In an unprecedented decision issued last month, the Supreme Court ruled in Kristina Raines v. U.S. Healthworks Medical Group, et al. that third-party vendors, who handle labor and employment issues for an employer, can be independently sued as defendants under Fair Employment and Housing Act (FEHA). The Court held that so long as such vendors employ five or more persons, they qualify as “agents” of an employer who are subject to liability for discrimination, harassment, and other claims under FEHA.
In the wake of this decision, any businesses handling HR functions for an employer in California will face increased exposure to lawsuits, both individual and class-based. That exposure will, in turn, lead to increased litigation risks for employers themselves. Employers should therefore take steps to ensure their HR vendors comprehend and carefully follow California’s anti-discrimination mandates.
The case came before the court in connection with an alleged violation of FEHA’s requirement that employers not discriminate based upon a disability, perceived disability, or pregnancy. Plaintiffs in the case were both hired on the condition of passing a medical exam administered by U.S. Healthworks Medical Group (“U.S. Healthworks”). The exam consisted of a questionnaire that asked intrusive medical questions with no relation to plaintiffs’ prospective jobs, including questions regarding pregnancy, menstruation, tumors, mental illness, cancer, and hair loss. The plaintiffs thereafter brought suit against U.S. Healthworks and the employers who required they submit to the exam, claiming violation of FEHA. U.S. Healthworks successfully secured a dismissal of the claim on the grounds it did not employ either plaintiff. The plaintiffs appealed and the question of liability under FEHA eventually came before the Supreme Court.
Third-Party Vendors Liable Under FEHA in California
In a unanimous decision, the Supreme Court ruled the trial court’s decision was wrong and that business entities who handle labor and employment duties for an employer can be independently named and sued under FEHA. The Court limited its decision to business entities only. It distinguished situations in which individual supervisors were responsible for labor and employment duties, upholding current case law barring FEHA claims against supervisors (other than in connection with allegations of actual harassment by such supervisor).
The Court noted that its decision was groundbreaking, but reasoned that business entities can and should be held liable in order to promote equal access to employment. The Court concluded that holding such business entity agents directly liable under FEHA would serve to deter unlawful employment practices and ensure effective remedies to aggrieved employees or job applicants. While the Court did not base its decision on the size of the defendant at issue, the fact that U.S. Healthworks was a nationwide provider of occupational health services seemed to influence the Court’s decision.
It remains unclear who will actually pay the bill for this new claim as the Court did not address whether the vendor could seek indemnity from the actual employer or vice versa. Those issues will have to be addressed by means of contractual relationships between the parties.