Facing An Employment Discrimination Claim? Adding Even a Single New Employee that Year Could Double Your Liability.

Sometimes, business growth is not a good thing . . .

Title VII of the Civil Rights Act of 1991 (Title VII), the federal law barring employment discrimination, places caps on certain types of employee damages based on employer size.  This creates uncertainty for employers because a company that grows or shrinks in size could be subject to much higher or lower caps based on when its size is determined.  Addressing this uncertainty, the First Circuit Court of Appeals recently decided that the applicable cap must be determined based on the employer’s size during the year in which the discrimination occurredHernandez-Miranda v. Empresas Diaz Masso, Inc., No. 10-1639 (1st Cir. Jun. 29, 2011).

Title VII caps compensatory and punitive damages according to 4 successive size categories:

  1. Damages are capped at $50,000 for employers of 15-100 persons.
  2. Damages are capped at $100,000 for employers of 101-200 persons.
  3. Damages are capped at $200,000 for employers of 201-500 persons.
  4. Damages are capped at $300,000 for employers of 501 or more persons.

In applying this scale, the size of the employer is determined based on how many employees the company has during “20 or more calendar weeks in the current or preceding year.”

In this case, the jury awarded damages to Edna Hernandez-Miranda for intentional discrimination by her former employer, Empresas Diaz Masso. The jury found that Ms. Hernandez-Miranda was subjected to sexual harassment and forced to engage in sex acts with a supervisor, and awarded her a verdict of $300,000 in compensatory and punitive damages.

While the claim was pending, the workforce of Empresas Diaz Masso plummeted from 247 employees at the time of the discrimination to 25 employees four years later when the jury returned its verdict.  After the verdict was returned, the trial court applied the lowest applicable cap based on the decrease in company size and reduced Ms. Hernandez-Miranda’s verdict to only $50,000.  In response, Ms. Hernandez-Miranda appealed this decision to the First Circuit.

On appeal, Empresas Diaz Masso argued that the $50,000 cap was appropriate based on the term “current or preceding year” in the statute, which, it argued, must be read as the year of the verdict.  In rejecting this argument, the First Circuit stressed that the clearest and most certain way to calculate employer size is to use the year the discrimination occurred.  The First Circuit reasoned that this approach provides sufficient, but not excessive, awards, and prevents employers from “engaging in gamesmanship by structuring companies, or timing the progress of lawsuits, to maximize gain or to minimize loss.” The First Circuit further defended its ruling as consistent with “Title VII’s purpose of encouraging resolution of disputes before litigation commences.”

Based on this decision, employers should be aware that even Title VII’s caps intended to limit liability will often be applied so as to leave them open to large damage verdicts for years into the future, despite changing economic conditions and resulting reductions in size and revenue.

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