The court’s decision to restore a $500,000 punitive damages award for failure to adequately address a sexual harassment complaint highlights employers’ duty to investigate every allegation and take appropriate remedial action.

A recent Massachusetts Supreme Judicial Court (SJC) ruling highlights the potential for significant punitive damages exposure when an employer is on notice of a sexually hostile environment and fails to take adequate remedial steps to address the situation. This LawFlash describes the ruling and then identifies six key takeaways.

After finding that the plaintiff suffered sexual harassment by her direct supervisor, a jury found car dealer Lexus of Watertown liable for $40,000 in compensatory damages for emotional distress. The jury then went on to award $500,000 in punitive damages to punish the employer for what the jury found to be intentional actions or reckless disregard for the employee’s rights under the state’s discrimination laws. The trial court set aside the award of punitive damages but let stand the award of compensatory damages. Both sides appealed, and the highest court in the commonwealth reinstated the punitive damages award.

In its decision, the SJC established a two-part test to determine whether a plaintiff is entitled to punitive damages from his or her employer based on a sexually hostile or offensive work environment that another employee creates. First, was the employer on notice of the harassment and failed to take adequate measures to investigate and remedy the situation? And second, was that failure “outrageous or egregious” based on the five nonexclusive factors outlined in Haddad v. Wal-Mart Stores, Inc., 455 Mass. 91, 110 (2009)? The five Haddad factors are:

1. whether there was a conscious or purposeful effort to demean or diminish the class of which the plaintiff is a part (or the plaintiff because he or she is a member of the class);
2. whether the defendant was aware that the discriminatory conduct would likely cause serious harm or recklessly disregarded the likelihood that serious harm would arise;
3. the actual harm to the plaintiff;
4. the defendant’s conduct after learning that the initial conduct would likely cause harm; and
5. the wrongful conduct’s duration and if the defendant tried to conceal it.

Applying this test to the record, the SJC concluded that the jury was warranted in finding that, independent of the underlying harassment, the employer acted intentionally or with reckless disregard for the employee’s rights under G. L. c. 151B when it failed to take adequate remedial action after the employee notified it of the harassing behavior, and that a punitive damage judgment was appropriate.

With this decision, the SJC reinforces employers’ obligation promptly and “adequately” to investigate each and every sexual harassment allegation. The decision also highlights an employer’s duty to take appropriate and proportional remedial action to end the harassment and address the situation with alleged harasser employees. Key takeaways from this decision include the following.

Punitive damages exposure is present as soon as an employer knew or should have known about sexually harassing conduct in the workplace. Employers should establish and enforce a clear process for reporting all complaints of sexual harassment or a hostile environment. The reporting procedure should impress on all levels of the organization the importance of reporting complaints of harassment and communicating those complaints to the appropriate level of management.

Where the channel for sexual harassment notifications (as delineated in an employer’s sexual harassment policy) fails to appropriately report or investigate a sexual harassment complaint, that lack of response is per se evidence of a failure to adequately remedy the alleged discrimination. Employers should establish a clear and thorough investigation and remediation procedure to ensure that they conduct investigations in a prompt, thorough, and objective manner. This requires having access to investigators who are trained to conduct such investigations and are not biased. Some employers will retain independent investigators from outside their company when they lack the internal expertise or resources to conduct an investigation, or when particular allegations are so unique, or concern such high ranking employees, that they require external expertise and independence.

An employer’s failure adequately to investigate a complaint may result in a substantial punitive damage judgment against it. The risk of punitive damages underscores the importance of training discussed below.

An employer’s investigation must be unbiased and adequate to a third-party reviewing the situation. Supervisors should take seriously and report all allegations of potential harassment, no matter how “offhand” or informal. Best practices dictate that investigators should interview all relevant personnel, take interview notes or prepare an investigation summary that reflects the questions they asked their interview subjects, and give the complainant an opportunity to participate in the investigation.

Employers must take prompt and effective remedial action if a complaint proves to be well-founded. This includes disciplinary action up to and including termination of employment for harassment.

All managers and supervisors should receive training on their responsibilities to prevent and address all forms of unlawful harassment. Managers must know that when they are on notice, they are required to promptly report incidents to an investigating authority (e.g., human resources, compliance, legal, etc.). Managers should consider themselves to be on notice when they either observe the questionable behavior or they learn about it from another source, including, for example, the complainant. Most importantly, managers should not try to validate a complaint’s legitimacy but report it to the investigating entity to make that conclusion.