Avoiding Liability Risks for Fair Housing Violations Committed by Contractors

One reason that complying with fair housing laws is so challenging is that you can’t delegate your nondiscrimination duties the way you can with other legal obligations. Managing your own personal conduct isn’t enough; you’re also responsible for the third parties you hire to market, manage, police, landscape, repair, maintain, and perform other services for your housing community. This includes not only the employees you directly hire, train, and oversee but also the outside businesses you engage as contractors. While you might think of them as independent contractors, they may actually be agents in the eyes of the law. Result: If contractors commit discrimination while performing services for your community, victims may have a valid claim for damages against you—even if you neither knew about nor condoned the discriminatory behavior.

The name of this concept is “vicarious liability,” and this month’s lesson is designed to help you avoid it. First, we’ll explain the principles of vicarious liability and how you can be liable for fair housing violations committed by third parties who work for you but aren’t in your employment. Then we’ll set out six rules to help you recognize and take practical actions to minimize your own liability risks. At the end of the lesson you can take the COACH’s Quiz to see how well you learned the material.   

WHAT DOES THE LAW SAY?

The federal Fair Housing Act (FHA) bans housing discrimination on the basis of race, color, religion, sex, national origin, familial status, and handicap (disability). In addition, many states and municipalities have even stricter laws banning discrimination on grounds that the FHA doesn’t cover, such as sexual orientation, marital status, ancestry, age, source of income and military or veteran status, to name just a few.   

There are two ways a landlord can be liable for violating the FHA: directly and vicariously. Vicarious liability, which comes from common-law court cases that predate fair housing laws by more than a century, is a concept of justice designed to hold people accountable for actions they don’t commit but still deserve to answer for. The idea is to ensure that those with deep pockets are held accountable for the wrongdoing committed by persons in their charge who are pursuing the more powerful person’s interests.

The concept, a.k.a., “respondeat superior” (Latin for “that the master must answer”), works this way: A principal is vicariously liable for the acts of its agent as long as the agent was acting within the scope of his or her actual or apparent authority. In other words, simply being a principal is enough to establish liability, regardless of whether the principal played any role in or was even aware of the agent’s wrongful conduct.

Vicarious Liability Under the FHA

The FHA doesn’t mention anything about vicarious liability. But from the beginning, courts and the U.S. Department of Housing and Urban Development (HUD) have held landlords and owners liable for offenses committed by their leasing, managing, and other agents.

A pivotal case came down in 2003 when an interracial couple sued the corporation of the real estate broker that allegedly thwarted their attempt to buy a house in California. The U.S. Supreme Court acknowledged that traditional principles of vicarious liability do, in fact, apply to the FHA. However, vicarious liability isn’t automatic, and the Court concluded that the corporate principals in this case weren’t liable because they neither participated in nor authorized the alleged discrimination [Meyer v. Holley, 537 U.S. 280 (2003)].

On Sept. 14, 2016, HUD issued new regulations (“Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices Under the Fair Housing Act”) specifying that the agency liability rules as they currently exist apply to the FHA. In other words, vicarious liability for an FHA violation is no stricter or easier than it would be for a tort or other kind of offense.

The actual rule of vicarious liability, according to the HUD regulations: A person is vicariously liable for a discriminatory housing practice by his or her agent or employee, regardless of whether the person knew or should have known of the conduct. “Agent” is defined as any party who enters into a contract with a seller or lessor, or a representative of the seller or lessor, for the purpose of selling or leasing target housing. This term doesn’t apply to purchasers or any purchaser's representative who receives all compensation from the purchaser.

Example: The property manager of a Kansas community engaged in a pattern of sexually harassing tenants over a five-year period. In January 2020, a federal district court found the property owner vicariously liable for the manager’s harassment and awarded $160,000 in damages to 11 of the victims [United States v. Cao, Case 6:17-cv-01310-EFM (D. Kan.)].

Note that while the HUD regulations address harassment, they also apply to other kinds of FHA violations. Moreover, commercial liability insurance policies generally don’t cover vicarious liability for civil rights offenses. Consequently, if you do get named as a defendant in a lawsuit for housing discrimination committed by your agent, you’ll have to pay any damages awarded out of your own pocket.

Are Independent Contractors a Landlord’s “Agent”?

As illustrated by the Meyer v. Holley case discussed above, there are limits to how far vicarious liability extends. The key question, for purposes of this lesson, is whether the independent contractor who commits a fair housing violation is actually (or apparently, as we’ll explain later) the landlord’s agent.

