Policy Guidance: Cases involving the deduction of pension payments from back pay awards

N-915-054

05/11/1990

1. SUBJECT: Policy Guidance: Cases involving the deduction of pension payments from back pay awards.

2. PURPOSE: This Policy Guidance provides information on the evaluation and processing of cases involving involuntary retirement or termination and discusses whether it is permissible to offset back pay with pension benefits received by a terminated employee during the period covered by the back pay award.

3. EFFECTIVE DATE: Upon Receipt.

4. EXPIRATION DATE: As an exception to EEOC Order 205.001, Appendix B, Attachment 4, sec. a (5), this Notice will remain in effect until rescinded or superseded.

5. ORIGINATOR: ADEA Division, Office of Legal counsel.

6. INSTRUCTIONS: File after the last Policy Guidance in the 800 series of Volume II of the Compliance Manual.

7. SUBJECT MATTER:

(a) Statutory Provisions -

Section 4 (a) (1) of the Age Discrimination in Employment Act of 1967, as amended (ADEA), 29 U. S.C. sec. 623 (a) (1), states that:

(4) (a) It shall be unlawful for an employer--

(1) to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's age;

Under section 7 (b) of the ADEA, remedies available to a successful claimant would include an appropriate award of back pay.

(b) Discussion: The issue to be considered in this Policy Guidance is whether it is permissible to deduct from back pay any pension benefits received by an illegally discharged employee during the back pay period.[1]

Example 1 : Employee A, age 66, earning a salary of $3,000 per month, is fired by Employer Z on March 1, 1988. After trial in United States District Court, the jury determines that the firing was in violation of section 4 (a) (1) of the ADEA since the firing was specifically based upon A's age (the president of Z had stated publicly that he wanted to fire all persons over the age of 62 because "older workers cannot possibly do the job; we need new blood.") Between the time of his firing and the entry of final judgment in the case, March l, 1990, A was unable to obtain work despite diligent efforts on his part. Since he was over the age of 65 at the time of his firing, A began receiving his monthly pension of $1,000 per month on March l, 1988 and continued to receive the pension amount each month thereafter.

In determining damages to be awarded to A, the jury determined that full back pay for the two-year period would be appropriate and awarded A (among other damages) the sum of $3,000 per month for the two years, or $72,000. Company Z argues that the pension amount received by A, $1,000 per month for two years, or $24,000, should be offset against the $72,000 back pay award.

(c) Analysis of Case Law: The Third Circuit has an absolute prohibition against such an offset (McDowell v. Avtex Fibers, Inc., 740 F.2d 214, 217-18 (3d Cir. 1984), vacated and remanded on other grounds, 469 U.S. 1202 (1985).

In the Seventh Circuit, the Commission argued, in EEOC v. O'Grady, 857 F.2d 383, 389 (7th Cir. 1988), that in the case of a public pension fund:

the pension plan is administered by an independent state agency and serves a social policy separate from the ADEA, and that it is therefore a collateral source. Further, to the extent that the refusal to offset provides plaintiffs with a windfall, the EEOC contends that it is better to give the windfall to the victims of discrimination than the perpetrator.

While the O'Grady case involved a public employer, at least one independent prong of the Seventh Circuit's reasoning in favor of the Commission's position should be extended to non-public employers:

We do not agree with defendants' arguments that the pension payments in this case should be offset. First, the pension benefits may be viewed as earned by the claimants and therefore not paid by the employer at all. Like an insurance policy provided by an employer, the pension benefits here were part of the claimants' compensation. . .. (O'Grady, at 391).

Furthermore, it should be recognized that although most private pension plans are funded mostly or entirely by employer contributions, by law the pension plan trusts must be maintained for the sole benefit of the employees, not for the benefit of the employer. The assets of the pension plan do not belong to the employer, but to the employees. Therefore, payment of trust assets to discharged employees who have reached the plan's retirement age would properly constitute a "collateral source" for purposes of the O'Grady decision.

The O'Grady court also cited cases from the Fourth and Seventh Circuits permitting the offsetting of pension benefits against back pay awards.[2] However, the O'Grady court made it clear that no circuits have required that pension payments be deducted from back pay awards. Rather, those circuits permitting such deduction have left the decision up to the discretion of the trial court and have not overturned such decisions barring abuse of discretion. See also Linn v. Andover Newton Theological School, Inc., 874 F.2d 1, 9 (1st Cir. 1989), holding that "it was not error in this case to subtract the received pension benefits"; Taylor v. Texas Corp., 831 F.2d 255 (11th Cir. 1988), holding that such a deduction was permissible.

(d) Commission Position -

In the Commission's brief in O'Grady, we argued (brief at 29-30):

Pension benefits are "not made to discharge any liability or obligation" of the employer to the employee. [NLRB v. Gullett Gin Co., 340 U.S. 361, 364 (1951)]. Rather, it is important to remember that "a pension plan is not just another pocket of the employer into which the employer had placed some funds for the time being. Such plans are separate entities holding separate funds [to which employees are entitled and] to which an employer has no right…." Monroe v. United Air Lines. Inc., 569 F. Supp. 645, 649 n. 4 (N.D. I11. 1983).

Therefore, like unemployment compensation, these benefits should not be deducted from back pay because they "serve social policies independent of those served by back pay awards." [McDowell v. Avtex Fibers, Inc., 740 F.2d 214, 217 (3d Cir. 1984), vacated and remanded on other grounds, 469 U.S. 1202 (1985)]…. Since the pension benefits in this case were collateral source benefits, it was within the district court's discretion to refuse to deduct them from the back-pay award…. Thus, failure to deduct pension benefits "does not make the employees more than 'whole' … resulting in a windfall to the claimants as the defendants contend…. Furthermore, as the district court found… the collateral source rule applies regardless of whether the collateral source attempts to recoup its payments…. Accordingly, even if the district court's refusal to deduct pension benefits could be viewed as a windfall to the claimants, a deduction of those benefits [from the back-pay award] would confer a windfall on the defendants, who, as we have discussed, have no right to the funds. In choosing between conferring a windfall on the employees, the victims of the defendants' unlawful retirement policy, or on the defendants, the employees are the logical choice.

It is the position of the Commission that the view of the Third Circuit and the Seventh Circuit in O'Grady is the appropriate policy to be followed on this issue. It is not equitable for the employer to be permitted to recoup pension payments made from the pension plan which, while usually funded by the employer, is a totally separate legal entity from the employer, a "collateral source" of payments to the employee and, indeed, a vested employee's own money. Accordingly, the Commission will argue in each case that no offsets should be permitted. In Example 1, above, employee A would be entitled to the full $72,000 back pay award, without deduction of the $24, 000 in pension payments received.[3]

(e) Case resolution -

The general procedures set forth in Volume II of the Compliance Manual should be utilized in the investigation of the charge. In attempting to fashion relief, it would not be appropriate for the field offices to permit the offset by the employer of pension benefits received against back pay due.[4]

In addition, in resolving the relief due to an employee, the employer must make all appropriate pension accruals and adjustments (such as those specified in section 4 (i) of the ADEA), for the back-pay period. Call Guidance for assistance with any questions.

DATE: _____5-11-90________________ APPROVED: ___________________

EVAN J. KEMP,

Chairman