Washington, D.C.—In an important legal victory for the National Treasury Employees Union (NTEU), an arbitrator has ruled that a pay-for-performance system unilaterally designed and implemented by the Securities and Exchange Commission (SEC) is illegal because it has resulted in discrimination against large groups of agency employees.

“This decision should serve as yet another warning against rushing to implement pay-for-performance systems in the federal workplace,” said NTEU President Colleen M. Kelley. “The SEC system failed because it lacks fairness, credibility and transparency, which are critical elements in any merit-based pay system.” NTEU represents more than 2,200 SEC employees.

In challenging the system, NTEU identified discriminatory impacts against groups of employees protected under federal anti-discrimination statutes, particularly among African-American SEC employees and those ages 40 and older. The arbitrator found that African-American employees above grade 8 and older employees received significantly fewer pay increases than would be expected given their representation in the pool of eligible employees. The arbitrator ruled that since the SEC’s subjective system for awarding pay increases was not valid or even reasonable, the pay-for-performance program violated Title VII of the Civil Rights Act as well as the Age Discrimination in Employment Act.

The SEC case arose out of a merit pay program put in place in 2003. Among the multiple issues with the SEC system is that it used a set of vague and subjective ‘agency success factors’ to determine whether and how much of a merit increase an employee would receive. The generic factors were not linked to employees’ job duties and applied to every position within the SEC, from administrative staff to IT staff and to attorneys, accountants and other professionals. They were based on such amorphous criteria as whether employees “focus on achieving results while adapting to changing priorities” or “present information accurately” or “gather and evaluate information to develop effective solutions” or “collaborate with others.” The subjective and arbitrary judgments managers were required to make was compounded by the lack of training and guidance the SEC provided them.

“NTEU warned the SEC that employees would not know how to satisfy these vague standards, that arbitrary treatment would occur, and that grievances would undoubtedly follow,” said President Kelley. This is the first of five pending grievances NTEU had filed challenging use of the system for each subsequent year, including the 2007 performance period. Those grievances also allege that the system violates federal law, the NTEU compensation agreement and the NTEU-SEC collective bargaining agreement.

The parties are to submit briefs to the arbitrator on an appropriate remedy within 60 days.

Even as NTEU works with the SEC to improve its performance management and merit pay systems, Kelley said there still are serious issues, most notably that the agency retains the discretion to determine the amount of the pay increase associated with each rating level under the new system. And, until the new job specific performance standards are established, employees continue to be evaluated under the vague and subjective “success factors.”

“At some point,” she said, “this agency, like so many others, is going to have to accept that the only way these critical matters can be dealt with effectively is by working with employees.”

The SEC has statutory authority to establish a pay system outside the General Schedule and NTEU is able to negotiate over these matters. Although the parties bargained over establishment of an initial merit pay plan in 2002, no agreement was reached, and the Federal Service Impasses Panel (FSIP) issued an order which imposed the flawed system proposed by the SEC.

NTEU is the largest independent federal union, representing 150,000 employees in 31 agencies and departments.