The New Year Brings Significant Changes to the California Department of Fair Employment and Housing

Article authored by Michael W. Pott and Kristina M. Hall

In an effort to reduce a multi-billion dollar budget deficit, Governor Brown is attempting to improve government efficiency by eliminating duplication within the state government. As part of this process, Governor Brown signed SB 1038, which eliminates the California Fair Employment and Housing Commission (“FEHC”) as of January 1, 2013. In addition, the bill creates a new Fair Employment and Housing Council, comprised of seven council members who are appointed by the governor and confirmed by the Senate. The council is funded by the existing DFEH budget and is responsible for the regulatory function of the DFEH, including rule making and non-adjudicatory public hearings.

What are the Changes?
The California Fair Employment and Housing Act (“FEHA”) prohibits, among other things, discrimination and harassment based on protected characteristics in the workplace. It also prohibits employers from retaliating against employees for making complaints of discrimination or harassment or participating in investigations into complaints of discrimination or harassment in the workplace. Before a current or former employee can file a lawsuit asserting the FEHA has been violated, the current or former employee must first file a claim with the DFEH within one year of the purported discriminatory conduct. In the past, a complaining current or former employee could request an immediate “right to sue” letter from the DFEH and pursue his/her claims in court or the employee could request the DFEH investigate the complaint. If the employee requested an investigation by the DFEH and the DFEH uncovered a violation of the law, the DFEH then decided whether to file an accusation with the FEHC or issue the complainant a “right to sue” letter.  If the FEHC issued an accusation, the employer had 90 days to respond to the accusation, during which time voluntary mediation services were available to try to settle the matter. If the matter could not be settled, then the case proceeded to a hearing before an FEHC administrative law judge. The employer also could remove the case to the superior court if an award of emotional distress damages or administrative fines was requested by the DFEH.

The elimination of the FEHC brings several important changes for California employers. Following the consolidation of the FEHC’s powers under the DFEH, the DFEH now will be able to file lawsuits directly in the superior court instead of presenting the claims to the FEHC for adjudication. However, before the DFEH files a lawsuit against an employer, the DFEH will require all parties to complete mandatory mediation in the DFEH Internal Dispute Resolution Division. (This is a significant change from the prior system, in which mediation was voluntary.) The mediation is free to all parties. The DFEH will continue to offer voluntary mediation during the pre-investigation phase.

Other changes occasioned by the passage of SB 1038 pertain to damages and attorney’s fees. Particularly significant to employers, SB 1038 now allows the DFEH to recover attorney’s fees (at the Attorney General’s rate of $170.00/hour) and expert witness fees if it is successful in pursuing claims against an employer. In addition, the DFEH can also seek punitive damages in any lawsuit it files. Proceeds of any recovery of fees and costs by DFEH will be deposited into a special fund that will be used to fund the DFEH itself. Perhaps most important, these statutory changes also result in the elimination of administrative fines and of the $150,000 cap on a complainant’s emotional distress damages that existed in the former administrative process. Since the DFEH can now take a case immediately to superior court, a jury can award any amount it believes is appropriate to compensate the complainant for alleged discrimination, including unlimited damages for emotional distress.

What is the Effect on California Employers?
While the transfer of the FEHC’s rulemaking duties to the DFEH most likely will not cause any significant change for California employers, the change may not be so benign with regard to ability of the DFEH to directly file lawsuits in civil court. The statutory change effectively permits complaining employees to pursue claims through essentially free representation by the DFEH. In theory, this could result in more employees attempting to obtain representation through the DFEH rather than through private attorneys because the employees would not have to share settlement proceeds with their attorneys. We expect these changes will likely have a significant impact on the number of cases the DFEH files in Court. It will be interesting to see if the DFEH decides to be extremely selective as to which cases it will pursue in court or files many cases.

As the DFEH can no longer pursue cases through the accusation and hearing process that was previously available, which resulted in hearings before the FEHC, employers will no longer be able to benefit from that process which provided for limited discovery, a cap on emotional distress damage awards and did not allow for the DFEH to recover reasonable attorneys’ fees against the employer.

One possible benefit to employers from SB 1038 is the requirement that all cases be mediated before the DFEH files a civil lawsuit. This may help employers resolve cases inexpensively at the outset before they spend thousands of dollars in defense costs. DFEH statistics indicate its Dispute Resolution Division has a success rate of over 80% in settling cases. In the DFEH’s 2010 Annual Report, it noted that the average case it resolved in the pre-accusation stage settled for just over $7,000, while cases that resolved post-accusation settled for just over $40,000. Thus, employers will have a significant opportunity to limit exposure to damages and defense costs through the mandatory mediation process.

Employers should take note of these changes to the FEHA and prepare for the opportunity to resolve difficult cases pre-litigation in matters that the DFEH decides to pursue in court. Employers may also be able to use the mediation process to resolve non-meritorious cases for little or nothing and thereby reduce their overall exposure in litigation. To this end, our attorneys are available to assist employers during this pre-litigation phase and, if the case does not resolve, through trial.