A union of formalism and flexibility: allowing employers to set their own liability under federal employment discrimination laws.

AuthorCreasy, Darren M.

INTRODUCTION

Several federal employment discrimination statutes allocate protection depending on whether potential plaintiffs occupy positions of control within a business entity. Title VII of the Civil Rights Act of 1964, (1) the Age Discrimination in Employment Act (ADEA), (2) and the Employee Retirement Income Securities Act (ERISA) (3) all permit suits by "employees" against their current or former employers, but do not provide any avenue of relief for those classified as "employers." (4) For instance, the ADEA provides: "It shall be unlawful for any employer ... to limit, segregate, or classify his employees ... because of such individual's age...." (5)

Predictably, courts have not always agreed as to what differentiates an employee from an employer. Particularly with regard to innovative business forms that have risen to prominence in recent decades, the distinction between the two is confounded. (6) Statutory language defines an employee as "any individual employed by an employer." (7) A strict statutory construction, therefore, would categorically deny relief to some members of business entities organized as partnerships, yet universally afford protection to similarly situated members of incorporated entities. (8)

Traditionally, a partner could not stand in an employment relationship with his or her partnership because partners personally control the ownership interests, making them employers rather than employees. Because a partnership is the partners, it cannot also employ the partners. Stated from another angle, a partnership simply cannot employ itself. If partners cannot employ themselves, it follows that partners cannot be employees in the technical sense of the term. On the contrary, all partners are, by default, employers. As a result, partners are ineligible to seek protection from employment discrimination because employers are not members of a protected category.

Compare partnerships to incorporated entities. Unlike a partnership, a corporation is an independent legal persona existing only on paper. It exists wholly apart from even its most high-ranking officers, operates as the de facto employer, and exists in perpetuity. (9) The title of "employer" resides with either the legal persona or, ultimately, with the shareholders. (10) Thus, no person who works for the corporation will be subject to the employer exemption, and courts will not dismiss plaintiffs' suits for lack of statutory standing. (11) Only the corporate persona itself falls into the employer exemption. (12) A strict statutory construction, therefore, only affords protection to members of incorporated entities.

Several courts have utilized this all-or-nothing approach and declined to look past a business entity's organizational form in determining worker eligibility to sue under Title VII, the ADEA, or ERISA. (13) This approach has been dubbed the "per se rule. "(14) As one would predict, courts invoking the per se rule always exempt partners of firms from protection. This is referred to as the "partnership exemption." (15) A brief history of holdings implicating the per se rule and justifications for its use is offered in Part I of this Note.

More recent decisions reflect an emerging trend, which is to consider a plaintiff's ability to protect his or her own interests within a business entity in order to determine eligibility for protection under ERISA, the ADEA, or Title VII. Courts have focused on an extensive, though not exhaustive, list of factors (16) that tend to indicate "whether the employer's control of employment opportunities places the worker in a position of dependency on the employer which may expose the worker to discriminatory conduct." (17) Courts that use this test ask whether a position of dependency within a business entity negates the presumption that a partner cannot be a victim of employment discrimination. This in-depth inquiry, spurning deference to an individual's title and focusing instead on actual powers, is referred to as the "economic realities test." (18) Part II of this Note will briefly examine representative cases that used the economic realities test as well as examine the justifications for its use.

The per se rule has received scant approval in recent years. The economic realities test has emerged as the more pragmatic, if less practicable, alternative of the two, though it is still unclear why these tests are necessary at all. Perhaps when the federal employment discrimination statutes were crafted, the distinction between employers and employees was more apparent. With the onset of various new business forms in recent decades, (19) however, this distinction has blurred. Professional corporations, limited liability companies, and limited liability partnerships, to name a few, are business forms that combine various aspects of partnerships and corporations. (20) In the modern global marketplace, applying the partnership exemption to individuals holding the office of partner, though they are deprived of powers traditionally associated with the title "partner," lacks justification and does more to undermine the goals of antidiscrimination statutes than it does to promote them.

The partnership exemption has its roots in partnership law. Partners are jointly and severally liable for partnership debts, and the actions of one can often be imputed to the others. (21) Because extensive liability can be easily incurred, courts have traditionally respected a partnership's freedom of association. For example, partners possess a nearly unfettered ability to dismiss their peers, whereas other business entities' dismissals are subject to greater levels of scrutiny regarding legality and fairness? History has shown, and this Note will reiterate, that this extreme position invites abuse and runs contrary to congressional intent in formulating employment discrimination legislation.

There are insufficient justifications for granting workplace discrimination a judicial safe harbor in partnerships and similar business forms. If there are legitimate reasons to terminate a partner, severance can be achieved without violating federal law. Otherwise, the reasons underlying the termination are inherently suspect and should be scrutinized. It is now neither appropriate to assume that partners possess the power to protect themselves from discrimination nor judicious to ignore their pleas.

Turning a blind eye to legitimate discrimination claims is imprudent; completely disregarding the sound reasons underlying the genesis of the partnership exemption is equally unwise. This Note takes the position that a solution capitalizing on the strengths of both approaches exists because concepts of workplace equality and a partnership's right to choose its members are not mutually exclusive. Allowing a business to determine for itself which of its employees are eligible for federal employment discrimination protection, subject to a threshold finding of fairness, would effectuate congressional intent in crafting employment discrimination legislation as well as respect a business entity's independence and freedom of choice.

Much like a corporation with thousands of dispersed shareholders, worldwide "partnerships" often have so many partners that it is unreasonable to expect that they will all participate fully in management decisions. Because such partners are necessarily removed from positions of actual power within a business entity, the assumption that they are beyond the reach of employment discrimination no longer holds water. (23) Extending protection to corporate employees when a lack of dependency makes protection from employment discrimination unnecessary is also unsound. Congress must modify discrimination statutes to redefine the class of individuals protected by statutes such as the ADEA, Title VII, and ERISA in order to properly effectuate their original intent. (24)

Part III of this Note proposes a new standard wherein an employer, following a prima facie showing that an employee has sufficient power within the entity with which to protect his own interests, can classify that individual as exempt from employment discrimination legislation. The prima facie showing will be made based upon the existence of a limited set of factors tending to show a lack of dependence on the employer and thus, limited vulnerability to employment discrimination.

Non-exempt individuals would be presumptively entitled to the full protections of federal law. Exempted employees (i.e., those holding positions classified by their employers as "exempt") would carry the burden of proof that they are in fact entitled to protection. The same shortened list of factors used in the prima facie showing to justify exemption will be used by the plaintiffs claiming protection to simplify the court's analysis of actual status. More efficient and more consistent holdings should result if exempted employees file suit to show that they should be entitled to protection despite the fact that their employer has classified them as exempt.

  1. THE PER SE RULE

    1. History

      In 1977, the Seventh Circuit laid the groundwork for the per se rule in Burke v. Friedman (25) when it declined to "expand the definition of employee to include a partner." (26) Other circuits soon followed suit. In Hishon v. King & Spalding, (27) the plaintiff brought suit against her law firm claiming discrimination on the basis of her gender following the firm's refusal to make her a partner. The Eleventh Circuit held that Title VII protections did not extend to partnership decisions (28) and affirmed the district court's dismissal for lack of subject matter jurisdiction. (29) Although the Supreme Court reversed on the grounds that the plaintiff had stated a claim cognizable under Title VII, (30) the Court declined to expressly reject the per se rule. (31) Furthermore, in a concurring opinion often cited in support of the per se rule, Justice Powell stated that "the relationship...

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