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A little-known section of the Civil Rights Act of 1866, Section 1981, prohibits racial discirmination in the making and enforcement of contracts. When Congress passed the Civil Rights Act of 1991, it expanded Section 1981 to cover all phases of employment.

Now, employees are increasingly filing claims under Section 1981 instead of Title VII, suing for potentially bigger windfalls because there's no cap on damage awards.

Case in point: Jackie Lauture, a black at-will employee at IBM for 16 years, was fired for poor performance. She sued for race discrimination but not under Title VII. Instead, she took an increasingly common route and sued under Section 1981, claiming that IBM violated her "contract." She argued that in this case the “contract” was that she agreed to work and the employer agreed to pay her. The argument worked, and she won.

The 2nd Circuit rejected IBM’s argument that Title VII is the only remedy for workplace discrimination. It noted that more than 11 million at-will employees work for employers that aren’t covered by Title VII because they have fewer than 15 employees. Lauture v. International Business Machines Corp., 216 F.3d 258 (2nd Cir. 2000)

Recommendation: If your company is too small to be covered by Title VII, don’t be complacent about the potential for discrimination suits. As the Lauture ruling shows, you need an anti-discrimination policy that’s enforced throughout the company.

Also, as more courts allow employees to bring Section 1981 suits, your liability increases in two major ways:

  • Maximum damages available under Section 1981 aren’t capped as they are under Title VII. Consider buying insurance that will cover a judgment larger than the Title VII cap.
  • The statute of limitations is the same as that of your state’s contract law, which is usually a much longer time limit than under Title VII. Make sure your record-retention practices cover the statute of limitations under your state’s contract law.

In 2008, the U.S. Supreme Court dealt a huge win to employees by ruling that Section 1981 provides a cause of action for retaliation claims. Considering that many employees lose their discrimination charges but still prevail on retaliation, the decision could significantly increase discrimination filings and awards. CBOCS West, Inc. v. Humphries, No. 06-1431 (2008)

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