An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

Adverse Impact

What Is an Adverse Impact?

An adverse impact is an often unseen yet negative consequence of an employment policy or practice. Most often, adverse impact is found in policies and practices that inform candidate or employee assessments, such as:

Title VII of the Civil Rights Act of 1964 prohibits employers from using purportedly neutral tests or selection procedures that have the effect of disproportionately excluding persons based on race, color, religion, sex (including sexual orientation and gender identity), or national origin if the tests or selection procedures are not "job-related for the position in question and consistent with business necessity."

To fight systemic discrimination, the U.S. Equal Employment Opportunity Commission (EEOC) identifies and addresses discriminatory practices in partnership with advocacy groups, state and federal agencies, employer groups, the plaintiffs' bar and other organizations. This includes practices that have an unintentional adverse impact.

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Is Adverse Impact the Same as Disparate Impact?

Adverse impact and disparate impact (also called disparate effect) are related, but are not the same.

Disparate impact refers to the policies and practices in employment that negatively (and potentially negatively) affect any legally protected civil group. Adverse impact is the measurement of the negative (and potentially negative) consequences of disparate impact.

What Standards Determine Disproportionate Exclusion in an Adverse Impact?

The EEOC applies what they term the 4/5ths Rule—a screening is disproportionate if the selection rate for any group is less than 4/5ths or 80% of the selection rate for the highest group.

What Are Some Examples of Adverse Impact?

Is Adverse Impact Illegal?

Adverse impact may be considered illegal—and trigger the investigation of an employer—if a group’s selection rate does not meet the EEOC 4/5ths or 80% rule.

You can check your hiring practices for adverse impact by calculating the rate of selection, as described in the following four steps:

Step 1: Calculate the rate of selection for each group (such as gender or race). Do this by dividing the number of people selected from the group by the number of applicants from that same group. If you had 30 white applicants for a position and hired 15 of them, the rate of selection would be 50%.

Step 2: Of all the groups, note the one that has the highest rate of selection.
Step 3: Compare the selection rates for each group with the highest selection group. Do this by dividing the selection rate for a group by the selection rate of the highest group. For example, divide a 30% selection rate for Asian applicants with the 50% selection rate for white applicants to see that Asian applicants were hired 60% as often as white applicants.

Step 4: Note whether the selection rate for any group is less than 4/5ths or 80% of the highest groups’ selection rate. If it is less than 80%, adverse impact may be indicated, as in the example from step 3.

It’s important to know that the 4/5ths test is only the first stage of looking for adverse impact. If this global way of looking at the overall selection process indicates no adverse impact, there is likely no need to investigate an employer’s job selection procedures. If closer examination is warranted, the EEOC will look closer at individual selection procedures. In other words, the 4/5ths test is only a starting point for uncovering adverse impact.

What Are the Consequences of Adverse Impact?

The Society for Human Resource Management (SHRM) highlighted the potential costs of adverse impact: “Adverse impact lawsuits generally involve multiple employees and many years of organizational practice. So the damages claims can be high and the lawsuits costly, and the cases are attractive to attorneys who specialize in handling class actions on a contingent-fee basis.” The article cites a settlement from Target Corporation for 2.8 million dollars as an example.

Along with the potential legal penalties, policies with adverse impact may exclude people from consideration for hiring, advancement opportunities, or retention during a workforce reduction. Policies with adverse impact lead to a loss of potential talent for the organization, as well as the time wasted using ineffective assessment tools.

How Can Employers Avoid Adverse Impact?

Employers can avoid adverse impact by ensuring their hiring process avoids disparate impact (unintentional discrimination). This is done by following EEO’s 4/5ths or 80% guidelines.

Consider these additional ways an employer can avoid adverse impact:

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