The PEO and Sexual Harassment Investigations

The PEO and Sexual Harassment Investigations

Philip A. Toomey, Esq

Sexual harassment claims and liability

due to inadequate investigations continue to be growing areas of concern for PEOs. Most PEOs attempt to limit exposure by allocating responsibilities within their client service agreements. However, recent court decisions have reaffirmed that when both the PEO and the client company have the right to exercise certain powers of control over the employee, whether or not control is actually exercised, dual employment status is established. In that case, employees who feel they have been victims of sexual harassment have the right to look to both the PEO and the client company for redress. In simple terms, this means the PEO may no longer rely upon allocation or indemnification language in the client service agreement when the issue of sexual harassment is present at the client company’s workplace. This article will address two common situations: employee dating and the download of objectionable material to desktop computers.

“Who Cares Who I’m Seeing?”

Anecdotal evidence supports the finding that despite increased sexual harassment training and educational efforts, romantic relations between co-workers continues to be a significant issue. The issue becomes more dangerous when the coworkers also share the relationship of supervisor and subordinate.

Concept of Strict Liability

Under both state and federal law, and with extremely rare exceptions, an employer has strict liability for sexual harassment committed by a supervisor. This means that despite a lack of notice or knowledge, and aggressive efforts to educate and root out the problem of sexual harassment, a PEO may find itself saddled with absolute liability for the conduct of supervisors if they date subordinates. The courts have not recognized any defense to the PEO based upon allocation of contractual responsibilities within the client service agreement. It is important to note that employer liability for supervisor harassment does not require a direct supervisory relationship between the dating employees. It is sufficient to establish employer liability if it is determined that the offending party is a supervisor as that term is defined under relevant law. It is not necessary for a complaining expectation of privacy. Under federal and most states’ laws, an employee has a protective zone of privacy into which an employer may not inquire without substantial justification. Included in this zone of privacy are romantic relationships that take place away from the worksite on the employee’s own time. The quandary for the PEO, in particular, is obvious. It may find itself strictly liable for conduct over which it had absolutely no knowledge, and at the same time did not have the ability to inquire because of employee privacy rights. Most courts, when faced with this dilemma, have allowed employers some latitude if the inquiry is based upon bona fide concerns, some potential conflicts of interest, and sexual harassment policies. To be safe, this ability to inquire should be specifically set forth in the written policies of the client.

“Reverse’ Harassment and Sexual Favoritism

If the issue weren’t complex enough, the California Supreme Court recently held that an employee may establish a claim of sexual harassment by showing widespread sexual favoritism creating a hostile work environment. Stated in simpler terms, under this court’s determination, an employee can claim to be the victim of sexual harassment based upon consensual sexual relations between other employees and a supervisor. The court did not provide any firm guidelines on the issue of sexual favoritism. As such, the PEO could find itself responding to a complaint based, in part, upon the allegation that a purely consensual relationship between a supervisor and a subordinate created a hostile work environment that violated the prohibited boundaries of sexual harassment.

Resolution of Dating Issue

As can be seen, there is no easy solution to the issue of co-employee dating. Because allocation of responsibility under the terms of the client service agreement will not insulate the PEO from a claim, the most prudent course is for the PEO to work closely with the client to establish clear conflict of interest guidelines and appropriate required reporting of dating relationships between co-workers to evaluate and enforce both the conflict and the sexual harassment policies.

“But It’s Only a Screensaver”

The desktop computer has proven to be an essential workplace tool. It has also been proven to be a diversion for some employees who surf the Web, collect images, and treat the computer as if it were their own personal, and private, domain.

Reasonable Expectation of Privacy Inappropriate images and other material stored by a user on a computer may be discovered in a multitude of ways. Another co-employee may use an employee’s workstation while he’s on vacation. A desktop computer may crash and the IT professional, in reinstalling the system, locates the material.

The user may simply decide to post the most recent racy image as a screensaver, which is then overseen by a coemployee. Because the PEO may find itself answering to a complaint, the PEO would be well advised to insist that each client company have a computer use policy that prohibits personal use of the computer, prohibits computer use for obscene purposes, and includes a consent to monitoring of the computer and its contents. An effectively worded policy can defeat any claim by an employee that he had a reasonable expectation of privacy in the content of the computer.

Issues of Hostile Environment Again, the courts have not provided solid guidance in this area. What is clear, however, is that sexual oriented pictures, images, or screensavers can constitute a hostile work environment and subject both the client company and PEO to liability. It is important to point out that it is not necessary for the material to be legally “obscene” for an employee to state a valid claim. The courts have entertained claims by employees that suggestive pictures are an impermissible stereotype of a person’s gender or sexual orientation, thus violating the law.

Special Issues Related to Images of Children

From time to time, employers have also located on computer hard-drives images that appear to be of children engaging in or simulating sexual conduct. The public display of these images obviously would support a claim of hostile work environment. However, when the images appear to be of children, special duties and responsibilities are imposed upon the employer. Those duties include, under federal law, an obligation to report the discovery to law enforcement agencies and allow the agency access to each depiction. The client company and the PEO, if faced with this type of situation, need to each immediately engage competent legal counsel to guide them through the complexity of both sexual harassment and child pornography law.


The law of sexual harassment and the liability of the PEO continue to evolve. In light of court decisions imposing joint liability upon the client and PEO, a PEO may no longer rely upon the allocation or indemnification language in its standard client service agreement to escape liability. Careful and diligent planning, training, follow-up, and review are critical if the PEO wishes to limit its exposure.

This article is designed to give general and timely information on the subject covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how matters relate to their own affairs.

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