In Raines v. U.S. Healthworks Medical Group, the California Supreme Court expanded the definition of an “employer” under the state’s discrimination statute to include certain third-party business entities that perform employment-related functions on behalf of employers. These agents may now be deemed “employers” such that they can be directly liable for employment discrimination under the Fair Employment and Housing Act for certain activities that they carry out on behalf of employers.

Overview of Raines

The Raines‘ plaintiffs were job applicants who received offers of employment that were conditioned on the successful completion of pre-employment medical screenings conducted by a third-party company that used automated decision-making. Plaintiffs alleged that the screening form contained intrusive questions regarding their medical history that violated FEHA. They brought claims against their employers, as well as the third-party provider that conducted the medical screening. The question for the Court was whether business entities acting as agents of an employer, can be considered “employers” under FEHA and held directly liable for FEHA violations caused by their actions.

The Court examined the plain language in FEHA’s definition of “employer” and concluded that the definition did indeed encompass third-party corporate agents like the medical provider in his case. FEHA defines an employer as “any person regularly employing five or more persons, or any person acting as an agent of an employer, directly or indirectly.” Here, the Court reasoned, recognizing the medical provider as an agent of the employer extended liability to the company most directly responsible for the FEHA violation.

Open Questions

The ruling also left several key questions unanswered. The Court did not address whether agents with fewer than five employees who provide services to covered employers could be considered employers under FEHA, the significance of the direct employer’s degree of control over the acts of the agent that gave rise to the violation, or an agent’s potential liability under FEHA’s separate aiding and abetting provisions. 

Practical Takeaways

The California Supreme Court’s broad definition of “employer” could extend FEHA liability to a wide range of service providers that perform employment-related functions, such as resume and applicant screening, recruitment, background checks, promotions, compensation and benefits administration, among others.

Raines is particularly important for vendors providing AI-driven human resources tools, as it establishes a potential basis for liability for these companies under FEHA ahead of pending regulations in this area.

We recommend auditing automated decision-making systems for discriminatory treatment or disparate impact on members of protected classes to get ahead of impending regulations, government agency actions and litigation in this area.  Companies should also be closely watching the evolution of the Risk Assessment Regulations for the California Privacy Protection Agency Board, which were proposed in draft form this fall and include elevated responsibility on companies to perform risk assessments with respect to automated decision making, including naming the individual who performs the risk assessment for auditing purposes.

Employers should inventory and review all HR-related functions that they outsource, and the contractual arrangements in place with each service provider. Ensure these contracts have adequate representations regarding the agent’s compliance with FEHA and other applicable laws and that they indemnify employers for the agent’s discriminatory or otherwise unlawful practices. It is also important for employers to conduct independent due diligence on any outsourced employment practices because contractual provisions cannot fully protect against the upfront costs of litigation or public relations issues associated with discriminatory employment practices.

Our AI team is currently leading AI assessments for our clients before performing a legal analysis / legal risk prioritization review to help map the road ahead. Please reach out to your Baker McKenzie attorney for more information.