As a business owner, hiring manager, or HR professional, you’ve likely heard the terms “adverse impact” and “disparate impact” used interchangeably. But what do they mean and why do they matter?
Adverse impact is an increasingly important concept in the world of human resources, particularly in the USA. As organizations strive to create a diverse and inclusive workplace, they’re looking more closely at their hiring practices and how they might be unintentionally causing unfairness.
Adverse impact, or disparate impact, is the term used to describe a situation where a hiring practice or selection process disproportionately affects a particular group of people and puts them at a disadvantage. It’s a timely topic that all businesses should be aware of, and in this blog, we’ll explore why it’s important and how to measure and reduce it.
So, let’s dive in and learn more about what is adverse impact and why it matters.
What is adverse impact?
Have you ever wondered: What is adverse impact?
In simple terms, it’s a measure of the degree to which certain employment practices have a disproportionate impact on certain protected classes of individuals. It’s important to note that this does not necessarily mean that the employer is engaging in discrimination. Rather, it’s a measure of the potential for discrimination.
Adverse impact can have a significant effect on a company’s ability to attract, retain, and promote a diverse workforce and lead to costly legal battles and reputational damage. Therefore, it’s important for you to be aware of the potential for adverse impact and take steps to measure and address it.
Here are some examples of adverse impact that may be seen in modern workplaces:
- Unfairness in hiring, firing, and promotion decisions based on race, sex, or other protected characteristics.
- Unfair pay scales for certain protected groups, such as women and minority groups.
- Unequal access to job opportunities or resources based on race, gender, or other protected characteristics.
- A lack of diversity in the workplace, which can lead to a lack of understanding of the perspectives of different groups.
- Unfavorable work assignments given to certain protected groups.
- Unfavorable performance evaluations or reviews due to protected characteristics.
- Unfavorable work hours or shift assignments given to certain protected groups.
- Unfavorable job security or job protections given to certain protected groups.
How did the concept of adverse impact come to be?
The concept of adverse impact has been around for decades, gaining traction in the early 1970s due to a case filed against the Duke Power Company in North Carolina: Griggs v. Duke Power Company.
This landmark employment discrimination case was decided by the U.S. Supreme Court in 1971. Willie Griggs and twelve other African-American employees of Duke Power’s Dan River hydroelectric plant sued the company for violating Title VII of the Civil Rights Act of 1964, which forbids race-based discrimination in employment, and the Supreme Court ruled unanimously in favor of Griggs.
The court decided that intelligence test scores and diplomas as requirements for employment are not in themselves illegal under Title VII, but if they limit ethnic minority hiring and do not pertain to job skills or performance, these requirements are illegal.
The Court noted that Duke Power had not made a serious effort to determine the effectiveness of diploma and intelligence test requirements as predictors of job performance and that none of the three federal courts that heard Griggs found that Duke Power had discriminatory intent.
This ruling laid the foundation of the legal standard known as “disparate impact,” which holds that employers can be liable for discrimination if their practices have a discriminatory effect on a protected group, even if the employer had no discriminatory intent. The Civil Rights Act of 1991 reinforced this standard, reaffirming the influence of Griggs.
Since then, the US Equal Employment Opportunity Commission (EEOC) has continued to recognize that certain employment practices such as hiring, promotion, and performance evaluation, can have a disproportionate impact on certain protected classes of individuals.
To ensure employers are aware of the potential for adverse impact, the EEOC has taken steps to require employers to analyze their employment practices to identify any potential disparities in their workforce.
Why should organizations measure adverse impact?
There are certain benefits to measuring adverse impacts;
- Reduced legal risk
One of the primary benefits of measuring adverse impact is the reduced legal risk that it provides. By conducting an adverse impact analysis, employers can identify potential discriminatory practices in their hiring and other employment processes. This is especially important in the US, where there are a variety of laws and regulations that prohibit discrimination. Companies can use the results of an adverse impact analysis to make sure that their processes are compliant, and that they are not unintentionally engaging in discriminatory practices.
- Improved employee morale
Measuring adverse impact can also have a positive impact on employee morale. When employees feel that their employers are committed to creating a fair and equitable workplace, they are more likely to be satisfied with their jobs, which would improve employee retention. Additionally, when employees feel that their employers are taking steps to prevent discrimination, they are more likely to trust their employers and be more comfortable speaking up about any potential issues that may arise.
- Improved performance
Another benefit of measuring adverse impact is improved performance. When employees feel that their employer is committed to fairness, they are more likely to be motivated and productive. Additionally, a diverse workforce can lead to better decision-making and more creative solutions.
- Increased efficiency
Measuring adverse impact can also lead to increased efficiency. By identifying potential discriminatory practices, employers can make sure that their processes are fair and equitable. This can lead to a more streamlined hiring and employment process, which can save both time and money.
