Employees Will Have Easier Time Proving Punitive Damages, But Will Employers Be Liable?

In the Civil Rights Act of 1991, Congress greatly expanded the rights and remedies of employees under Title VII of the 1964 Civil Rights Act. For example, Congress authorized punitive damages of up to $300,000 against employers in discrimination cases brought under Title VII where an employer has engaged in intentional discrimination and has done so "with malice and reckless indifference to [the employee.s] federally protected rights."

In Kolstad v. American Dental Association, the United States Supreme Court recently analyzed when an employer can be held liable for punitive damages under Title VII. The Court eased the burden on employees by holding that an employee suing for unlawful discrimination need not show egregious misconduct by an employer in order to obtain punitive damages. However, the Court also devised a potent defense to an award of punitive damages by concluding that an employer may not be liable for punitive damages if it can show that the misconduct was contrary to the employer.s "good-faith efforts" to comply with the anti-discrimination laws.

The Facts of the Case

In Kolstad, a female employee brought a gender discrimination claim under Title VII when she was passed over for a position in favor of a male. The employee argued that she was not selected because of her gender, and presented evidence at trial that the decision-makers unfairly favored the male employee and that one of the decision-makers made sexually offensive jokes and comments. The trial judge, however, refused to submit to the jury the issue of punitive damages.

The Legal Standard For Proving Punitive Damages

The Supreme Court ruled that in proving entitlement to punitive damages under Title VII, an employee need not demonstrate "egregious" conduct by the employer. Instead, the employee must show that the employer.s discriminatory practice was done with "malice" or with "reckless indifference" to the rights of the employee. The Court stressed that "malice" and "reckless indifference" focus on the subjective intent of the employer, while an "egregiousness" requirement would add an objective element that the law does not impose. The Court then elaborated on the definition of "reckless indifference", stating that to meet this standard an employer must at least discriminate in the face of a perceived risk that its actions will violate federal law.

The Defense To Punitive Damages

The Court also noted that there will be some circumstances where intentional discrimination does not warrant punitive damages, such as when the employer is simply unaware of the relevant federal prohibition. The Court also suggested that punitive damages would not be allowed where an employer believes that its discrimination is lawful, such as when it reasonably believes that its discrimination satisfies a bona fide occupational qualification defense.

Because an employer acts through the conduct of individuals, the Court also stated that the employee must prove that the employer is liable for the discriminatory act committed. Reviewing traditional agency principals, the Court stated that an employer normally will be responsible for the wrongful act of an individual if: (1) the employer authorized the act, (2) the individual was unfit and the employer was reckless in employing him, (3) the individual was employed in a managerial capacity and was acting in the scope of employment, or (4) the individual was a "managerial agent" and the employer ratified or approved the act.

Focusing on the "scope of employment" language, the Court ruled that even if a managerial agent makes a discriminatory employment decision while acting within the scope of employment, an employer may not be liable for punitive damages where the decision is "contrary to the employer.s good-faith efforts to comply with Title VII". The Court reasoned that it would be unfair to hold employers liable for punitive damages when they attempt in good faith to comply with Title VII. However, the only concrete example provided by the Court as to what may constitute a "good-faith effort" to comply with Title VII is where the employer has been making good-faith efforts to enforce its anti-discrimination policy.

Practical Effect In Title VII Cases

The Court.s decision eases the burden on employees to make a case for punitive damages on the one hand, but also creates a powerful defense against the issuance of punitive damages on the other hand. To present a case for punitive damages, an employee not need show that the objective conduct of an employer is "egregious". Rather, the conduct need only be motivated by malice or reckless indifference, and thus the employer.s subjective intent is the only issue. Hence, an employee may be able to obtain punitive damages for non-egregious acts, so long as the employer discriminates out of malice or reckless indifference to the rights of the employee.

However, an employer may avoid liability for punitive damages if it shows that the employment decisions of its supervisors or managers were contrary to its good-faith efforts to comply with the anti-discrimination laws. An employer may prove this by showing the efforts it has made to enforce an anti-discrimination policy.

Meaning For California Employers

Kolstad was decided under Title VII and not the California Fair Employment and Housing Act ("FEHA"), California.s own anti-discrimination law. Therefore, Kolstad is not directly applicable to FEHA claims. When a claim is brought under FEHA, punitive damages are available if the employee can satisfy the standards for punitive damages under California Civil Code Section 3294. Under Section 3294, an employee must prove that the employer acted with malice, oppression or fraud. A corporate employer is liable if an officer, director, or managing agent acts with advance knowledge or conscious disregard of the rights or safety of its employees, or authorizes or ratifies the malicious, oppressive or fraudulent conduct.

In summary, California law imposes a higher burden for employees to establish punitive damages for FEHA or other tortious employment claims than is now required for Title VII under Kolstad. Moreover, employers should argue that California courts adopt the defense to punitive damages for FEHA claims that was established by Kolstad. Depending upon how the California courts resolve these issues, employers may get the best of both worlds.

The Kolstad case also underscores the importance of having effective anti-discrimination policies. The case highlights the importance of employers giving more than "lip service" to eliminating bias in the workplace. To help avoid the imposition of punitive damages, employers should take effective measures to enforce their anti-discrimination policies such as creating policy statements and conducting seminars and training for all employees, especially for managers. Employers also should be diligent in following up on employee complaints and monitoring employment decisions to ensure compliance with employer policies and the laws.

This article was originally published as a Labor & Employment Update (July 1999), a Sheppard, Mullin, Richter & Hampton LLP publication.