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Adverse Impact: What It Is and How to Avoid It

09 November
by Josh Hrala
6 minute read

There a lot of things to consider when crafting a hiring policy for your organization, but one of the most important aspects you need to pay close attention to is whether or not your activities have 'adverse impact.'

But what is adverse impact, how are you supposed to protect yourself against it, and what can happen if you don't? These are the questions we'll be digging into here.

Let's get started with the very basics of understanding the core aspects of adverse impact.

What Is Adverse Impact?

In most circumstances, 'adverse impact' is an unwanted or unanticipated repercussion caused by a specific practice. When it comes to hiring, which is where the term is normally used, adverse impact is when a disparity arises from poor hiring practices that can alienate groups of people based on their ethnicity, age, sexuality, gender, etc.

"Adverse impact refers to employment practices that appear neutral but have a discriminatory effect on a protected group. Adverse impact may occur in hiring, promotion, training and development, transfer, layoff, and even performance appraisals," reports the Society for Human Resource Management (SHRM).

"Adverse impact is often used interchangeably with "disparate impact"—a legal term coined in a significant U.S. Supreme Court ruling on adverse impact. See Griggs v. Duke Power Co., 401 U.S. 424, 431-2 (1971)."

Adverse Impact

In many cases - but definitely not all - adverse impact is caused unintentionally by hiring practices because even the smallest details of a hiring policy can create it.

For example, if you post a job on a job board and require a very specific level of experience, you could unintentionally force older, more experienced workers to feel like they are unwanted.

How would that look?

Well, for instance, say that you post a job requiring between 4-7 years experience. You've really pigeon-holed the age of the candidate you are looking for. It says - without outright saying it - that you do not want an entry-level, recently graduated candidate, but you also don't want an older worker who has more than 7 years experience, locking out most people over 40.

Now, sure there are some older workers who will fall into this sweet spot, but not many. Like we said, most of the time this type of adverse impact is unintentional, but the sad fact is that it's sometimes very intentional. In fact, a recent report was published about this exact example.

Why It's Important to Avoid Adverse Impact

Adverse impact, in every situation, is a negative. Otherwise, it wouldn't be adverse.

Besides that obvious point, adverse impact has the power to upend your business by seriously hurting your ability to hire great talent that encompasses many different groups of people.

There have been countless studies that claim that diverse workplaces improve overall company performance while also making a better work environment in general. Plus, there's the very real possibility that your organization can face discrimination lawsuits down the road if you have poor hiring practices that unintentionally or intentionally discriminate.

Adverse Impact

In short, it doesn't make any sense to use hiring practices that can cause adverse impact.

"Compliance with the EEO laws in terms of adverse impact is probably not at the top of the typical manager's to-do list, but it is something the manager cannot ignore," SHRM writes.

"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."

So how are you supposed to ensure that you aren't using practices that create adverse impact in the first place? After all, like we said above, most organizations do not actually try to discriminate. So what's the trick?

How to Avoid Adverse Impact at Your Organization

The best way to avoid adverse impact is to use tools to measure it. While that may seem like an odd word to use, measuring adverse impact is vital so that you can keep an eye on your hiring practices and not let them get away from you. Given that hiring processes can get confusing quickly, by measuring often, you can keep yourself on track, which - for most organizations - is what is needed to comply with EEO laws.

Measuring helps you better understand how your hiring practices are working, allowing you to make changes to be more encompassing.

The goal is to maintain compliance with the Uniform Guidelines for Employee Selection Procedures, which were set up back in 1978 by the EEOC, Department Of Labor, Department of Justice, and the Civil Service Commission. Yes, all four of those governing bodies signed off on these guidelines.

You can read the full set of federal regulations here.

Adverse Impact

While it's great to know the full set of guidelines, there's an easier way measure adverse impact laid out in the guidelines that many organizations have started to use as a rule-of-thumb: the four-fifths rule.

Understanding the Four-Fifths Rule

In short, the four-fifths rule helps you understand the rate you are hiring specific groups. However, how the four-fifths rule is used can sound like an HR riddle. So we'll let the EEOC explain:

"The agencies have adopted a rule of thumb under which they will generally consider a selection rate for any race, sex, or ethnic group which is less than four-fifths (4/5ths) or eighty percent (80%) of the selection rate for the group with the highest selection rate as a substantially different rate of selection," the EEOC reports.

"This '4/5ths' or '80%' rule of thumb is not intended as a legal definition, but is a practical means of keeping the attention of the enforcement agencies on serious discrepancies in rates of hiring, promotion and other selection decisions."

Did that make your head hurt? Let's take an example to clear that up.

"There are 135 applicants: 72 non-minority compared to 63 minority and 84 male compared to 51 female.  Seven of the 72 non-minority applicants were hired, which is a 9.7% hire rate compared to the hire rate for minorities of 4.8%," writes Prevue HR in a succinct example of the rule.

"The 80% rule states that the selection rate of the protected group should be at least 80% of the selection rate of the non-protected group.  In this example, 4.8% of 9.7% is 49.5%.  Since 49.5% is less than four-fifths (80%), this group has adverse impact against minority applicants."

Adverse Impact

So, you basically look at your hire rates and figure out what percentage of hires come from minority and non-minority groups. You then take those percentages and factor them together, seeing if the minority rate is over 80 percent of the non-minority rate.

To help understand this further, here's a nice video that gives more examples:

Adverse Impact: The Takeaways

If you take special care to understand how your hiring practices are working, you can avoid adverse impact before it becomes a problem.

Using the four-fifths rule can help you keep track on the fly.

If you are running into trouble, we always suggest that you speak with your legal team to ensure that you are following all guidelines set by the EEOC and other governing bodies while also complying with all local, state, and federal laws. We are not lawyers and do not know your specific case.

Also, there are many laws and regulations in place that define discriminatory practices at every stage of the employee lifecycle. We highly recommend you acquaint yourself with them. The Society for Human Resource Management (SHRM) and the Equal Employment Opportunity Commission (EEOC) sites are a great place to start.

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