Unfortunately, there’s no simple answer to this question. Courts decide the issue on a case-by-case basis. But while facts and situations vary, the factors that determine agency status don’t. The most important factor is whether the landlord has the right to control the contractor’s actions and the means by which the work is carried out. Other key factors include:

• How the landlord and contractor perceive their relationship—for example, whether the contract describes the latter as an “employee” or “independent contractor”;
• Industry practice and custom in structuring such relationships;
• Control over the activity that led to the FHA violation; and
• The landlord’s actions or inactions toward the contractor.

6 RULES FOR AVOIDING LIABILITY FOR CONTRACTORS’

FAIR HOUSING VIOLATIONS

Given the complexity of the issue, you may be unable to reliably determine which of your contractors is your agent and which of your contractors isn’t. Attorneys recommend that you don’t even attempt it. Instead, they advise that you err on the side of caution by treating all of your contractors as agents and take steps to guard against liability—both direct and vicarious—for violations they may commit. Accordingly, you should apply all of the rules below to your outside contractor and vendor relationships.

Rule #1: Use Due Diligence in Selecting Your Contractors

Vicarious liability won’t be an issue if contractors don’t commit fair housing violations. So, the best way to protect yourself is to exercise due diligence in selecting your contractors. You may just assume that your contractors already know about and comply with fair housing laws, especially if you’re hiring a broker or property manager. However, attorneys caution that levels of understanding may vary. And contractors not directly involved in leasing and real estate operations, like painters, plumbers, and landscapers, may have little or no understanding of fair housing laws.

When checking references and performing background checks, consider not just the company’s reliability and workmanship but also its professionalism and experience. Look at the company’s employment policies, as well as its criteria and procedures for hiring its own employees. Questions to ask:

• Has the company or its employees been sued for fair housing discrimination?
• If so, what happened and what was the outcome?
• Does the company provide fair housing training to its employees?
• Does the company have a nondiscrimination and anti-harassment policy?

In addition, give the contractors you’re considering a copy of your community’s fair housing and sexual harassment policy and specify that complying with it will be a non-negotiable condition for hiring.

COACH’s Tip: Train your contractors. Ensure that all contractors who work at your community have at least a basic understanding of fair housing laws. Depending on the nature of the services they perform, you could provide some contractors with basic fair housing training. If that’s impractical, at the very least, ensure they understand enough to be able to comply with your community’s fair housing policy.  

Rule #2: Include the Right Liability Protections in the Contract

Once you select a contractor, put language into the contract to protect yourself against liability for the contractor’s fair housing violations. There are two kinds of provisions you can use to reduce your liability risks:

• A separately signed clause or attachment acknowledging that the contractor has read, understood, and agreed to fully comply (and ensure that its employees will comply) with your community’s fair housing and sexual harassment policies and that failure to do so will be considered a “material” breach triggering all your remedies under the contract, including termination; and
• An indemnification clause requiring the contractor to “hold you harmless” and repay any damages or legal expenses you incur in defending yourself against allegations of fair housing violations that the contractor commits.   

The acknowledgement clause or form should include specific language that spells out your community’s commitment to equal housing opportunity and treating all applicants and tenants in a fair manner, regardless of race, color, national origin, religion, familial status, disability, sex, and any other characteristics protected under state or local law. It should also make a specific reference to sexual harassment, since that’s a common source of liability from outside contractors.

Rule #3: Guard Against Liability for Agents with “Apparent Authority”

Imagine this: An old college chum shows up at your place needing a place to crash for a few weeks while he searches for a new job. You let him stay in a vacant unit. You also ask him to “keep an eye” on the rental office and pick up the phone when you’re not around. He agrees.

A week later, while your chum is behind the rental office desk, a fair housing tester shows up posing as a disabled applicant who needs an assistance animal. The chum sends him swiftly on his way with a “we don’t allow dogs here” scolding. He delivers the same message to testers who call the office.

You’re appalled when you find out what happened, especially when you get that summons notifying you that a local fair housing organization and state civil rights agency are suing you for disability discrimination. “I had nothing to do with it,” you protest. “The guy who made these remarks doesn’t work for me and isn’t my agent. And I neither approved nor condoned what he said.” But the court finds that your chum had “apparent authority” and refuses to dismiss the vicarious liability case against you.

This scenario, which is based on an actual Oregon federal court case, Avakina v. Chandler Apartments, LLC (Case No. 6:13-cv-1776-MC (D. Or. Jan. 30, 2015)), illustrates an important point: Landlords can be vicariously liable for actions of a person who isn’t actually their agent but have what’s called “apparent authority” to act on their behalf. Apparent authority is especially likely to be found when a third person reasonably believes the person has actual authority to act as the landlord’s agent and engages in actions that have legal consequences as a result, such as signing or deciding not to sign a lease.

