California Expressly Adopts the Avoidable Consequences Defense (ACD) in Cases Filed Under the Fair Employment and Housing Act

On November 24, 2003, the California Supreme Court issued an opinion in Department of Health Services v. Superior Court (McGinnis) clarifying the scope of an employer’s liability for a supervisor’s harassment under the Fair Employment and Housing Act (“FEHA”). The Court’s opinion will have a significant effect on discrimination litigation. It also impacts how a company prepares against harassment, communicates its policies to employees, and enforces the law.

Facts of the Case

Ms. McGinnis worked for the Department of Health Services (“DHS”) under the supervision of Mr. Hall. Ms. McGinnis waited 20 months from the first incident of alleged harassment before making a report to the company. Upon receiving the complaint, DHS commenced an investigation and took disciplinary action prompting Mr. Hall to retire.

Ms. McGinnis subsequently brought suit against DHS alleging unlawful sexual harassment. After considerable discovery, DHS filed a motion for summary judgment, alleging a complete defense to the claims under federal law, based on the employee’s failure to promptly report her claims. The Court of Appeal rejected the defense contending that California law made employers strictly liable for the harassment by supervisors regardless of the employee’s delay in reporting.

The Court's Holding

The Supreme Court concurred with the Court of Appeal and held that an employer is strictly liable for the hostile work environment created by a supervisor. However, the court softened the impact of strict liability by expressly adopting the “avoidable consequences defense” (“ACD”). Under the ACD, damages are reduced provided the employer has established an effective anti-discrimination policy and has a record of acting on harassment complaints, and the employee acted unreasonably in failing to report the harassment sooner.

Analysis of the Ruling

The ACD consists of three distinct elements. An employer has the burden of proving: (1) It took reasonable steps to prevent and correct workplace harassment; (2) the employee unreasonably failed to use the preventive and corrective measures provided by the employer; and (3) reasonable use of the procedures would have prevented at least some harm to the employee. Examining these three elements suggests that while the ACD may result in reduced damage awards, an employer is still exposed to significant liability even after expending considerable effort to comply with the law.

What constitutes reasonable steps to prevent and correct harassment? The Court identified two essential elements of an anti-harassment policy: a provision prohibiting retaliation for reporting violations, and enforcement procedures protecting employee confidentiality to the extent practicable. The contours of confidentiality will depend on the workplace and the circumstances of each case. Moreover, whether or not the policies are in effect, if they are not adequately communicated, the policy is ineffective.

The Court also suggested that the employer must consistently and firmly enforce its policies. Failure to investigate, or retaliating against an employee negates the ACD because employees will not have a reasonable avenue for voicing their complaint. The Court further advises employers to take steps to encourage victims to come forward with complaints, and then respond effectively.

The Court seems to justify an employee’s failure to report alleged incidents of harassment. For example, fear of retaliation or natural feelings of embarrassment or shame may be a sufficient excuse for a delay in reporting. An employee’s delay in reporting may be justified if a company has not consistently enforced the policy or has failed to investigate a complaint.

The Court concluded that whether the employee’s delay in reporting is reasonable must be judged in light of the circumstances at the time of the incident. Furthermore, the standard for determining reasonableness is not high. In other words, if an employee presents a basis for the delay, which may be reasonable, the justification is acceptable.

Finally, the employer must show that more likely than not, had the employee promptly reported the incident(s), the employer’s internal remedies would have prevented at least some harm. We are concerned, however, that unless an employer has a past record of responding to harassment complaints, that this element of the ACD will be difficult to establish. And does the existence of a record or past complaints suggest an ineffective policy? These may be difficult issues to plead and prove in court.

The Benefits of the ACD

The proving of the ACD does not negate an employer’s liability. The Court emphasized that under California law, an employer is strictly liable for the harassing acts of its supervisors. Therefore, unlike the Ellerth defense under federal law, the ACD does not negate an employer’s liability.

The ACD provides a reduction in damages only. While this can be substantial, it is not nearly as effective in terms of a defense as a bar to liability. Since damages are only reduced, it stands to reason that an employee may still obtain attorneys’ fees for prosecuting the case. In many cases, attorneys’ fees constitute a significant part of the employee’s damages.

In addition, the Court stated that in most cases there would be disputed factual issues. This suggests that employers will be unable to use the ACD in many cases as a basis for a motion for summary judgment. This results in more cases going to trial where employers face even greater exposure for attorneys’ fees.

What You Should Do

To take fullest advantage of the ACD, an employer must take several very important steps. First, you should verify that your anti-discrimination policy contains the essential elements as described by the Court. Second, the employer must take very conspicuous steps to implement and communicate its anti-harassment policy. This will involve teaching and training staff and management on the elements of the policy and the methods by which a complaint will be addressed.

Topics presented to employees should include the types of prohibited or unlawful behavior, definitions of terms, protected classes, the processes the company takes as well as the shared responsibilities of employees and managers in preventing harassment, and the process for filing a complaint, and to whom, in the event of harassment.

Supervisory training should include cues to watch for in the work environment, including inappropriate screensavers or graphics on computer monitors, suggestive or discriminatory decals on T-shirts or hats, and degrading jokes. Any such inappropriate behavior should alert supervisors to take immediate proactive action, including consulting with the Human Resources Department. All staff training should also include an employee’s legal remedies and the complaint process available through the Department of Fair Employment and Housing (“DFEH”) and instructions on how to contact the DFEH.

Employers should document employee and supervisory training conducted. These documents should include a record of training outlines and materials, sign-in sheets and signed acknowledgment forms from each employee verifying he/she understands and agrees to follow the company’s anti-harassment policy.

Investigations and decisions must be made promptly. Records of investigations must be maintained to verify the effectiveness of the company’s policies. Most often, an employer will need to take some type of action in the event there is any factual basis to the complaint. Otherwise, employees will argue that the company’s procedures are not firmly enforced and that a delay in reporting is justifiable. Employers will need to use trained investigators who can obtain not only the information necessary about an employee’s complaint, but also investigate the reasons alleged for failure to report.

Fishman, Larsen & Goldring and FLG Consulting are prepared to assist you with your policy development and implementation of procedures and staff training. We have courses available for staff and management employees on compliance with anti-harassment laws. We encourage you to take full advantage of the ACD now expressly made available as a result of the Supreme Court decision in McGinnis.