Also in this issue:

Good News For Employers – Misconduct Amendment to FCRA

In late November, the California Supreme Court delivered a near unanimous decision (written by Justice Kennard with Justice Moreno in concurrence) in the case of State Department of Health Services v. Superior Court, 31 Cal. 4th 1026 (2003), confirming strict liability of employers for the existence of hostile environments in their workplaces, i.e., harassment, but creating a potential bar to the recovery of damages that otherwise could have been afforded the plaintiff, if those damages could have been avoided by prompt notice of the harassment to the employer. This bar can be hurdled if the plaintiff offers appropriate proof that the damages could not have been avoided with "reasonable effort and without undue risk, expense or humiliation." Id. at 1034.

The genesis of the State Department of Health Services case is interesting and instructive. The jumpstart for interest in this approach to a potential affirmative defense under the FEHA began with developments in federal case law, but the State Department of Health Services case diverges from federal holdings and their rationale in light of differences between Title VII (the federal anti-discrimination statute) and the FEHA. In 1998, the United States Supreme Court held, in two companion cases, Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998), and Farragher v. City of Boca Raton, 524 U.S. 775 (1998), that in "hostile work environment" sexual harassment cases not involving a tangible employment action (such as a promotion) brought under Title VII of the Civil Rights Act of 1964 (42 U.S.C. § 2000 et seq.), an employer has an affirmative defense if it can prove "(a) that the employer exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and (b) that the plaintiff unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise." Ellerth, 524 U.S. at 765. The Supreme Court reached this standard relying on principles of agency and vicarious liability as well as the common-law doctrine of avoidable consequences.

The twin holdings in Ellerth and Farragher prompted quick interest and legal comment in California. Employers urged that the defenses be imported into the FEHA, consistent with the long-standing principle of looking to federal case law as authority for the interpretation of the FEHA. See, e.g., Kohler v. Inter-Tel Techs, 244 F.3d 1167 (9th Cir. 2001) (holding in a diversity case interpreting California law that the Ellerth affirmative defense applies to the FEHA). There were, however, several problems with the wholesale importation of the Ellerth affirmative defense into the FEHA statutory scheme. First, in very important ways, the two anti-discrimination statutes are not alike with regard to the language that supports the respective claims for hostile workplace harassment. Title VII language only contains generic prohibitions against "employment discrimination." It does not explicitly mention harassment as a form of discrimination, nor does it refer to any standard of culpability required before employers are held responsible for the conduct of their supervisory personnel. Rather, under federal law, sexual harassment is a claim created by case law. See, e.g., Meritor Savings Bank, FSB v. Vinson, 477 U.S. 57 (1986). The absence of both a statutory definition of harassment and an explicit reference to a standard of liability gave the United States Supreme Court the latitude to infer, under general interpretative principles, the appropriateness of the Ellerth affirmative defense. This defense "rewarded" employers who adopted and disseminated effective anti-harassment programs, and recognized the policy upon which the doctrine of avoidable consequences is premised: Plaintiff bears some responsibility to act reasonably to avoid either the liability or the mounting damages from continuing harassment. See Employment Law Commentaries, "Win One, Lose One: A New Defense for California", September 2001, and "A Modest Expansion of Employee Rights: The New California Employment Legislation Effective January 1, 2002", December 2001.

In contrast, FEHA expressly prohibits both employment discrimination (Gov. Code § 12940(a)) and sexual harassment (Gov. Code § 12940(j)(1)). Moreover, FEHA contains statutory language which supports the interpretation that employer liability for supervisor as contrasted to coworker harassment is to be treated differently. The FEHA indicates that an employer will be liable for co-employee harassment (i.e., non-supervisory personnel) only if it "knows or should have known of this harassing behavior" and fails to correct it. Id. Because the FEHA imposes this negligence standard for harassment "by an employee other than an agent or supervisor," it was argued, and in State Department of Health Services the California Supreme Court has now confirmed, that the standard for supervisor liability is more stringent: "under the FEHA, an employer is strictly liable for all acts of sexual harassment by a supervisor." State Department of Health Services, 31 Cal. 4th at 1042 (emphasis omitted).

Despite the explicit confirmation of strict liability for supervisory harassment, the State Department of Health Services court indicated that the doctrine of avoidable consequences was applicable because "strict liability is not absolute liability in the sense that it precludes all defenses." The defense the California Supreme Court made applicable to claims of harassment is that the plaintiff failed to avoid harm under the following situation: (a) the employer had taken reasonable steps to prevent and correct harassment, (b) the employee failed to use the provided procedures, and (c) use of the procedures would have prevented at least some of the harm. Note the defense does not apply to damages that could have been prevented by use of the procedures without "undue risk, expense or humiliation" on the part of the plaintiff.

In sum, the California Supreme Court's adoption of this defense is, at best, a way to reduce damages, not a bar to liability. Moreover, this new defense will not likely aid the grant of any summary judgment motions for employers both because it applies to damages, not liability, and because a plaintiff can easily create a material issue of fact by referencing fear of retaliation, shame etc.

