Last week, 13 Republican state attorneys general published a letter to the largest companies in the country, creating confusion, uncertainty and risk for businesses that have sought to adopt diversity, equity and inclusion (DEI) practices. Citing the U.S. Supreme Court’s recent decision striking down race-based admissions policies in institutions of higher education, the letter seeks to “remind” companies of their “obligations as an employer under federal and state law to refrain from discriminating on the basis of race, whether under the label of ‘diversity, equity, and inclusion,’ or otherwise.”
Businesses of All Sizes Should Take Note
Although addressed to “Fortune 100 CEOs,” the letter warns that “[t]he Supreme Court’s recent decision should place every employer and contractor on notice of the illegality of racial quotas and race-based preferences in employment and contracting practices” and promises that “you will be held accountable—sooner rather than later.” Given the letter’s lack of clarity on what policies are and are not legally permissible, businesses of all sizes should be concerned, particularly ones headquartered or otherwise doing business in one or more of the 13 signatories’ states: Alabama, Arkansas, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, South Carolina, Tennessee and West Virginia.
In response, Delaware Attorney General Kathy Jennings and Nevada Attorney General Aaron Ford, co-chairs of the Democratic Attorneys General Association, issued a statement “condemn[ing]” the letter as “anti-diversity, anti-business, and anti-economy,” and suggesting that the letter “contains cherry-picked sources that paint a false picture of America’s workforce.” The statement states that contrary to the letter’s claims, “it is legal for business to be responsive to their workforce’s wishes and concerns through diversity programs and initiatives.”
In many ways, the letter and statement seem to be talking past each other, with the Republican letter focused on hard quotas and the Democrats’ statement focused on softer commitments and initiatives. If analogous precedent is any guide, hard quotas are likely to come under legal scrutiny while other commitments and initiatives toward achieving diversity are not.
Quotas Especially Under Scrutiny
Last year, for example, judges in California determined that two state laws mandating diversity—one requiring public companies headquartered in the state to have a certain number of women board members and the other requiring them to have at least one diverse director—violated the state constitution’s equal protection clause. A similar Nasdaq listing requirement, which the United States Securities and Exchange Commission approved, requiring that companies have at least one diverse board member or provide an explanation why they do not, is likewise being challenged in the courts. On the other hand, diversity disclosure requirements—including the long-standing federal EEO-1 reporting mandate and state diversity disclosure laws in Illinois, New York and Washington—have largely remained unchallenged and legally viable.
Given the high likelihood that the July 13 warning letter is a precursor to civil investigative demands to individual companies, we offer five suggestions for companies to mitigate risk.
- First, conduct an internal review of your DEI practices, including hiring practices, promotion processes, compensation structures, DEI trainings, and reporting mechanisms for discrimination. Include in that review any external statements, and guidelines for any company representatives speaking on behalf of the company.
- Second, compare your current practices with existing law. For example, one glaring concern could be the use of race or gender as a “plus factor” to improve workplace diversity, which could easily violate Title VII of the Civil Rights Act following the Supreme Court’s reasoning in its recent affirmative-action decision.
- Third, periodically review and update company practices to align with the changing DEI legal landscape.
- Fourth, do not lose sight of discrimination risks. Although the July 13 warning letter adds a new wrinkle to a company’s risk profile, old-fashioned methods of assessing risk (e.g., pay equity audits) remain a sound mitigation tool to avoid historically costly impacts of discrimination lawsuits.
- Fifth and finally, craft an outreach plan for state attorneys general as an integral component of any risk mitigation strategy. In the case of DEI and related practices, the political affiliation of a state attorney general matters in the ultimate risk assessment. A solid outreach strategy can result in a more positive outcome while navigating that risk.
The landscape for practices that account for social impact is in a volatile transition, made increasingly complicated by the influence of competing partisan philosophies and goals. This latest letter follows other public warnings from state attorneys general and federal lawmakers that DEI, social and environmental risk management strategies and related business practices are now under a harsh light. Brownstein’s State Attorneys General, State and Federal Government Relations, and Government Investigations practice groups have deep experience in emerging regulatory issues, appellate law, partisan influence on legal risk, and overlapping state and federal investigations. We are following all of these letters trends to best serve the firm’s clients. Please contact one of the authors below with questions about these developments and how to prepare for ongoing scrutiny related to DEI.
This document is intended to provide you with general information regarding the legal and regulatory landscape for DEI practices. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.