- Improved reputation
Measuring adverse impact can improve an employer’s reputation. When employers are seen as taking proactive steps to prevent discrimination, they are more likely to be viewed positively by potential customers and employees. This can lead to increased business opportunities and a stronger brand.
The risks of not measuring adverse impact
When it comes to hiring, recruiting, and other employment decisions, it’s important to consider the potential of adverse impact. But what happens when you don’t take the time to measure it? Here’s a look at the risks of not measuring adverse impact.
- Legal action
One of the biggest risks of not measuring adverse impact is that it can lead to unfair and inequitable hiring and human resource practices, which can lead to legal action. From hefty fines to lost business, the cost of not measuring adverse impact can be significant.
- Missed opportunities
When employers fail to measure adverse impact, they miss the chance to identify and correct any potential issues. This can lead to a workplace that’s not as diverse or inclusive as it could be, which can have a negative impact on morale, productivity, and the overall success of the organization.
- Reputational damage
News of a legal battle or lack of diversity in the workplace can damage an organization’s reputation. This can lead to a loss of customers, investors, and even employees. It’s important to be aware of the potential for reputational damage when it comes to adverse impact.
- Missed talent
When employers don’t measure adverse impact, they may be missing out on talented candidates from underrepresented groups. This can lead to a workplace that’s not as diverse or innovative as it could be, and it can limit an organization’s ability to stay competitive.
The methods for calculating adverse impact
To calculate adverse impact, you must first identify the employment practice that is being evaluated. This could be anything from a hiring decision to a promotion or termination.
Once the employment practice has been identified, you must then calculate the selection rate of the protected class and the selection rate of the non-protected class. The selection rate is the percentage of individuals from each group that were selected for the employment practice.
Once the selection rates have been calculated, the next step is to compare the selection rates of the protected class and the non-protected class. If the selection rate of the protected class is significantly lower than the rate of the non-protected class, this could be an indication of adverse impact. To make this determination, you must use the four-fifths rule.
The Four-Fifths Rule
The four-fifths rule is a guideline for impact ratio used to determine if the selection rate of the protected class is significantly lower than the selection rate of the non-protected class. The rule states that if the selection rate of the protected class is less than four-fifths (or 80%) of the selection rate of the non-protected class, the selection process has an adverse impact on the protected class.
Here’s a four-fifth rule example.
Let’s take a look at a real-life example of how the four-fifths rule can be used to determine if a selection process has an adverse impact on a protected class.
Suppose an employer is evaluating their selection process for hiring new employees. The employer has identified two groups: the protected class (minorities) and the non-protected class (non-minorities). The employer has determined that the selection rate for the protected class is 20%, and the selection rate for the non-protected class is 80%.
In this case, the selection rate of the protected class is less than four-fifths (or 80%) of the selection rate of the non-protected class. As a result, the employer can conclude that the selection process has an adverse impact on the protected class.
Limitations of impact ratio calculations
It is important to understand that the impact ratio is subject to sampling errors when the sample size and selection rates are small. When interpreting the results of the impact ratio, employers should consider that language contained in the Uniform Guidelines that allows for more rigorous statistical tests, such as the chi-square or Fisher’s exact test.
Additionally, depending on the distribution of the data, one method may yield evidence of adverse impact, while another may not. It is also important to remember that after the initial analysis of the overall selection process, the impact ratio may be used to evaluate each step of the process if adverse impact is found.
Overcoming the limitation of adverse impact calculations
You must ensure that your employment tests and selection procedures are properly validated for the positions and purposes for which they are used. The test or selection procedure must be job-related and its results must be appropriate for your purpose. Although it is helpful to have documentation supporting the validity of a test from the testing vendor, you are ultimately responsible for guaranteeing that the tests you use meet the standards of the Uniform Guidelines.
If a selection procedure disproportionately excludes a protected group, you should determine if there is an equally effective alternative selection procedure with less adverse impact available. For example, if a test is used as a selection procedure and it screens out a protected group, you should investigate if another test would predict job performance but not disproportionately exclude the protected group.
Start measuring adverse impact to avoid repercussions
We hope this article gave you the answer to the question: What is adverse impact? It’s an important concept for organizations to understand and measure.
By measuring adverse impact, organizations can ensure that their hiring practices are fair and equitable for all applicants. This can help them avoid legal issues and other problems that can arise from discriminatory practices.
When measuring adverse impact, organizations can use a variety of methods. These include analyzing selection rates, comparing the selection rates of different groups, and using statistical tests to detect any potential adverse impact. Each of these methods can be used to identify any potential disparities in the hiring process.
If you want to learn more about human resource management-related concepts like this, feel free to check out our other blog posts here.
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Gabrielle Martinsson is a Content Writer at Interviewer.AI. She’s a tech geek and loves optimizing business processes with the aid of tech tools. She also loves travelling and listening to music in her leisure.
