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August 2023

California Supreme Court Rules Agents of Employers May Be Directly Liable for Discrimination Under FEHA

As of Monday, agents of employers with applicants and workers in California may be held directly liable for discrimination, even where the agents do not employ California workers themselves. Following the California Supreme Court’s decision in Raines v. U.S. Healthworks Med. Grp., August 21, 2021, California Supreme Court Case No. S273630 (“Raines”) (decision available here), a business-entity agent that performs employment-related tasks for an employer may be directly liable for discrimination under the Fair Employment Housing Act (“FEHA”). This ruling is expected to result in increased litigation against screening companies, placement agencies, recruitment agencies, and numerous other employment-related businesses that service job applicants and workers in California.

FEHA is California’s primary law that provides employees with protection from discrimination, retaliation, and harassment in the terms and conditions of employment. (Cal. Gov. Code, §§ 12900-12996.) The statutory definition of “‘[e]mployer’ includes any person regularly employing five or more persons, or any person acting as an agent of an employer, directly or indirectly . . . .” (Cal. Gov. Code, § 12926, subd. (d).)

Factual background of Raines v. U.S. Healthworks Medical Group      

The Raines case started as an individual action in state court. The plaintiff, Kristina Raines, sued her prospective employer after the company revoked a job offer based on her failure to complete a pre-employment medical screening examination. She also sued the screening company, which terminated the examination after Raines refused to answer questions about when she received her last menstrual period. Raines claimed the questions were invasive and impermissible under provisions of FEHA, which prevent employers from asking applicants about a disability or medical condition. (See Cal. Gov. Code, § 12940, subd. (e)(1).) Raines amended her complaint to add class claims on behalf of a class of current and former job applicants who received job offers that were conditioned on the successful completion of a pre-employment medical screening. Based on the addition of the class claims, the defendants removed the case to federal court under the Class Action Fairness Act (“CAFA”).

Following the removal, Raines settled her individual claims with the prospective employer. She amended her complaint twice more to add additional screening providers as defendants, to add a second named plaintiff, and to add new claims. The defendants moved to dismiss the plaintiffs’ third amended complaint for failure to state a claim under Federal Rule of Civil Procedure, Rule 12(b)(6). The district court agreed and dismissed all but one of the plaintiff’s claims with prejudice. On the FEHA claim, the district court ruled that even though the plaintiffs sufficiently plead that the defendant screening companies were agents of the prospective employers, the plaintiffs could not state a plausible claim because FEHA does not impose direct liability on agents. The plaintiffs dismissed their remaining claim with prejudice and appealed to the Ninth Circuit. 

Last year, the Ninth Circuit asked the California Supreme Court to decide the following “crucial question of state law”: Can a business entity be directly liable for unlawful conduct in violation of FEHA when the business entity acted only as the agent of an employer, rather than as an employer itself? The primary argument on appeal and before the California Supreme Court was whether an employer’s business agent entities can be held directly liable for FEHA violations, as the plaintiffs contended, or whether an applicant’s or employee’s only recourse for third-party FEHA violations is through their direct employer, as the defendants contended. The plaintiffs were supported by way of amicus briefs from disability advocacy organizations and the State of California. In its amicus brief backing the plaintiffs, Rob Bonta, a Democrat from the California Office of Attorney General, argued that state lawmakers did not intend to exempt all agents from liability under FEHA. Otherwise, the lawmakers would have carved out an express statutory exemption in FEHA, which has been amended several times in recent decades.

Raines held that agents of employers may be directly liable for employment discrimination under the FEHA     

On Monday, August 21, 2023, the California Supreme Court answered yes to the Ninth Circuit. For the first time, the Court held that third-party business agents can be directly liable for violations of FEHA when performing actions for client employers in California.

