The 6th U.S. Circuit Court of Appeals said R.G. & G.R. Harris Funeral Home in Garden City discriminated against director Aimee Stephens by firing her in 2013.
In a 3-0 decision, the court said "discrimination against employees, either because of their failure to conform to sex stereotypes or their transgender and transitioning status, is illegal under Title VII" of federal civil rights law.
The court overturned a decision by U.S. District Judge Sean Cox, who said the funeral home had met its burden to show that keeping Stephens "would impose a substantial burden on its ability to conduct business in accordance with its sincerely held religious beliefs."
The lawsuit was filed by the U.S. Equal Employment Opportunity Commission.
"The unrefuted facts show that the funeral home fired Stephens because she refused to abide by her employer's stereotypical conception of her sex," said judges Karen Nelson Moore, Helene White and Bernice Donald.
The EEOC learned that the funeral home, until fall 2014, provided clothing to male workers dealing with the public but not females. The court said it was reasonable for the EEOC to investigate and discover the "seemingly discriminatory clothing-allowance policy."
Stephens said in a statement released by the American Civil Liberties Union that nobody "should be fired from their job just for being who they are," adding "I'm thrilled with the court's decision."
Matthew Rost, a company manager and funeral director, told The Associated Press that the ruling "doesn't surprise me" but declined further comment.
Gary McCaleb is an attorney with the Alliance Defending Freedom, which is representing the funeral home. He said in a statement that the opinion "rewrites federal law and is directly contrary to decisions from other federal appellate courts." He added an appeal is being considered.
The case now will return to Cox's courtroom for additional work, including the EEOC's claim that the funeral home's clothing allowance policy was discriminatory.
Dan Korobkin, deputy legal director for the ACLU of Michigan, called it a "path-breaking decision" that builds on other, precedent-setting cases.
"A growing number of courts have recognized transgender individuals are protected," he said. "It does address the funeral home's religious excuse in a comprehensive and powerful way. That will be cited as law ... and it will have an effect throughout the country, too."
The EEOC in 2014 sued the funeral home and a Florida eye clinic, saying it was the first time it had filed lawsuits to protect transgender people in the workplace. A year later, the commission reached a $150,000 settlement with Lakeland Eye Clinic of Lakeland, Florida. Brandi Branson was fired there in 2011 as director of hearing services after saying she was undergoing a gender transition to female.