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California Supreme Court Rules that Age Discrimination in Employee Benefits Does Not Violate State Law

July 19, 2002

The California Fair Employment and Housing Act ("FEHA") (Gov't Code § 12900 et seq.) protects individuals from discrimination in the workplace. Specifically, the Act protects those age forty or older by mandating that employers not consider age in decisions relating to hire, discharge, suspension or demotion. The California Supreme Court recently ruled, however, that employers may take age into account when it comes to providing certain fringe benefits. Esberg v. Union Oil Company of California, 2002 Cal. LEXIS 3801 (June 24, 2002).

In 1991 Union Oil Company of California (UNOCAL) advised Dan Esberg and his coworkers about its educational aid program, under which employees could obtain a college degree at the company's expense. Esberg earned a bachelor's degree and was reimbursed by UNOCAL under the program. In 1994, at age fifty-six, Esberg requested additional aid to pursue a master's degree. UNOCAL denied his request stating that he was "too old to invest in." Esberg subsequently filed suit claiming, among other things, age discrimination under the FEHA.

The Supreme Court examined the relevant sections of the statute and concluded that the FEHA does not prohibit age discrimination as to the "furnishing of employee benefits such as educational assistance." The Court observed that Section 12940 prohibits employers from discriminating, among other things, in the "terms, conditions, or privileges of employment" because of race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, marital status, sex, or sexual orientation. However, the Court noted, this Section does not prohibit discrimination based upon age.

Section 12941, on the other hand, which specifically addresses age discrimination, makes it unlawful for an employer to "refuse to hire or employ, or to discharge, dismiss, reduce, suspend, or demote, any individual over age forty on the ground of age…" Yet, this section is limited to the specified types of personnel action, and contains no catchall prohibition of discrimination as to the "terms, conditions, or privileges of employment." The Court thus concluded that California law does not preclude employers from considering age when furnishing employment benefits.

California employers, however, should not view this decision as a license to engage in wholesale age discrimination with respect to employee benefits. It is important for employers to consider, for example, that a drastic change in an older worker's benefits may be construed as a constructive discharge which, if based on age, would violate the FEHA.

Moreover, this decision does nothing to avoid the impact of the federal Age Discrimination in Employment Act ("ADEA"), which prohibits age discrimination in employment with respect to all "terms, conditions and privileges" of employment, including employee benefits. 29 U.S.C. § 623(a)(1). While the ADEA contains a general exception which permits employers to "observe the terms of a bona fide employee benefit plan" when doing so otherwise would violate the ADEA, this exception is qualified, and applies only where "the actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker." 29 U.S.C. § (f)(2)(B)(i). The ADEA also contains detailed provisions that address how that Act operates in the area of pension benefit plans. 29 U.S.C. § 623(i).

In addition to the limits posed by the ADEA, age discrimination in the administration of certain benefits is likely to violate the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001 et seq. ("ERISA"), which governs certain employee pension benefit and welfare benefit plans.

While the ultimate impact of the Unocal decision thus is to shift the focus of benefits litigation in California from state courts under the FEHA to federal courts under the ADEA, it is a welcome development that may have advantageous uses in age discrimination cases under the FEHA; for example where employees try to tack on benefits claims to an underlying discharge claim.