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On April 22, 2003, the U.S. Supreme Court weighed in on an issue that created a split among the lower federal courts: when should owner/shareholders of professional corporations be considered “employees” for purposes of federal employment laws? The issue is important for two reasons. First, it determines who can be sued for violations. The Americans With Disabilities Act (“ADA”), like many federal employment laws, does not cover relatively small businesses. Under the ADA, an employer is not covered unless its workforce includes 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year. Similarly, Title VII of the Civil Rights Act of 1964, which precludes discrimination in employment on the basis or race, gender, religion and national origin, has a 15-employee threshold. The Age Discrimination in Employment Act (“ADEA”) has a threshold of 20, and the Family and Medical Leave Act applies only to employers with 50 or more employees. Thus, for professional corporations hovering around 15-20 workers, the determination of who counts as an “employee” often can be vital. Second, the issue determines who can sue for alleged discrimination. Only “employees” — not bona fide owners of a business — benefit from the protection of the ADA and other anti-discrimination laws. Thus, courts have historically held that partners in law, accounting and medical practices cannot sue their firms for discrimination because they are not “employees” within the meaning of the relevant statutes. However, with the recent advent of professional corporations and huge multi-tiered partnerships, the courts and the Equal Employment Opportunity Commission (“EEOC”), have begun looking beyond mere appellations to determine if partners and shareholders really wield the attributes of ownership or are simply glorified employees. The Supreme Court case, Clackamas Gastroenterology Associates, P.C. v. Wells, involved a bookkeeper at an Oregon medical clinic who claimed that she was fired because of her disability. The clinic denied that it was covered by the ADA and moved for summary judgment on the ground that, excluding the four physician-shareholders who owned the professional corporation, the clinic employed fewer than 15 employees. The trial court, employing what has become known as the “economic realities” test — a test adopted by the 7th U.S. Circuit Court of Appeals based in Chicago — concluded that the four doctors were “more analogous to partners in a partnership than shareholders in a general corporation” and therefore were “not employees for purposes of the federal anti-discrimination laws.” Ms. Clackamas appealed, and a divided panel of the 9th U.S. Circuit Court of Appeals (which covers California, Washington and Oregon) reversed the district court. The 9th Circuit, rejecting the “economic realities test,” held that the use of any corporation, including a professional corporation, precludes any analysis designed to determine whether the entity is in fact a partnership. The Court saw “no reason to permit a professional corporation to secure the �best of both possible worlds’ by allowing it both to assert its corporate status in order to reap the tax and civil liability advantages and to argue that it is like a partnership in order to avoid liability for unlawful employment discrimination.” When the case reached the Supreme Court, Justice Stevens, writing for the majority, flatly rejected the 9th Circuit’s blanket rule that the use of a professional corporation precludes any argument that officers, members of boards of directors or major shareholders are not “employees”. However, the Court also concluded that the “question whether a shareholder-director is an employee … cannot be answered by asking [as the district court had] whether the share-holder director appears to be the functional equivalent of a partner.” In this day and age, the Court noted, “there are partnerships that include hundreds of members, some of whom may well qualify as �employees’ because control is concentrated in a small number of managing partners.” The Court instead adopted a “middle ground” approach advocated by the EEOC, which focuses on the common-law touchstone of whether the person alleged to be an “employee” acts independently and participates in managing the organization, or is instead subject to the organization’s control. In making that determination, the Court adopted a muddy standard that looks to “all the incidents of the relationship … with no one factor being decisive.” However, the Court did endorse consideration of the six factors set out in the EEOC’s Compliance Manual, namely: � Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work; � Whether and, if so, to what extent the organization supervises the individual’s work; � Whether the individual reports to someone higher in the organization; � Whether and, if so, to what extent the individual is able to influence the organization; � Whether the parties intended that the individual be an employee, as expressed in written agreements and contracts; and � Whether the individual shares in the profits, losses, and liabilities of the organization. The Court noted that some of the district court’s findings, viewed in light of the EEOC’s standard, appeared to weigh in favor of a conclusion that the four shareholder physicians were not employees. Specifically, the physicians appeared to control the operation of the clinic, shared in its profits, and remained personally liable for malpractice claims. However, since the district court had not made detailed findings on the other factors, the Court remanded the case to the district court for further review. The Clackamasdecision is a mixed blessing for professionals. On the who can be sued front, the case is obviously a huge victory for those operating small professional corporations in jurisdictions that previously followed the 9th Circuit’s blanket rule. The mere fact that one elects to operate as a corporation no longer precludes shareholder-directors from asserting that they should not be counted towards the minimum employee threshold. In addition, the Clackamasdecision creates opportunities for professionals to proactively structure their shareholder agreements, operating agreements, and employment arrangements, and to conduct their businesses in a manner geared towards satisfying the EEOC factors. The flip-side to that coin, however, is that the courts (and plaintiffs) will now carefully scrutinize the operating documents and internal management procedures of professional corporations whenever cases like Clackamasarise. Consequently, professional corporations in the 15-20 person range would be well-advised to take a hard look with their counsel at how they have set up and operate their businesses. The biggest fall-out from the case may ultimately be in the who can sue area, as the Supreme Court has now effectively endorsed the EEOC’s recent efforts to expand the protection of federal employment laws to “partners” who do not actually exercise meaningful control over the enterprise. Expect to see far more cases, such as the recent one involving the Chicago-based law firm of Sidley Austin Brown & Wood, in which the EEOC is challenging the huge firm’s demotion of 32 partners as potentially violative of the ADEA. Terence F. Flynn is an attorney with the labor and employment practice group at Crowell & Moring, LLP (www.crowell.com) in Washington, D.C. He specializes in the representation of employers in all aspects of employment and employee relations issues. He may be reached at [email protected] . If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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