What is Adverse Impact Analysis?

Erin Iafelice
collaboration working group

According to new research into the use of analytics in talent acquisition, 46% of TA practitioners report using scientific data to improve diversity, equity, and inclusion (DEI) initiatives in their organizations. Adverse impact analysis is one of the tools that can measure gains toward DEI goals and help minimize bias in the hiring process.

What is adverse impact analysis?
Adverse impact analysis refers to metrics’ use to detect a discriminatory effect on people in protected classes during a human resource process. U.S. federal law prohibits discrimination based on race, color, national origin, religion, sex, age, or disability. These are the protected classes. Adverse impact can occur in any HR process or step in an HR process, including candidate selection, hiring decision-making, performance appraisals, promotions, and force reductions and layoffs.

How is adverse impact analysis performed?
Adverse impact analysis is performed using the four-fifths rule, also called the 80% rule. This rule was defined in 1978 within the Uniform Guidelines for Employee Selection Procedures (UGESP) developed and adopted collaboratively by the Equal Employment Opportunity Commission (EEOC), Department of Labor, Department of Justice, and the Civil Service Commission. The four-fifths rule compares the selection rates of people from different classes. According to the UGESP, “a selection rate for any race, sex, or ethnic group which is less than four-fifths (or 80%) 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.”

Here are two examples of adverse impact analysis in the context of hiring.

In a pool of 300 job applicants, there are 175 non-minority and 125 minority applicants. Twenty non-minority applicants are hired, a hire rate of 11.4%; ten of the minority applicants are hired, which is an 8% hire rate. According to the four-fifths rule, the protected group’s selection rate should be at least 80% of the selection rate of the non-protected group, but in this example, 8% is not at or above 80% of 11.4%. It is 70.2%, indicating an adverse impact on the minority applicants.

In another example, with a talent pool of 300 applicants, there are 150 non-minority applicants and 150 minority applicants. In this case, 18 non-minority applicants and 15 minority applicants are hired. The hire rate for each group is 12% for non-minority applicants and 10% for minority applicants. There is no adverse impact since the group with the lower selection rate – in this example, minorities were selected at a rate higher than 80% of the group with the higher selection rate, in this case, non-minorities.

How can adverse impact analysis be used during the pandemic?
During the first year of the COVID-19 pandemic, some essential businesses continued their hiring and adverse impact analyses. A few were faced with high-volume hiring demands. However, many companies were forced to reduce the size of their workforce.

When layoffs are necessary, adverse impact analysis can be performed on reduction-in-force (RIF) selection decisions to determine if a protected class of employees is more likely to be selected. Depending on the representation of protected classes in specific roles, layoffs of particular roles for business reasons may lead to adverse impact.

Can adverse impact analysis be used to minimize bias in hiring?
Adverse impact analysis is primarily a reactive practice, but when used in conjunction with validated pre-employment assessments, the outcome is the reduction or elimination of bias, leading to adverse impact in hiring. Job simulation assessments like Modern Hire’s Virtual Job Tryout™ have lower rates of adverse impact. This is because they only measure core competencies that drive job performance. Assessments with a job simulation minimize bias and have higher predictive validity than many other types of assessments.

Modern Hire can customize a Virtual Job Tryout for a specific role in an organization to help that organization progress toward goals for improving new hire performance and retention. Ongoing monitoring of the size of group differences when using the Tryout is essential to ensure the Tryout continues to deliver the performance or retention outcomes the organization seeks. Modern Hire uses advanced analytics to measure adverse impact at intervals and uses that data to be proactive in adjusting its customized pre-employment assessments to minimize bias and ensure organizations hire the most qualified talent. Learn more about pre-employment assessments.

How will adverse impact analysis be used in the future?
The Uniform Guidelines for Employee Selection Procedures were created more than four decades ago in a different business climate. There is recognition that it is time to update these guidelines, which may impact the way adverse impact is defined, and adverse impact analysis is performed.

While organizations continue to perform adverse impact analyses, many are setting higher standards for themselves as part of DEI initiatives. Adverse impact analysis is becoming one critical tool of many organizations to minimize bias in the workplace. To learn more these tools, download The Future is Fair: How AI is Eliminating Bias.