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August 02, 2022

California Board Diversity Rulings & Lawsuits

In many states, there has been a push for diversity in the workplace. In California, this sentiment has been codified into law with two new rules requiring diversity on boards for corporations that are headquartered in the state. However, both of these laws have been challenged in court, and the recent court rulings on California board diversity are big news for any companies affected by the diversity requirements.

AB 979 and SB 826

Senate Bill 826 was signed into law in 2018. Under the new law, publicly held corporations with principal executive offices located in California had to have a minimum number of female directors on the board. By the end of calendar year 2019, boards needed at least one female director. By the end of calendar year 2021, boards with five directors had to have at least two female directors and boards with six or more directors had to have at least three female directors.

Assembly Bill 979 was signed into law in 2020. Like SB 826, it applied to the boards of publicly held corporations with principal executive offices in California, but it created additional diversity requirements. Under this law, boards were required to have a minimum number of directors from underrepresented communities. By the end of calendar year 2021, boards were required to have at least one director from an underrepresented community. By the end of 2022, corporations with more than four but fewer than nine needed to have at least two directors from underrepresented communities, and larger corporations needed to have at least three directors from underrepresented communities.

For the purpose of AB 979, an “individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender” is considered to be from an underrepresented community.

Enforcement of the New Laws

According to a Bloomberg article from January 2022, California’s attorney general was warning that compliance with the laws was not optional, and that the state would take enforcement action if needed.

Boards that failed to meet the requirement could be fined $100,000 for the first violation and $300,000 for each subsequent violation.

Although some corporations may have struggled to meet the new requirements, a report from California Partners Project found that about 30% of boards were all male in 2018, but only 3% were all male in 2020.

Diversity Rules Struck Down in Court

Now, both AB 979 and SB 826 have been struck down by state courts. According to the National Law Review, Crest v. Padilla II challenged AB 979, while Crest v. Padilla I challenged SB 826. In Crest v. Padilla I, the plaintiffs argued that the law violated California’s Equal Protection Clause prohibiting discrimination based on sex.

What’s Next for the Diversity Requirements?

Right now, corporations do not have to worry about enforcement of the diversity requirements. However, it may be too early to forget about AB 979 and SB 826 completely. Appeals could drag the debate on for years. It’s possible that the recent rulings could be overturned, allowing California to resume plans to enforce the diversity requirements.

In the meantime, Bloomberg says that other states are developing disclosure-only laws that require corporations to report information on diversity. These laws are less likely to be struck down, and we may see more of them.

Treading Carefully

Diversity continues to be a pressing issue. Companies are under pressure to show that they are promoting women and individuals from underrepresented communities. At the same time, companies that approach their diversity efforts imprudently could face claims of reverse discrimination.

In one example, CBS News reports that a white man claimed that he was fired as part of his employer’s diversity efforts. The man says he was fired without warning or cause because the employer was trying to promote diversity in management. A federal jury awarded him $10 million.

When companies work on their own diversity efforts, they must be careful to adhere to both state and federal laws, including the anti-discrimination laws enforced by the U.S. Equal Employment Opportunity Commission. Under these laws, it is illegal to discriminate against applicants or employees based on race, color, religion, sex (including gender identity, sexual orientation and pregnancy), national origin, age, disability or genetic information. The EEOC notes that a help-wanted ad seeking “females” could be considered a violation of the law because if could discourage men from applying.

Navigating the changing California board diversity requirements can be challenging. Make sure your business consults legal counsel and talk to your insurance broker about employment practices liability insurance. Heffernan Insurance Brokers can help you secure customized business insurance coverages. Learn more.

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