Participation as a theory of employment.

• Author: Bodie, Matthew T.
• Position: Abstract through II. The Definition of Employment in Doctrine and Theory A. Defining "Employee", p. 661-691

ABSTRACT

The concept of employment is an important legal category, not only for labor and employment law, but also for intellectual property law, torts, criminal law, and tax. The right-to-control test has dominated the debate over the definition of "employee" since its origins in the master-servant doctrine. However, the test no longer represents our modern notion of what it means to be an employee. This change has played itself out in research on the theory of the firm, which has shifted from a model of control to a model of participation in a team production process. This Article uses the theory of the firm literature to provide a new doctrinal definition for "employee" based on the concept of participation rather than control. The participation test better delineates the boundaries of employment and provides a framework for addressing the stresses on firms and workers that are rife within the modern economy.

INTRODUCTION

The concept of employment plays an important role across the legal landscape. Most obviously, labor and employment law protections provided under local, state, and federal law are limited to those contracting parties that are defined as employees. (1) However, many other areas of law draw distinctions based on the fact that the actor was an employee, or that the actions were taken within the scope of employment. Common law doctrines or statutory provisions in intellectual property, (2) criminal law, (3) torts, (4) and tax (5) use the concept of employment in assigning critical rights and liabilities. Although these regimes are not generally thought of as labor and employment law, they invest the employment relationship with even further legal meaning.

Because the same concept of "employment" is used across legal contexts, one's intuition is that the concept would remain largely consistent even in its variegated uses. And this has largely been true. The concept of control has served as the unifying idea behind the use of "employee" and "employment" in different contexts. (6) The common law "control test" comes out of the original conceptions of master and servant from pre-industrial English law, and the Supreme Court has used this test as the default definition of the term "employee" in federal statutes. (7) However, the control test is not the unanimous answer, and in fact it may be losing its firm grip on the category. Courts have long used the "economic realities" test in interpreting the broader definition provided under the Fair Labor Standards Act (FLSA). (8) In addition, the D.C. Circuit recently installed an "entrepreneurial opportunities" test that has received support from the Restatement (Third) of Employment Law. (9) Foreign jurisdictions have looked to the concept of "economic dependence." (10) Other jurists and scholars have argued that there should not be any one definition of employment, and that instead the term should be adapted to fit the needs of the particular statutory, regulatory, or common law regime. (11)

This Article argues that there is a consistent meaning to the idea of employment, but it is not the control test. The meaning comes not from looking at employees but rather at the firm that employs them. Ever since Ronald Coase's The Nature of the Firm, (12) economists and legal scholars have puzzled over why the law created firms that stand outside the market. The purpose of firms, Coase famously answered, is to avoid transaction costs by allowing the parties to organize in a hierarchical manner without the need for prices or specific contracts. (13) As Coase put it: "If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so." (14) Less well known is that Coase then looked to the legal definition of employee to determine whether his transaction costs theory was supported in practice. (15) He found that it was. Since the "control" test was based on the employer's ability to require its employees to take specific actions, he concluded, "[w] e thus see that it is the fact of direction which is the essence of the legal concept of 'employer and employee,' just as it was in the economic concept which was developed above." (16)

Coase's approach to the theory of the firm was only the beginning. In fact, Armen Alchian and Harold Demsetz famously rejected Coase's workman example. (17) Scholars have continued to place importance on the role of employees within the firm in defining what a firm is and why it has independent existence. (18) This rich literature, however, has been largely ignored when it comes to defining the concept of employment. (19) This Article seeks to correct that failing. The theory of the firm contains a critical insight: the idea of employment is based not on our notions of employees, but rather on our notions of employers. There can be no employee without an employer. (20) The theory of the firm literature demonstrates that the employer is a firm, and that the concept of employment is critical in determining what a firm is and why it continues to exist.

Using the theory of the firm literature to demarcate the boundaries between employee and independent contractor may appear at first to be a tedious and inconsequential exercise. But its theoretical and practical implications are massive. The sociological stability of the employment relationship has seen significant erosion, as more companies seek to outsource their chain of production and more workers enjoy only temporary employment. (21) At the same time, nationwide firms are placing greater importance on their economic brands, and employees are critical representatives of their companies when it comes to their brand's value and influence. (22) We grow closer to a potential "death of employment" (23) at the same time that multinational corporations have more economic power (and employees) than ever. These pressures ask us to consider what, if anything, about the concept of "employment" is worth saving.

This Article argues that the proper definition of employee is not the control test, the economic realities test, or the entrepreneurial opportunities test. Instead, the concept of employment has in fact been and should henceforth be used to differentiate between members and nonmembers of an economic firm. In other words, employees are participants in a common economic enterprise organized into a business entity. This participation-based definition provides the best rationale for the use of the "employee" category in areas of law such as intellectual property, tax, and torts. Moreover, the participation theory explains why labor and employment law protections are based on employment status: these protections are designed to make firms more economically responsible for their participants. Because employees participate in the common economic enterprise as organized into a firm, the firm in turn must take care of its employees within that common enterprise.

Part I of the Article examines where (and why) the concepts of "employee" and "employment" are used within the law. Part II sets out the different doctrinal definitions of the terms "employee" and "scope of employment," and also examines the theories behind these definitions. Part III provides an overview of the theory of the firm literature and the role of employees within that literature. Part IV uses the theory of the firm to develop a new definition of employment within the law based on participation. Finally, Part V briefly considers the future of the concept of "employment" in the law.

1. THE CONCEPT OF EMPLOYMENT IN THE LAW

   The role of "employment" within the law extends beyond the easily identifiable categories of labor and employment law. This Part examines the role that employment serves in defining a variety of legal regimes.

   1. Labor and Employment Law

      Lawmakers have used the concept of employment to create a set of rights within the law that provide protections to those defined as employees. Prohibitions against race, sex, age, and disability discrimination, (24) below-minimum wages, (25) dangerous working conditions, (26) retirement funding requirements, (27) and attacks on collective activity, (28) among others, (29) are limited to employees. State employment provisions such as workers' compensation and unemployment compensation are also limited to employees. These statutory schemes are designed to provide protections to employees as employees and not to any other groups, even if those outside the...