4 Steps to Calculating Your Adverse Impact

Arguably, one of the more challenging aspects of an affirmative action plan is evaluating adverse impact. Today, we will just delve into the four steps which you, as the federal contractor, should take to calculate adverse impact.

Before you start: Know what you are doing and why you are doing it. Federal contractors are required to evaluate their selection procedures which utilize a test known as the “four-fifths rule” to assess any possible adverse impact. Title 41 § 60-3.4(D) of the eCFR explains this as “A selection rate for any race, sex, or ethnic group which is less than four-fifths (4/5) (or eighty percent) of the rate for the group with the highest rate will generally be regarded by the Federal enforcement agencies as evidence of adverse impact, while a greater than four-fifths rate will generally not be regarded by Federal enforcement agencies as evidence of adverse impact.” This means that you, as the federal contractor, will be evaluating selection processes – maybe it is faculty hires or competitive promotions for operatives on your assembly line or layoffs for housekeepers – and identifying the total pool for those who were selected for hire, promotion, or terminations.

Here's a step-by-step way to calculating your adverse impact:

Step 1: Find the selection rate for each group. For each group, divide the number of applicants selected by the total number of applicants. (Bear in mind that the Internet Applicant Rule applies, so if you are not familiar, you will need to bring yourself up to speed.)

• Here we use the example of male versus female applicants for faculty hires. We have ten male applicants with 5 male hires for a 50% male selection rate. We also have forty female applicants with 5 female hires for a 12.5% female selection rate.

Step 2: Determine the group that is most favored and the group that is least favored. For positive personnel actions (e.g. hiring or promotion), the most favored group has the highest rate. For negative personnel actions (e.g. terminations), the most favored group has the lowest rate.

• In our example, the favored group is male and the nonfavored group is female.

Step 3: Calculate the impact ratio analysis for each group. This compares the favorable group selection rate with the selection rates of all other groups.

• In our example, we are dividing the female selection rate (.125) by the male selection rate (.5) to get .25 or 25%.

Step 4: Determine whether the result is less than 80%. Remember, according to the regulation, a result that is less than 80% is considered evidence of adverse impact.

• In our example, the result is 25% indicating adverse impact.

The “maybe” step: If adverse impact is indicated, we then calculate the statistical significance of the adverse impact. According to the FCCM, “by comparing the selection rates of members of favored and non-favored groups who met the subjective requirements to determine whether statistically significant differences exist. If the disparity in these selection rates is not significant, then it is highly unlikely that discrimination resulted from the use of the subjective criteria. If the disparity is significant, then adverse impact exists and disparate impact discrimination may have occurred.” Chapter 2 of the Federal Contractor Compliance Manual contains more details on this.  

Statistical significance is most often calculated using one of two tests, either by Standard Deviation or Fisher’s Exact. The Standard Deviation Test is typically used for pools of 30 or more, is more commonly used, and the significance threshold is 1.96 standard deviations or above. The Fisher's Exact Test is the small groups test (less than 30) used for comparing the difference in selection rates of two groups. Generally, a Fisher's result of .025 or less (this roughly equates 2.00 SD) is regarded as statistically significant.

• In our example, the result is 25% which leads us to the “maybe step”. Using the Standard Deviation Test, the calculation is 2.65 so the adverse impact is statistically significant.

These four steps are only part of the subject that is adverse impact. Work with your consultant, your counsel and download our on-demand webinar to learn more.