California Supreme Court expands reach of FEHA to third-party service providers

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The California Supreme Court recently issued its opinion in Raines v. U.S. Healthworks Medical Group, deciding a question from the Ninth Circuit Court of Appeals as to the possible extent of liability for business-entity agents who carry out activities regulated under the California Fair Employment and Housing Act (“FEHA”) on behalf of employers. Under the FEHA, a covered employer includes: “any person acting as an agent of an employer, directly or indirectly.”

In this case, the defendant U.S. Healthworks Medical Group conducted pre-employment medical screenings on behalf of multiple employers. The plaintiffs were applicants who alleged that U.S. Healthworks asked them inappropriate questions as part of pre-employment health screenings, in violation of the FEHA.

The Supreme Court concluded that third-party agents who carry out FEHA-regulated activities on behalf of employers can be held directly liable under the FEHA for employment discrimination, ruling that business-entity agents who are involved in the hiring, firing and/or supervision of employees; make employee benefits decisions; administer employee benefits on behalf of employers, or carry out any of the other types of activities that are regulated under the FEHA may be directly liable in “appropriate circumstances.” However, the Court did not provide a clear definition of what “appropriate circumstances” are for purposes of this ruling.

The Court noted that business-entity agents, unlike employee agents, have comparable bargaining power to employers, and the parties can negotiate and contractually address such issues, including indemnification regarding any potential violations of the FEHA. The Court also mentioned that this decision will not lead to a double recovery for the plaintiff but instead would increase the number of defendants that might share liability for plaintiff’s damages. Although it remains to be seen whether this decision is applied retroactively, there is precedent indicating that it would have retroactive effect.

Employers should be aware that their business-entity service providers who conduct FEHA-regulated services may be liable as co-defendants in FEHA actions. As such, they should assess to what extent the services contract between them should clarify the extent of any liability and whether indemnification provisions should be in place to allocate risk of liability.