California’s FEHA Liability Extends to Service Providers

Topics: AI in the Workplace, Court Decisions, Employee Hiring, Discipline & Termination, Personnel Policies and Procedures

A recent unanimous California Supreme Court decision makes clear that when third-party entities provide services to employers with California applicants and/or employees, they may risk being held liable under the FEHA.

Employer Liability Under FEHA

California’s Fair Employment and Housing Act (“FEHA”) prohibits employers from engaging in unlawful discrimination, harassment and retaliation. When such a violation occurs, the FEHA imposes liability on “Employers,” which “includes any person regularly employing five or more persons, or any person acting as an agent of an employer, directly or indirectly […]”

Who Can Be Held Liable?

In recent years, the Supreme Court has clarified that the FEHA does not impose liability in discrimination and retaliation matters on employer’s agents if said agents are individual employees - Reno v. Baird (1998) 18 Cal.4th 640 (Reno); Jones v. Lodge at Torrey Pines Partnership (2008) 42 Cal.4th 1158 (Jones). However, until recently, the Court had yet to address whether other types of agents could be held liable as an agent of an employer under the FEHA. 

On August 21, 2023, the Court issued its decision in Raines v. U.S. Healthworks Medical Group (Raines), concluding that business-entity agents with five or more employees may be held directly liable as the employer for employment discrimination when that entity carries out FEHA-regulated activities on behalf of the employer. This means businesses that provide employment-related services to California employers can potentially be held liable for FEHA violations.

The Raines Decision

In Raines, the named Plaintiffs received conditional offers of employment, subject to a pre-employment medical screening through a third-party vendor. As part of the screening process, applicants were required to complete a written health history questionnaire, which included non-job-related questions about applicants’ private medical history, such as whether the applicants had venereal diseases, cancer, or HIV. Plaintiff Raines alleged that she was ultimately denied the position after she completed the screening questionnaire but refused to answer certain questions. 

By providing its services to the employer and engaging in FEHA-regulated activity, the screening entity was deemed the employer’s agent. The Court reasoned that a third-party entity employing more than five employees could bear the cost of ensuring its own statutory compliance, negotiate with the employer about the employer’s statutory compliance, and further contract with the employer as to the extent of the entity’s role to avoid obligations that would force the entity to violate the FEHA. The Court notably refused to address whether the employer’s extent of control over the agent’s acts impacted the agent’s liability arising from a FEHA violation. Instead, the Court explained that an agent’s independent liability is based on the entity’s engagement in FEHA-regulated activities on the employer’s behalf.

Effect on Employers

This decision has a significant impact on third parties providing services to employers with California employees and applicants. 

One potential scenario may arise in which an entity without any California employees is held liable for discrimination under California’s FEHA because it provided employment-related services to an employer with a single California employee. Given the Raines decision and the fact that employees need not be located inside of California for purposes of counting toward the threshold requirement of five or more employees, it is possible that a third-party entity with five employees (all of whom are located outside of California) could be liable for discrimination as the employer of the single California employee merely as a result of providing employment-related services to that employee’s employer.  

The concern does not stop there. With the influx of artificial intelligence (AI) and its use among businesses for employment-related services, if an employer relies on AI advice in making an employment decision, the purveyor of that service could be held liable as the agent of the employer. 

What’s Next

Employers and third-party service providers should ensure that their contracts are clear as to indemnity and expectations between the parties. Employers should seek advice and counsel from an attorney to ensure that they can confront these issues head-on.