7th Circuit rules that Section 1981 of Civil Rights Act of 1866 provides for individual liability in certain circumstances

Employers are used to defending against traditional claims of discrimination or retaliation, in which an employee alleges that the employer violated Title VII of the Civil Rights Act of 1964, or some similar statute. In some cases, employers have to defend against the use of the “cat’s paw” theory of liability, which holds that an employer can be liable for discrimination or retaliation if the employer acts innocently but based on input from a biased employee. Employers will now have to become familiar with a less common scenario, in which an employee alleges that a co-worker is individually liable for causing the employer to retaliate against him or her under the Civil Rights Act of 1866, also known as Section 1981, which prohibits discrimination in contractual relationships.

On May 24, 2012, in Smith v. Bray, the 7th Circuit considered an issue of first impression: whether a former employee could sue a human resources manager individually for retaliating against him by influencing the decision to terminate his employment. The court held that the employee stated a viable claim against the HR manager for retaliating against him under a “cat’s paw” theory of liability. The court ruled, however, that the employee failed to establish a Section 1981 retaliation claim against the HR manager in that case because he could not show that the supervisor acted with retaliatory intent.

District court dismisses retaliation claim against employee

In Smith, an employee complained internally of racial harassment and race-based discrimination by his supervisor and co-workers. The employee’s complaints were communicated to the HR manager, who failed to take any corrective action. The employee ultimately requested, but was denied, short-term disability benefits. The company then terminated the employee for being absent without leave. The HR manager participated in the termination decision.

The employee filed claims of discrimination and retaliation against the corporate entities as well as against his former supervisor and the HR manager. The corporate entities filed for bankruptcy and, as a result, the employee’s lawsuit was limited to his claims against his supervisor and the HR manager. The employee settled the claims against his supervisor.

The U.S. District Court for the Northern District of Illinois then granted summary judgment to the HR manager on his Section 1981 retaliation claim, holding that the employee had failed to establish that the HR manager had actually participated in the termination decision or was motivated by retaliation for his prior racial harassment and race-based discrimination complaints.

7th Circuit applies cat’s paw theory to retaliation claim

The 7th Circuit affirmed summary judgment for the HR manager, but disagreed with the district court’s rationale. First, the court explained that Section 1981 differs from Title VII and other statutes by providing for individual liability under certain circumstances. Further, the 7th Circuit pointed out that the Supreme Court had previously ruled that Section 1981 authorizes retaliation claims, and had specifically upheld the validity of the cat’s paw theory of liability.

The 7th Circuit also noted that many circuits had already applied the cat’s paw theory of liability to impose vicarious liability on employers under both Section 1981 and the similar statute, Section 1983; as well as to impose individual liability on employees under Section 1983.

Drawing on these decisions, the 7th Circuit held that the HR manager could be held individually liable under Section 1981 for retaliating against the employee by participating in the termination decision and acting with a retaliatory motive. The court held, however, that the employee failed to establish that the HR manager had acted with a retaliatory motive based on his racial harassment and race-based discrimination complaints and dismissed the employee’s Section 1981 retaliation claim against the human resources manager.

Important guidance for employers

Employers should take away two key lessons from this new cause of action in the Smith decision.

1. Employers should provide adequate training to decision-makers to ensure they investigate and formulate employment decisions based on relevant, non-biased, lawful and otherwise appropriate evidence.
2. Employers should provide often overlooked anti-retaliation training to all management-level employees, especially those involved with complaint investigations and termination decisions. Following these lessons may help employers avoid not only having to defend against costly claims brought against the corporate entity, but also against individual employees.