In the past, any judicially interpreted "inroad" into the perceived strength and protections afforded employees by the FEHA has been jealously guarded against by the California Legislature. On multiple occasions, we have seen holdings of California courts, including the Supreme Court, which were perfectly consistent with the statutory language of the FEHA "overturned" by the Legislature by enacting amendments to the FEHA. Examples abound. In Carrisales v. Department of Corrections, 21 Cal. 4th 1132 (1999), the Supreme Court unanimously ruled, relying on the same statutory language discussed above, that a non-supervisory employee could not be personally liable to a coworker for his or her harassment. (The employer might still be liable if it knew, or should have known, of the harassment and did nothing -- a negligence standard.) The Legislature's response was AB 1856 (2000), which added Gov. Code § 12940(h)(3) (later renumbered as § 12940(j)(3)) making employees personally liable for their harassment. Similarly, in Salazaar v. Diversified Paratransit, Inc., 103 Cal. App. 4th 131 (2002), the Court of Appeal concluded that the FEHA did not create employer liability for acts of a non-employee client or customer who harasses an employee. Again, the Legislature's prompt response was AB 76 (2003), which amended Gov. Code § 12940(j) to provide that in certain circumstances an employer may be liable for harassment of its employees by non-employees.

This legislative tradition of overriding employer-oriented judicial interpretations of the FEHA extends beyond sexual harassment cases. In Marks v. Loral Corp., 57 Cal. App. 4th 30 (1997), the Court of Appeal ruled that employers may prefer younger workers with lower salaries and benefits to workers with higher salaries or benefits, even if the preference resulted in a disparate impact in favor of younger workers. In response, the Legislature enacted SB 26 (1999), reflected in Gov. Code § 12941.1 (later renumbered as § 12941) to specifically reject Marks and prohibit using salary as a basis for differentiating between employees when terminating employment if the criterion adversely impacts older workers. Similarly, the Legislature rejected the Supreme Court's interpretation in Esberg v. Union Oil Co. of California, 28 Cal. 4th 262 (2002), that the FEHA prohibition against age discrimination in employment did not extend to the furnishing of employee benefits, such as education assistance. This holding was based on statutory interpretation and the fact that the statute, as it related to age discrimination, did not prohibit discrimination in the terms, conditions and privileges of employment. The Legislature simply thereafter amended the statute to fill in the absent language.

But the questions we now face are: Is this new defense sufficiently tepid so that it will avoid the fate of legislative rewrite of other court rulings regarding the FEHA? Or, even if the Legislature acts, what will be our new Governor's attitude to the FEHA and the Legislature's pattern of "overturning" judicial interpretations as to its meaning and scope? Only time will tell.

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Good News For Employers – Misconduct Amendment to FCRA

Employers investigating allegations of sexual harassment, discrimination, theft, or other misconduct or policy violations can breathe a sigh of relief. They will no longer have to notify suspected employees and obtain authorization prior to conducting an investigation. Nor will the employer have to provide notice prior to taking adverse action or furnish the employee with a copy of the report. Congress has finally followed California's lead and passed long-awaited amendments to the Fair Credit Reporting Act ("FCRA"), http://www.ftc.gov/os/statutes/fcra.htm. President Bush signed the legislation on December 4, 2003, and the effective date of the amendments will be determined jointly by the FTC and the Board of Governors of the Federal Reserve System.

FCRA's new amendments are intended to overturn the Federal Trade Commission's infamous April 1999 "Vail letter" in which the FTC responded to questions concerning FCRA's application to sexual harassment investigations. See Keller-Vail, Fed. Trade Comm'n Staff Op. Letter, April 5, 1999, http://www.ftc.gov/os/statutes/fcra/vail.htm. The FTC concluded that private investigators hired by an employer qualify as consumer reporting agencies under FCRA even when the scope of the investigation does not go beyond the employer's workforce or internal documents. While FTC opinions are not law, the Vail letter effectively stifled an employer's ability to bring in outside investigators, including attorneys, without triggering obligations under FCRA.

In 2002, California responded to employers' concerns by amending the Investigative Consumer Reporting Act ("ICRA") to generally exclude from coverage those investigations conducted by employers that suspect an employee of wrongdoing or misconduct. In practice, the amendment provided little benefit to employers because FCRA lacked a comparable exception. However, FCRA's new provisions make the federal act more consistent with its California equivalent.

Once the amendments become effective, communications relating to employee investigations will be excluded from FCRA's definition of consumer report if all of the following are true:

• The communication is made to an employer in connection with an investigation of (a) suspected misconduct relating to employment; or (b) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer;
• The communication is not made for the purpose of investigating a consumer's creditworthiness, credit standing, or credit capacity; and
• The communication is not provided to any person except (a) the employer or agent of the employer; (b) any Federal or State officer, agency, or department, or any officer, agency, or department of a unit of general local government; (c) any self-regulating organization with regulatory authority over the activities of the employer or employee; (d) as otherwise required by law; or (e) pursuant to 15 U.S.C. § 1681f (disclosures to governmental agencies).

Communications satisfying the above description will be subject to only one requirement. If an employer takes adverse action "based in whole or in part" on such a communication, the employer must disclose to the employee or applicant a summary of the nature and substance of the communication on which the adverse action is based. This obligation is considerably less than that imposed on communications meeting the definition of consumer report. Without the new exemption, employers would need to disclose the results of an investigation prior to taking adverse action and then give the employee a "reasonable" amount of time before taking the desired action. The FTC opined that five days is reasonable. See Brinckerhoff-Weisberg, Fed. Trade Comm'n Staff Op. Letter, June 27, 1997, http://www.ftc.gov/os/statutes/fcra/weisberg.htm.

The new amendments are also significant in that they allow an employer to withhold from disclosure sources of information acquired solely for use in preparing an investigative consumer report. This provision is another departure from the Vail letter, which prohibits an employer from redacting information contained in a consumer report. It qualifies as a major victory for employers who worry that witnesses may not otherwise be forthcoming with information due to concern that their identity will be revealed to the suspect employee.

Although compliance with federal and state investigation requirements remains an arduous task, FCRA's new amendments at least lighten the burden. And employers can only hope that the amendments are but one step in the right direction.