What Does Adverse Impact Mean?

Learn about what adverse impact is and how it impacts your hiring goals.

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What Does Adverse Impact Mean?

Many hiring teams today work hard to mitigate bias as much as possible in the hiring process. However, despite best efforts, some hiring practices are still unfair to specific groups. To counter this unfairness, we have to look at and consider the adverse effect specific hiring policies may inadvertently cause. To root these unfair practices out, we have to consider adverse impact.

Adverse impact is the negative effect an unfair or biased hiring policy has on a given protected class.

Adverse impact occurs in various hiring practices, such as screening. However, it is important to note that the causes of adverse impact are varied, and most often, it is a result of unwanted or unanticipated consequences of the hiring process. Do not confuse this with disparate impact discrimination, which are deliberate hiring policies meant to disparage protected groups.

That’s why we’re going to look at adverse impact, meaning we’re going to look at how to identify unfair hiring practices as well as the difference between adverse impact and disparate treatment. From there, we go on to explore how we can mitigate this in the hiring practice to create a fairer and equal program for a more diversified workforce and eliminate bias.

To this end, we will, in turn, explore adverse impact analysis — the practice of utilizing statistical review to determine when and where discrimination is affecting hiring decisions. One such practice we will explore in this article is known as the 4/5ths rule — a selection rate of protected groups based on race, sex, age, and religion should be 80% or more to avoid adverse impact against these groups.  

Not only is this a matter of legal importance to HR professionals, but ensuring fair hiring practices allows employers to build a more diverse workforce, a serious boom to any competitive company. According to a 2018 Boston Group Consulting Group survey, companies with above-average diversity in their workforce enjoyed a greater proportion of revenue from innovation, an impressive 45% of the total.  

And evidence shows that more diverse teams are better achieved by organizations that focus on empirical data.  

Adverse Impact vs. Disparate Treatment

When discussing adverse impact vs. disparate impact, it’s essential to understand the core concept that differentiates them from each other — intent. Although these two terms are often used interchangeably, there are some nuanced differences between the two. That’s why we’re going to take a quick look at adverse impact vs. disparate treatment. Both refer to discriminatory practices against protected groups. However, disparate treatment is specifically a legal concept regarding outright and deliberate discriminatory business practices, and adverse impact is the result of unintended consequences. Although the law strictly prohibitions this discrimination, it remains in practice.

These problems continue to play business across industries. This is, in part, especially for adverse impact because the HR professionals overseeing them see no problem and assume their practices are fair and balanced. These practices are often formulated by individuals or groups that, even despite avoiding discrimination, may still possess unconscious biases against a given group. As such, it is easy for adverse impact to go unnoticed.

The differences between disparate impact and disparate treatment, on the other hand, are easier to see. The key difference is that while disparate impact is unintentional, disparate treatment includes direct acts of a given group being treated differently.

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Example of Adverse Impact

Here are some adverse impact vs. disparate treatment examples.

As an adverse impact example, imagine two equally qualified candidates applying for a role. Both are given the opportunity to go through the screening process. However, this interview process requires a webcam or other non-standard equipment for one candidate. One of the candidates cannot afford a webcam for a single interview. Here we see an example of an adverse impact in which the hiring process was made inaccessible to a certain candidate.

Another example of adverse impact would be a hiring process with unbalanced background checks. That’s to say, should an employer frequently run background checks on a given group of candidates but not the majority, the minority group has been subjected to unfair treatment. The employer, in this case, may well believe that they have a logical reason for this choice

Here’s a disparate impact example. Two workers have committed a violation that warrants a suspension. They both possess equal standing in the company, and both are equally guilty of the violation. However, should only one candidate be suspended while the other is fired entirely, this may also constitute disparate treatment.

Adverse Impact Calculator

To begin an adverse impact ratio analysis, you first must understand the system which HR professionals use to evaluate adverse impact. To this end, we’ll look at the rule that federal contractors must use to evaluate their selection procedures — the 4/5th rule. This rule explains that a selection race for any protected minority of less than 4/5/ths, or 80%, of the group with the highest rate of selection will be regarded as evidence of adverse impact. Any more than that will not be regarded by federal enforcement agencies as an indication of adverse impact.

Many organizations have adopted this rule as practical means of watching for potential discrepancies in the hiring rates. As such, the 4 / 5 rule provides a sort of adverse impact ratio formula to help guide recruiters in avoiding unintentional, unfair hiring practices.

There are a number of adverse impact calculators that you can find online. However, the adverse impact formula itself is rather simple. Simply divide the number of hires of a given group by the number of candidates. Do this both for the majority group of your organizations, and the protected minority group for which you wish to perform an adverse impact analysis. You will then divide the quotient of the minority group by that of the majority. Should the resulting number be less than 80%, adverse impact is considered present.

Let’s take a look at a 4/5th rule example to see it in action.

Organization One has begun to suspect unfair hiring practices are affecting its process. So, they’ve decided to perform an adverse and disparate impact analysis of their practices. However, first, they need to determine if an adverse impact is truly present.  

Organization One must then,

  1. Identify the protected minority in question - Organization One must first consider what group may be affected by the adverse impact. This could be based on race, gender, or religion.

  1. Divide hires by applicants for this group -  Once identified, organization one can begin applying the 4/5ths rule. For the sake of this example, the identified group has 5 hires in 30 applicants. So, 5 / 30 = 0.166

  1. Repeat for majority group - They must then repeat for their majority hire — which for this example will be 20 hires to 50 candidates. So, 20 / 50 = 0.4

  1. Divide the quotients - Organization One would then in turn divide the minority group by the majority. In this case, 0.166 / 0.4 = 0.415 or 41.5%

In this example, Organization One has found a clear indication of adverse impact, and can now begin steps to address them. If you are looking for an easy way to mitigate bias in your hiring process, consider on-demand phone interviews, which give every candidate an equal chance to shine in the screening process.

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