California employers and their third-party service providers—including artificial intelligence vendors—are now exposed to a host of litigation as the state’s courts sort out the extent to which workers can sue such agents for discrimination.

The California Supreme Court recently held that workers can sue third-party providers under the state’s Fair Employment and Housing Act for actions performed on behalf of employers.

The high court ruling came in response to a question posed to it by a US appeals court in a case involving job applicants who said they’d been asked improper personal questions as part of a health screening by a prospective employer’s vendor.

But its decision didn’t address what conduct can give rise to a FEHA claim against third-party vendors that assist employers with job application reviews, post-offer medical and psychological examinations, and other employment and human resource tasks.

That uncertainty “will absolutely invite litigation that will necessarily involve what conduct is severe enough to amount to a violation,” said Renee N. Noy, co-founder of California-based boutique employment law firm WorkWise Law.

The “real concern” is the cost of finding that answer, even if third-party agents win cases against them, said Walter M. Stella of Cozen O’Connor PC. “Litigation still costs money. So if you’re getting sued where before you wouldn’t be getting sued, somehow that’s going to have to be paid for,” Stella said.

As a result, he said, third-party service providers may pass those costs on to employers to cover those potential liability-related expenses.

“The dust is settling, and everybody is trying to figure out what” the ruling means, he said.

Potential AI Impact

The lower courts also will have to determine the exact impact on artificial intelligence vendors, whose services are often used to perform employment-related tasks like sifting through job applications, attorneys said.

“It’s clear on the facts” that the court was “contemplating things like leave administration, background checks, medical exams,” said Jeffrey S. Bosley of Davis Wright Tremaine LLP. “The court was thinking that agency liability may apply to those kinds of FEHA regulated activities.”

“It’s not clear whether” vendors that provide employment decision-making AI programs would be liable under the language of the high court’s decision, Bosley said. “We need more guidance on that.”

The decision does appear to align with state regulatory efforts concerning employers’ use of automated decision tools.

As state lawmakers encounter roadblocks in their efforts to put guardrails around AI, the California Civil Rights Department’s Civil Rights Council is considering modifying existing employment discrimination regulations to cover the technology.

The agency’s proposal, released in February, would ban an AI system from using a FEHA-protected characteristic—such as age, race, or sexual orientation—or data that could be affiliated with it.

Employers would be liable for discriminatory actions stemming from AI systems that made or facilitated human decision making and caused an adverse impact on job applicants or employees on the basis of a protected characteristic.

The proposal “goes beyond the scope of the current decision” on third-party liability, Bosley said. But the question is whether the state’s high court will also consider the proposal as within the confines of what FEHA prohibits, he said.

“I think the trend is going to be [to] continue to expand potential liability to agents, to third parties, to entities that provide services that actually help employers access, manipulate and filter through large amounts of data,” Bosley said. And that will lead to more litigation about the proper scope of FEHA, he said.

New Service Contracts

As the courts iron out FEHA’s new liability wrinkle, employers and third-party vendors likely will change how they typically do business in the Golden State, attorneys said.

Third-party agents can refuse contractual obligations that may expose them to FEHA violations, or secure agreements from client employers to indemnify them for any FEHA liability, the state supreme court said.

In that vein, employers are expecting that third-party vendors to update their contracts to specify who will be on the hook for certain claims, said Stacey Chiu of Michelman & Robinson LLP.

“We’ve already started advising our clients that when they receive these updated contracts to take a really close look at the indemnity provision,” she said.

Employers that outsource employment and human resource tasks sometimes “don’t really have any say or oversight into the work that these service provider agents are doing,” such as direct communication with job candidates or current employees, Chiu said.