Professor Eugene Volokh has a post on the Volokh Conspiracy that raises a "thought experiment" about transgender employees. First, he asks whether a gay man who visits a brothel for oral sex (in a jurisdiction where prostitution is lawful) can insist that the prostitute have a penis. And if so, in what other situations should an employer be permitted to determine a transgender individual's sex from the customer's perspective?
Volokh concludes, and I agree, that if a customer is hiring a prostitute, then the brothel should be free to accommodate the customer's view of whether the prostitute is male or female. Even if the prostitute views himself as male, that's not good enough when the customer is paying for someone to provide him with sexual gratification, which obviously turns on the customer's viewpoint.
By extension, I think the same applies to situations in which a customer's bodily privacy is at issue. For instance, if you visit a Korean spa, you may decide to get a body scrub, which is provided while you are completely naked. A man can certainly scrub a naked woman's body, and a woman can scrub a naked man's body. However, social norms about bodily privacy dictate that male employees provide services to naked male customers, and female employees to naked female customers. As with the prostitution example, it is the customer's interests that dictate the appropriate sex of the worker, so if a customer's viewpoint controls the determination of whether an employee is male or female in the prostitution example, it also should control the determination of whether an employee is male or female in the body scrub example.
Still, although bodily privacy interests may be implicated even when no one is nude, such cases might be distinguishable. In particular, given the evolution in mainstream thought about sexual modesty, sex-segregated bathrooms may continue to exist not because of any significant bodily privacy interests but only because of custom. If so, there may be little basis for allowing bathroom users' interests in bodily privacy to outweigh the interests of transgender individuals in using the bathrooms they are most comfortable with.
Of course, even if a transgender woman with male genitalia should not be barred from the women's room, barring her anyway is not necessarily a form of sex discrimination (see this prior post).
This blog reflects the views solely of its author. It is not intended, and should not be regarded, as legal advice on how to analyze any particular set of facts.