• U.S. Supreme Court Expands The Scope Of Federal Employment Law
  • June 10, 2003 | Author: Cameron G. Shilling
  • Law Firm: McLane, Graf, Raulerson & Middleton Professional Association - Manchester Office
  • Are the President and Vice President of a business "employees" for purposes of federal employment law? How about partners or shareholders in a professional services company? Many businesses (and courts) have assumed that executives, directors, and shareholders are not employees, but rather the "employer." The U.S. Supreme Court issued a decision in April that changes the landscape, and fundamentally expands the scope and breadth of federal employment law.

    The case involved a professional corporation of physicians called Clackamas Gastroenterology Associates. The plaintiff was the bookkeeper, who had brought a claim for disability discrimination. Clackamas argued to the Supreme Court that the company was not covered by the Americans With Disabilities Act because (unless the Court counted its 4 physician-shareholders) it did not have 15 employees, which is the cut-off for that law and many other federal employment laws.

    The Supreme Court rejected the argument that corporate executives, directors and shareholders are not employees. The mere fact that a person has a title-like partner, director, vice president, or member-is not determinative of whether the person is an employee under federal employment law. Today there are businesses, such as banks and professional services companies, that have numerous members with ownership interests, many of whom qualify as employees because control is concentrated in a small number of managers. It is the extent of control a person exerts over a business that is the principle guidepost to determine whether the person qualifies as an employee.

    There are several factors pertinent to this determination. For example, can the company fire the person? Does he or she have a direct supervisor and, if so, what is the extent of the supervision? What is the extent of the person's influence over the business? Does he or she share in the profits, losses and liabilities? And did the company intend the person to be an employee, such as in an employment contract? Ultimately, whether a person is an employee depends on the totality of the circumstances, and no one fact or factor is determinative. Thus, the mere existence of a document entitled 'employment agreement' does not mean that a person is an employee.

    The Supreme Court's decision has practical ramifications for small and medium sized businesses. Many more businesses will satisfy the 15 employee cutoff of federal law, such as the prohibition of discrimination based on age, sex, race, disability, national origin, pregnancy, and religion. Our own state employment law reaches even farther, to businesses with 6 or more employees, and therefore many small entities (like family businesses) will be subject to the state's anti-discrimination provisions. Also, more medium sized businesses will be subject to the federal Family and Medical Leave Act, which has a cut off of 50 employees. These practical ramifications mean that small and medium sized companies should promptly undertake a factual evaluation of whether their executives, directors and shareholders are counted as employees in a legal context.

    The Supreme Court's decision also has practical ramifications for businesses that have unusual compensation, benefits, or other employment terms for their officers, directors or shareholders. Some of those terms could violate federal employment law, such as the law governing age discrimination and family or medical leave. Companies that provide such different or unusual terms of employment need to reevaluate the legality of them.

    Finally, this decision has practical ramifications when a business terminates an executive, or when a professional services company expels a member. No longer can you rely on the person's status to automatically exclude him or her from the protections of federal or state employment law. These individuals are often well paid, and can claim significant damages or fund expensive litigation. This means that businesses must take extra care to ensure that terminations of these types of individuals are founded on legitimate business reasons and supported by contemporaneous documentation.