• Supreme Court Broadens Class of "Employees" Subject to the Federal Antidiscrimination Laws
  • August 11, 2003 | Author: Timothy M. Singhel
  • Law Firm: Holland & Knight LLP - New York Office
  • Perhaps no question concerning the federal employment discrimination statutes is more important than "which individuals are employees covered by the Act." The Supreme Court recently considered and answered that question in a way that broadens the scope of covered "employees" and makes it more difficult to determine whether an individual is a covered employee. In Clackamas Gastroenterology Assoc., P.C. v. Wells, the Court ruled that the mere designation of an individual as a corporate shareholder or a partner does not exclude him or her from the definition of employee. Rather, a court must assess on a case-by-case basis how the organization actually treats the individual. The likely result is more confusion and more litigation.

    In Clackamas, the plaintiff was an employee of a small medical clinic in Oregon who claimed she had been discriminated against in violation of the Americans with Disabilities Act (ADA). The clinic was organized as a professional corporation under state law. The issue before the Supreme Court was whether the four physician-shareholders of that clinic are employees of the corporation under federal employment discrimination law. For the plaintiff, the answer to that question determines whether she has an ADA case against her employer. If the physician shareholders are counted as employees, the medical clinic has more than the minimum 15 required for ADA coverage, but if they are not counted, the medical clinic does not. However, the Supreme Court's reasoning goes beyond professional corporations and minimum numbers necessary for ADA coverage. It addresses the question of who is and who is not an employee for all traditional federal employment discrimination statutes that define an employee as "an individual employed by an employer."

    Earlier in the litigation, the United States Court of Appeals for the Ninth Circuit had ruled that the physician-shareholders were not employees based solely on their status as shareholders under corporate law. It reasoned that the physician-shareholders' decision to adopt the corporate form and become shareholders prevented them from qualifying as employees as a matter of law. According to the Ninth Circuit, having reaped the tax and civil liability advantages of corporate status, the shareholders could not claim a different status under federal discrimination law.

    The U.S. Supreme Court disagreed with this reasoning. It concluded that whether an individual qualifies as an "employee" for the federal discrimination statutes should not depend on his or her status under state corporate or partnership law, but upon how the organization treats the individual. The Court majority adopted the approach advocated by the EEOC, ruling that courts must look beyond the corporate form and examine whether shareholder directors operate independently and manage the business, or whether they are subject to control by the business.

    To engage in that inquiry, lower courts will be required to examine six factors set out by the EEOC:

    • whether the organization can hire and fire the individual
    • whether the organization can set rules and regulations governing his/her work
    • whether the organization can supervise him/her
    • whether he/she has to report to someone else in the organization
    • whether the individual shares in the organization's profits and losses

    In sum, the Supreme Court ruled that "[a]s the EEOC's standard reflects, an employer is the person or group of persons, who owns and manages the enterprise." Answering that question involves an analysis that goes beyond the title of the individual, and even beyond the title of the organization.

    Practical Implications

    The Clackamas decision has implications far beyond the narrow question presented. The Court set out the test for determining whether an individual is an employee protected by the federal discrimination statutes or an owner or employer bound by those statutes. That distinction makes a difference in a significant number of cases. For example, if an individual is an owner and employer, as opposed to an employee, that individual cannot bring an employment discrimination claim. Just as far-reaching is the Court's decision that state corporate or partnership law does not control and its adoption of the EEOC's six-factor test to determine whether an individual is an employee or an employer. This ruling means that the employer-employee decision cannot be made simply by looking at the corporate documents, but instead will require substantial litigation regarding the six-factor EEOC test.

    Cases currently in the litigation pipeline demonstrate the importance of this issue. The EEOC is currently suing a large law firm, claiming that some of its partners are employees for purposes of the federal age discrimination law and thus able to sue for age discrimination. The Clackamas decision will aid the EEOC in that suit. Similarly, in the case of Schmidt v. Ottawa Medical Center, P.C, the U.S. Court of Appeals for the Seventh Circuit recently applied a test similar to the one adopted by the U.S. Supreme Court and ruled that the plaintiff was an owner, and therefore, not entitled to maintain an ADEA suit.

    In sum, under the Clackamas decision, simply labeling an individual as a "partner" or a "shareholder" does not mean that individual is not an "employee" under the federal discrimination laws. Professional corporations and partnerships will have to look closely at how their shareholders and partners are actually treated to determine whether, as in Clackamas, they have a sufficient number of "employees" to be covered by the federal discrimination laws. They also need to be aware that "partners" or "shareholders" may nonetheless be able to sue under the discrimination laws.