Does FEHA Apply to Small Businesses? The Five-Employee Rule

A California business needs five employees before most of the Fair Employment and Housing Act applies, but only one before its harassment ban does. Government Code section 12926(d) defines an employer as “any person regularly employing five or more persons,” but the harassment provisions in section 12940(j) reach anyone “regularly employing one or more persons.” A business below five can still face a harassment claim under FEHA and a wrongful-termination claim outside it. How the company counts its workers often decides which claims survive.

Which FEHA rules apply at five employees?

The rules on discrimination and retaliation, along with disability accommodation. Most of section 12940 applies to an “employer,” and the statute says “The definition of ’employer’ in subdivision (d) of Section 12926 applies to all provisions of this section other than this subdivision,” meaning the harassment subdivision. That covers hiring and firing decisions, disability accommodation and the interactive process, and the duty to prevent discrimination.

Other California statutes borrow the same number. The California Family Rights Act applies to “Any person who directly employs five or more persons to perform services for a wage or salary,” under section 12945.2(b)(4). And section 12950.1 requires sexual harassment training from “an employer having five or more employees.”

Federal law sets a much higher number, since Title VII applies to an employer that “has fifteen or more employees for each working day in each of twenty or more calendar weeks,” under 42 U.S.C. section 2000e(b). A business with eight employees is outside Title VII but fully inside FEHA.

Does the harassment ban apply to a business with one employee?

Yes. For harassment claims only, section 12940(j)(4)(A) defines employer as “any person regularly employing one or more persons or regularly receiving the services of one or more persons providing services pursuant to a contract.” A sole proprietor with a single assistant is covered.

The same subdivision reaches beyond employees. It protects “an applicant, an unpaid intern or volunteer, or a person providing services pursuant to a contract,” under section 12940(j), and makes the individual harasser “personally liable for any harassment prohibited by this section.” For a very small business, the owner is often both the employer and the accused, so the claim can name the owner personally.

The practical point is that size never protects a business from a harassment claim. A complaint, a prompt response, and documentation matter as much at a three-person office as at a large company.

How are employees counted under FEHA?

By payroll over time, not by who showed up on a given day. In Robinson v. Fair Employment & Housing Com. (1992) 2 Cal.4th 226, an employer had more than five people on the payroll but no more than five working on most days. The Supreme Court of California agreed with the lower court “that the number of persons on the payroll, not the number working on any particular day, is determinative of the number of employees an employer regularly employs,” according to the opinion.

The current CRD regulation goes further. Under California Code of Regulations, title 2, section 11008(e), part-time employees “will be counted the same as full-time employees,” and employees on leave are counted. It also says “Employees located inside and outside of California are counted in determining whether employers are covered.” A company with three workers in California and four in Nevada is a covered employer.

Seasonal businesses are covered too. The regulation says an employer “need not have five or more employees working every day throughout the year or have five or more employees at the time of the allegedly unlawful conduct, so long as at least five employees are regularly on its payroll during the season.”

Do independent contractors and family members count?

Family members employed by a parent, spouse, or child generally don’t. Section 12926(c) excludes “any individual employed by that person’s parent, spouse, or child,” subject to an exception in section 12926.05. A family business with four relatives and one outside hire may fall below five.

Independent contractors aren’t employees under the regulation, but the label on the contract doesn’t decide the question. If a worker called a contractor is really an employee under California’s tests, the head count goes up, and a business that thought it had four employees may have six. Misclassification can create FEHA coverage the owner never planned for.

That’s the first thing to check when a small business receives a CRD complaint. The defense that the company is too small only works if the payroll records, contractor agreements, and actual working relationships all support it.

Can a small employer still be sued for wrongful termination?

Sometimes. A claim for wrongful termination in violation of public policy, a tort recognized at common law, doesn’t depend on FEHA’s definition of employer, but the Supreme Court of California has limited how plaintiffs can use FEHA against small businesses through it.

In Jennings v. Marralle (1994) 8 Cal.4th 121, an employee alleged age discrimination by an employer with fewer than five employees. The court held she couldn’t bring the tort claim based on FEHA’s age policy, because “Employers of four or fewer persons are exempt under the FEHA and no other law makes discrimination on the basis of age unlawful.”

The result differs when another source of law supplies the policy. In Badih v. Myers (1995) 36 Cal.App.4th 1289, an employee of a business with fewer than five employees was fired after becoming pregnant. The Court of Appeal held that the claim could go forward because “article I, section 8 expresses a fundamental public policy against sex discrimination in employment.” The constitutional provision states that “A person may not be disqualified from entering or pursuing a business, profession, vocation, or employment because of sex, race, creed, color, or national or ethnic origin.”

For a small employer, that means the five-employee defense defeats a FEHA claim but may not end the case. Age claims against employers below five have been barred, while claims based on the characteristics the constitutional provision lists can proceed as torts.

Steps when a small business receives a discrimination claim

Coverage questions are decided by records, so the first job is to gather them. The firm’s page on defending employment lawsuits in California has more on how these claims are handled.

1. Preserve the payroll registers and tax filings along with contractor agreements and invoices. Keep work schedules and the emails and texts of the owner and anyone involved in the decision.
2. Calendar the deadline on the CRD complaint, EEOC charge, or lawsuit, and check for an arbitration agreement and any EPLI or business policy that requires notice.
3. Identify every person who worked for the business during the relevant period, including part-time and seasonal workers and anyone out of state or on leave, and avoid any further action against the employee who complained.
4. Count the workforce the way the regulation does and flag anyone whose contractor or family status is open to dispute.
5. Get legal advice before asserting that the business is too small, because a wrong count can cost credibility with the agency or court.

Small employer FEHA questions

Does a business with four employees need a harassment policy?

FEHA’s written-policy regulations apply to covered employers, but the harassment ban itself applies at one employee. A short written policy with a way to report complaints costs little and gives the business something to point to if a claim arrives. The training mandate in section 12950.1 starts at five employees.

Are owners and partners counted as employees?

Owners who aren’t on the payroll as employees generally aren’t counted, but the answer depends on the structure of the business and how each person is paid. An owner who draws a salary as an employee may count. This is a fact question worth reviewing with counsel early.

Is the head count measured when the employee was fired?

Not only then. The regulation looks at whether the business employed five or more for any part of the day of the alleged conduct, or on a regular basis. A business that dropped to four employees shortly before a termination may still be covered if it regularly employed five or more.

Do local ordinances cover smaller businesses?

Some local laws set their own thresholds for specific protections, and some state statutes outside FEHA, such as wage and hour laws, apply to every employer regardless of size. A small business shouldn’t assume it’s exempt from everything because it’s exempt from FEHA’s discrimination provisions.

If your small business faces a discrimination or harassment claim

If your company has received a CRD complaint, EEOC charge, or lawsuit and has fewer than a handful of employees, the payroll records and the way each worker is classified usually decide which claims can proceed. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving small-business coverage under FEHA and wrongful termination. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.

Sources

The statutes are Government Code section 12926, section 12940, section 12945.2, section 12950.1, the employment provision of the California Constitution, and 42 U.S.C. section 2000e. The regulation is California Code of Regulations, title 2, section 11008. The decisions are Robinson v. Fair Employment & Housing Com. (1992) 2 Cal.4th 226, Jennings v. Marralle (1994) 8 Cal.4th 121, and Badih v. Myers (1995) 36 Cal.App.4th 1289.

This post is general information about California and federal employment law as of November 7, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.