VIRGINIA H. PERKINS
Over thirty years ago, Congress passed the Pregnancy Discrimination Act ("PDA"), providing that differential treatment of pregnancy leave constitutes sex-based discrimination. It would be illegal now under the PDA to deny service credits for pension plan purposes for pregnancy leave, while granting such credits for other types of medical leave. The Supreme Court recently held, however, in AT&T Corp. v. Hulteen ("Hulteen"), that a retirement plan provision which provides less retirement credit for pre-PDA pregnancy leave than for medical leave generally, does not violate the PDA. The Court's decision reversed a decision by the Ninth Circuit Court of Appeals and confirmed the presumption that anti-discrimination statutes will not be applied retroactively.

The Facts and Lower Court Rulings

Like many employers, AT&T offers its employees pension benefits based, in part, on the length of the employee's credited service. Before 1977, female employees who took pregnancy leave were granted a maximum of thirty personal days. Any additional pregnancy related leave did not count towards the employee's credited service for plan purposes. By contrast, employees on regular temporary disability had no limit on the days they could continue to accrue service credit. In 1977, AT&T adopted a Maternity Payment Plan ("MPP") which entitled pregnant employees to disability benefits and service credit for up to six weeks of leave. Pregnancyrelated absences beyond six weeks were treated as personal leave without further benefits or service credit, whereas employees on disability unrelated to pregnancy continued to receive full service credit for the duration of the absence. This type of differential treatment of pregnancy leave was sanctioned by the Supreme Court in General Electric. Co. v. Gilbert, 429 U.S. 125 (1976) ("Gilbert"), which held that a disability benefit plan excluding disabilities related to pregnancy was not sex-based discrimination within the meaning of Title VII of the Civil Rights Act of 1964.

Congress responded swiftly to Gilbert in 1978 by passing the PDA, which amended Title VII and made "clear that it is discriminatory to treat pregnancyrelated conditions less favorably than other medical conditions." Newport News Shipbuilding & Dry Dock Co. v. EEOC, 462 U.S. 669, 684 (1983). On April 29, 1979, the effective date of the PDA, AT&T adopted its Anticipated Disability Plan which replaced the MPP and provided service credit for pregnancy leave on the same basis as leave taken for other temporary disabilities. AT&T did not, however, make any retroactive adjustments to the service credit calculations of women who had been subject to the pre-PDA policies.

The four individual plaintiffs in Hulteen are current and former AT&T employees who took pregnancy-related leave before the PDA was passed and before the Anticipated Disability Plan came into effect. Each of the plaintiffs received less service credit for pregnancy leave than she would have received had that leave been for non-pregnancy related purposes. Without this disparate treatment, each of the plaintiffs would have received greater benefits upon retirement.

After filing charges of discrimination with the Equal Employment Opportunity Commission, which issued a notice of probable discrimination and a notice of right to sue, the Plaintiffs filed suit against AT&T in the United States District Court for the Northern District of California.

The District Court ruled in favor of the Plaintiffs, finding itself bound by a prior Ninth Circuit decision, Pallas v. Pacific Bell, 940 F.2d 1324 (1991), which held that a Title VII violation had occurred where post-PDA retirement eligibility calculations incorporated pre-PDA accrual rules that differentiated on the basis of pregnancy. The Ninth Circuit, en banc, affirmed, holding that Pallas "was, and is, correct" in concluding that "calculation of service credit excluding time spent on pregnancy leave violates Title VII." 498 F.3d 1001, 1003 (2007).

Because the Ninth Circuit's holding in Hulteen directly conflicted with the holdings of the Sixth and Seventh Circuits, the Supreme Court granted certiorari.

The Supreme Court Decision

The Supreme Court reversed the Ninth Circuit in an opinion authored by Justice Souter and joined by Chief Justice Roberts and Justices Alito, Kennedy, Scalia, and Thomas. Justice Stevens concurred. Justice Ginsburg authored a dissent which was joined by Justice Breyer.

The majority held that AT&T's pension plan did not violate the PDA because it fell within the ambit of Section 703(h) of Title VII, which insulates "bona fide" seniority systems from Title VII liability. Section 703(h) provides:

According to the Court, "seniority systems are afforded special treatment" by Section 703(h). While "adopting a service credit rule unfavorable to those out on pregnancy leave would violate Title VII today, a seniority system does not necessarily violate the statute when it gives current effect to such rules that operated before the PDA." In upholding AT&T's Plan, the Supreme Court explained: there is "no question that the payment of pension benefits in this case is a function of a seniority system, given the fact that calculating benefits under the pension plan depends in part on an employee's term of employment."