First, the Court reexamined its prior precedent on the statutory definition of employer from Reno v. Baird (1998) 18 Cal.4th 640 (“Reno”), and Jones v. Lodge at Torrey Pines Partnership (2008) 42 Cal.4th 1158 (“Jones”). Those cases considered whether individual supervisory employees could be held personally liable for discrimination and retaliation under FEHA, respectively. In Reno, the Court held that “individuals who do not themselves qualify as employers may not be sued under FEHA for alleged discriminatory acts.” (Reno, supra, 18 Cal.4th at p. 663.) There, the Court expressly declined to rule on the issue decided in Raines: “whether section 12926, subdivision (d) permits direct liability for other types of agents, such as business entities acting as independent contractors.” (Raines, supra, at p. *7 (emphasis in original) (quoting Reno, supra, 18 Cal.4th at p. 18).) In both cases, the California Supreme Court declined to hold individual supervisors directly liable for discrimination and retaliation claims, respectively. A key factor in the Court’s analyses was FEHA’s statutory requirement that an employer have five or more employees to be sued. The Court found it would be incongruous to hold individual agents directly liable for FEHA violations, while the statute contains an express exception for small businesses with less than five employees. In contrast, the considerations that motivated the Court to rule against expanding FEHA liability in Reno and Jones were not present in Raines because the plaintiffs alleged that the defendant screening companies were large business enterprises operating on a national scale. (See Raines, supra, at p. 9, n.5.)

Next, the Court evaluated the legislative history of FEHA. It concluded that “the agent-inclusive language of section 12926, subdivision (d) permits a business entity agent of an employer to be held directly liable for violation of FEHA when it carries out FEHA-regulated activities on behalf of an employer.” (Raines v. U.S. Healthworks Med. Grp. (Cal. Aug. 21, 2023) *2 (citation forthcoming).) Because the statutory definition of employer includes agents acting on behalf of an employer, the Court reasoned that an “‘agent of an employer’ is itself an employer for purposes of the FEHA.” (Raines, supra, at p. 11.) Treated as an employer, “an employer’s agents are subject to all the obligations and liabilities that the FEHA imposes on the employer itself.” (Ibid.) The resulting liability is direct because it arises from the agent-entity’s personal engagement in FEHA-protected activities on the employer’s behalf.

In circumstances where a business agent harms a FEHA-protected employee, Raines “imposes FEHA liability not only on the employer but also extends it to the [agent] entity that is most directly responsible for the FEHA violation.” (Raines, supra, at p. 27.) Extending liability to agents is consistent with the public policies behind FEHA because, according to the Court, the business-entity agent “is in the best position to implement industry-wide policies that will avoid FEHA violations” based on their specialized expertise and contracts with multiple employers. (Ibid.) In employment contracts, the employer often has greater bargaining power over the employee. In contrast, the Court finds agency contracts distinguishable because agents and employers have comparable bargaining power, which allows the business-entity agent to avoid contracts that will cause it to violate FEHA. (Id. at p. 30.)

What Raines means for employers

For businesses that perform employment-related services in California, the impact of Raines will be felt immediately across industries. Businesses acting as agents for California employers are now subject to direct liability for employment discrimination under FEHA, even where the agent acted at the employer's direction. The scope of the Raines decision is far broader than the question of whether a screening company can directly violate FEHA—the Court's opinion makes clear that any business agent with five or more employees engaging in conduct that FEHA covers can be directly liable for employment discrimination.

Following Raines, California courts are more likely to extend the sweeping hiring and employment protections in FEHA to other employment-related conduct of agents, including the administration of disability-based accommodations and leaves of absence, hiring and recruitment of talent, and the use of artificial intelligence vendors to assist with recruitment of new hires. Emerging issues that businesses should be aware of include whether a preexisting contractual relationship between an employer and an agent satisfies all parties' obligations under FEHA, whether company policies and handbooks of agent businesses should be updated to ensure compliance with FEHA, and whether additional training should be conducted to ensure staff understands the obligation to comply with FEHA anti-discrimination provisions.

To be protected, employers and businesses that provide employment-related services that FEHA may cover should promptly consult with legal counsel to ensure compliance with all statutory obligations. If you have any questions about this decision or any other legal developments, please contact the authors or the Employment Law team with Gordon & Rees for more information.

Artificial Intelligence

Amanda H. Herron
Brandon D. Saxon

Artificial Intelligence
Employment Law