Rule #4: Take Special Precautions to Prevent Sexual Harassment Claims

When contractors get landlords into fair housing hot water, more often than not it’s the result of harassment based on sex or other grounds that the FHA or state or local law protects from discrimination, such as race, religion, disability, sexual orientation, etc. (which, for simplicity’s sake, we’ll refer to collectively as “sexual harassment”).

Landlord liability for third-party sexual harassment against an applicant or tenant may be vicarious and direct. Explanation: Vicarious liability arises when the contractor is considered the landlord’s agent and acts within the scope of its agency, regardless of whether the landlord approved of or knew about the conduct. By contrast, direct liability arises if the landlord knew or should have known about the harassment but didn’t take steps to stop it. In essence, the landlord becomes liable, not for committing the harassment but for negligently allowing it to continue.

Again, don’t take it for granted that contractors understand all of this. While getting them to sign the fair housing acknowledgement clause/form and accept the indemnification clause discussed earlier should help, you may also want to instruct on-site managers and supervisors to keep their eyes and ears wide open, and ensure they’re trained to recognize the signs of sexual harassment.

Direct oversight is especially important for painting, plumbing, carpet cleaning, maintenance, and other contractors who enter tenants’ apartments. Staff members should accompany contractors who perform work inside occupied apartments. Leaving tenants alone with contractors creates the risk of not only sexual harassment but also misunderstandings and false accusations.

Rule #5: Establish a Complaint Reporting and Investigation System

While prevention is the priority, you also need to be prepared in case any of your contractors do engage in harassment or other discriminatory conduct. The key to damage control is establishing a mechanism that prospects and tenants who suffer discrimination at the hands of a contractor can use to report to you. Create a report template for victims and management to fill out listing key information about the incident, including:

• The date and time it occurred;
• Where it occurred;
• The parties involved;
• A description of the incident; and
• The names and contact information of any witnesses.

Since knowing about harassment (and other forms of misconduct) and failing to take steps to prevent it exposes you to direct liability for negligence, you need to instruct your staff to take all discrimination complaints seriously, including those involving outside contractors that might otherwise get ignored or swept under the rug. Also establish procedures to ensure a prompt response to reports of contractor discrimination, which should include:

• Contacting the person who filed the report to apologize, offer support, and explain the investigation process and what happens next; and
• Having a designated person with knowledge of fair housing laws and investigation experience investigate the incident by, at a minimum, interviewing the victim, the accused, and the witnesses.

If the investigation finds that the complaint is valid and that discrimination did occur, take appropriate action to address the problem and ensure it doesn’t happen again. Overreacting can be just as bad as ignoring the problem. Your response should be measured and proportionate to the offense. Apologizing to the victim and reprimanding and warning the contractor may be enough to resolve a minor incident. However, more serious violations may require more drastic measures, which may include offering support to the victim and exercising your right to terminate the contractor for violating its contractual obligation to comply with fair housing laws and your community’s policies.

If the investigation finds that the complaint isn’t valid, promptly notify the complainants and contractor of the results, preferably in writing.

In either event, keep written records documenting your investigation, corrective actions, and communications with the parties in case you’re sued for not taking action to stop the contractor’s allegedly discriminatory behavior. Also use the occasion to review your current contractor controls and ask whether there’s something you could have done differently to have prevented the problem, whether real or perceived, and ensure that it doesn’t happen with other contractors in the future.

Rule #6: Keep Written Records to Document Compliance

If you’re ever accused of a fair housing violation committed by one of your contractors, the government investigators or attorneys representing the alleged victim will look at your records and seek to determine what, if anything, you did to prevent discrimination at your community and/or remedy problems that did arise. Your mission: Ensure that what they find is a complete set of records documenting your compliance efforts, including:

• Records of your due diligence efforts to vet contractors’ compliance with fair housing laws;
• The language in your contracts obligating contractors to comply with fair housing laws and your community policies;
• Records of your subsequent efforts to enforce that contract language, including copies of any written warnings, reprimands, and/or notices of termination;
• Records of any fair housing training or education you provided to contractors;
• Written directives instructing on-site staff to monitor contractors’ compliance and respond promptly to any reported problems; and
• Records of all fair housing complaints involving contractors received, investigations carried out, and, where necessary, corrective actions, taken.

If you succeed in your mission, you may persuade the investigators and attorneys who are examining your files to drop the case. But even if they do proceed, the documentation you assembled may enable your own lawyers to mount an effective defense and maybe even get the case dismissed as quickly, early, and as relatively painlessly as possible.