In concluding that AT&T's Plan was a "bona fide" seniority system the Court relied in part on Teamsters v. United States, 431 U.S. 324 (1977), a case in which the advantages of a seniority system flowed disproportionately to white, and against minority, employees because of an employer's prior discrimination in job assignments. In Teamsters, the Court recognized that this "disproportionate distribution of advantages does in a very real sense operate to freeze the status quo of prior discriminatory employment practices[,] [b]ut both the literal terms of section 703(h) and the legislative history of Title VII demonstrate that Congress considered this very effect of many seniority systems and extended a measure of immunity to them." The discrimination in Teamsters had occurred in prior executive action hiring employees and assigning jobs, but the seniority system was a bona fide system without any discriminatory terms. Therefore, the Court could conclude that the system "did not have its genesis in ... discrimination, and ... has been maintained free from any illegal purpose." Similarly, in Hulteen, the Court concluded that AT&T's seniority system was bona fide and had no discriminatory terms.

Underpinning the Court's decision that AT&T's seniority system was bona fide is the Court's determination that AT&T's pre-PDA policy of differential treatment was not, at the time, unlawful discrimination on the basis of sex. According to Gilbert, which was good law until superseded by the PDA in 1979, an accrual rule limiting seniority credit for time taken for pregnancy leave was not unlawful discrimination on the basis of sex. Relying on Gilbert, the majority opinion in Hulteen reasoned that "[b]ecause AT&T's differential accrual rule was ... a permissible differentiation given the law at the time, there was nothing in the seniority system at odds with the subsection (h) bona fide requirement."

The majority opinion in Hulteen further states that it could only conclude that AT&T's current seniority policy was not bona fide if it read the PDA as applying retroactively to overturn Gilbert and recharacterize the pre-PDA policy as illegal even prior to passage of the PDA. The Court declined to do so, concluding instead that Congress intended the PDA to take effect on the date of enactment, without retroactive effect.

The Court also considered and rejected several other arguments raised by the plaintiffs in reaching its holding. The Court rejected the argument that Section 706(e)(2) of Title VII "affects the validity of any arrangement predating the PDA that would be facially discriminatory if instituted today." According to the Court, Section 706(e)(2) applies only to seniority systems "adopted for an intentionally discriminatory purpose" and is therefore inapplicable. The Court also rejected the argument that because AT&T could have chosen to give post-PDA credit to pre-PDA pregnancy leave, its failure to do so was facially discriminatory at that time. The Court explains: "[i]f a choice to rely on a favorable statute turned every past differentiation into contemporary discrimination, subsection (h) would never apply."

The Court also rejected the plaintiffs' analogy to Bazemore v. Friday, 478 U.S. 385 (1986) (per curium), which held that "[a] pattern or practice that would have constituted a violation of Title VII, but for the fact that the statute had not yet become effective, became a violation upon Title VII's effective date, and to the extent an employer continued to engage in that act or practice, it is liable under that statute." Id. at 395. In Bazemore, the Court found that a differential compensation plan extending back to pre-Title VII segregation which paid black employees less than comparable white employees violated Title VII. The Hulteen Court concluded that "Bazemore has nothing to say here ... [because] it did not involve a seniority system subject to subsection (h)." According to the Court, "Bazemore would only be on point if, after the PDA, AT&T continued to apply an unfavorable credit differential for pregnancy leave simply because it had begun to do that before the PDA."

Finally, the Court rejected the plaintiffs' argument that policies such as AT&T's are prohibited by the Lilly Ledbetter Fair Pay Act, which recently amended Title VII to provide that unlawful compensation discrimination occurs not only when a discriminatory compensation decision is made, but also when an individual "is affected by" the application of such decision. Again, the Court relied on Gilbert for its conclusion that AT&T's pre-PDA decision not to provide full service credit for pregnancy leave was not unlawful discrimination, and therefore, Plaintiffs were not "affected by" application of a discriminatory decision or other practice within the meaning of the statute.

In a concurring opinion, Justice Stevens expressed his disagreement with Gilbert, but recognizing its force prior to enactment of the PDA, agreed with the majority.

In a dissent, joined by Justice Breyer, Justice Ginsberg viewed the relevant discriminatory event as occurring after the effective date of the PDA, when the plaintiffs' benefits were calculated under the AT&T Plan. According to the dissent:

In Justice Ginsberg's view, Gilbert should be explicitly overruled "so that the decision can generate no more mischief."

What Does AT&T v. Hulteen Mean For Plan Sponsors

Though unfavorable for the women directly affected by Hulteen, the Supreme Court's decision can be viewed as a positive result for employers and pension plans as a whole. Any employer maintaining a benefit plan that incorporates pre-PDA accrual rules like the AT&T plan may continue that plan unchanged. Had the Ninth Circuit decision been permitted to stand, any such plan would have been required to retroactively credit previously uncredited service for purpose of calculating retirement benefits. The result might have been to undermine existing benefit systems by reducing the confidence plan sponsors have in their ability to estimate future benefit and funding obligations. The general rule reinforced by AT&T v. Hulteen, that anti-discrimination statutes will not be applied retroactively, serves to increase certainty and predictability for employers.

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