Are Law Firm 'Partners' Really 'Employees'?

By Jeffrey P. Ayres, Esquire
August 28, 2003

The Clackamas Decision

Law firm management often assumes that some attorneys, such as partners, shareholders and of counsels, are not covered by various civil rights statutes, eg, the Age Discrimination in Employment Act (ADEA) and the Americans With Disabilities Act (ADA). As firms which have been sued by such attorneys or which have faced broad Equal Employment Opportunity Commission (EEOC) investigations have learned, however, such assumptions are often not well founded.

The U.S. Supreme Court recently rendered a decision that provides further proof that, depending upon the circumstances, some partners, of counsels and shareholders will be regarded as 'employees' to whom federal employment statutes provide protection. That decision, Clackamas Gastroenterology Associates, P.C. v. Wells, No. 01-1435 (April 22, 2003), was authored by Justice Stevens. Clackamas involved four physicians who were actively engaged in the practice of medicine as owners/shareholders and directors of a professional corporation. The issue was whether they should be counted as 'employees' for purposes of establishing the 15-employee threshold for ADA coverage. A disabled bookkeeper who was terminated by the medical practice argued that the physicians should be counted. If she was right, then the ADA applied. Otherwise, it did not.

The District Court held that the physicians were not employees, but the Ninth Circuit (with one dissenting judge), held that they were. The District Court relied upon the 'economic realities' test set forth in EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177 (7th Cir. 1984), in holding that the four physicians were 'more analogous to partners in a partnership than to shareholders in a general corporation.' The Ninth Circuit disagreed, though, seeing 'no reason to permit a professional corporation to secure the 'best of both possible worlds' by allowing it to assert its corporatestatus 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.' 271 F.3d 903, 905.

The Supreme Court reversed the Ninth Circuit's decision and remanded the case for further proceedings consistent with the new test that it announced in Clackamas. Citing Hishon v. King & Spalding, 467 U.S. 69, 80 n.2 (1984) (Powell, Jr., concurring) and other cases, the Court observed that '[t]oday 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.' Slip Op. at 6. On the other hand, the Court recognized that the 'congressional decision to limit the coverage of the legislation to firms with 15 or more employees has its own justification that must be respected ' namely, easing entry into the market and preserving the competitive position of smaller firms.' Id. at 7.

Accordingly, the Court struck a balance and adopted the EEOC's position that 'the common-law element of control is the principal guidepost that should be followed in this case.' The Court was persuaded by the following six factors identified by the EEOC as relevant to the issue of whether the physicians were employees (and covered by the ADA) or proprietors (and not):

'Whether the organization can hire or fire the individuals 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 or contracts'; and
'Whether the individual shares in the profits, losses, and liabilities of the organization.'

Slip Op. at p. 10, quoting EEOC Compliance Manual '605:0009.

The Supreme Court in Clackamas then reviewed the District Court's factual findings. Some seemed 'to weigh in favor of a conclusion that the four director-shareholder physicians in this case are not employees of the clinic. For example, they apparently control the operation of their clinic, they share the profits, and they are personally liable for malpractice claims.' Slip Op. at 11. On the other hand, the Supreme Court noted, other factors pointed toward the conclusion that the doctors were employees. 'For example, the record indicates that the four director-shareholders receive salaries, ' that they must comply with the standards established by the clinic, ' and that they report to a personnel manager.' Id. at 11, n.11. Consequently, the Supreme Court remanded the case for further proceedings consistent with the EEOC's standards that the Supreme Court adopted.

The Impact of Clackamas

Clackamas will have an impact upon all shapes and sizes of law firms. This impact will be both legal and practical in nature.

Legal Implications

On the legal side, it is telling that the Supreme Court adopted the entire EEOC position regarding the appropriate test for deciding whether someone is an employee or a proprietor. Particularly with the EEOC's interest in mandatory attorney retirement ages at large law firms, Clackamas may trigger an increase in EEOC investigations and subpoenas or private litigation regarding this important issue. See, eg, EEOC v. Sidley, Austin, Brown & Wood, 315 F.3d 696 (7th Cir. 2002).

In addition, Clackamas may increase administrative charges and lawsuits against smaller firms ' even in employment decisions involving non-lawyers. For example, Clackamas itself was a disability case brought by a bookkeeper against a four-physician medical practice. If more attorneys (such as partners) are regarded as employees, more law firms will be large enough to be deemed covered under various federal civil rights statutes. Increased coverage will mean that all firm employees, from messengers and secretaries to lawyers and administrators, will be able to file charges and bring lawsuits.

Clackamas should prompt law firms to examine their relationships with all attorneys who are above associate level. Thus, application of the six Clackamas factors to various attorney categories, to determine whether they are likely to be regarded as employees, would be a useful exercise for law firms to undertake. Indeed, to the extent that a law firm does not want certain classes of attorneys to be covered by various employment laws, it should consciously restructure those relationships to accomplish the intended result.

For example, assume that a law firm has a mandatory retirement policy for partners and 'of counsels.' If 'of counsels' are regarded as employees, such a policy would probably be illegal under the ADEA. A prudent firm should examine its 'of counsel' attorneys, through the lens of the six Clackamas factors, to determine whether this class of attorneys will be regarded as proprietors rather than employees.

Factor one ' whether the law firm can hire or fire the 'of counsel' or set the rules and regulations of his or her work ' would decidedly point toward an employee relationship. It would be difficult to construct an 'of counsel' relationship that did not reflect this factor.

The second factor is whether the firm supervises the 'of counsel's' work. Particularly if the 'of counsel' functions like a true equity partner, this factor will weigh in favor of the conclusion that the individual is a proprietor and not an employee. Documenting the understandings of the parties or the extent of supervision in a contract or letter agreement will help to fortify this conclusion.

The third Clackamas factor, whether the 'of counsel' reports to someone higher in the law firm, is similar to the preceding consideration. If the 'of counsel' reports to a department head or division manager to the same extent as a true equity partner ' and this is spelled out in writing ' a proprietorship relationship would be more likely to be found.

The fourth Clackamas consideration is how much the 'of counsel' is able to influence the law firm. If the 'of counsel' can vote on firm matters like true equity partners (which often is not the case), serve on firm committees and hold leadership roles, the individual will more closely resemble a proprietor. At many firms, though, the fourth factor would point toward the conclusion that the 'of counsel' is an employee.

The fifth consideration is perhaps the easiest to satisfy. If the parties intend 'of counsels' to be proprietors, as expressed in written agreements or contracts, all the law firm needs to do is put that relationship in writing.

The final Clackamas factor is perhaps the most important one in the eyes of courts and agencies. Does the 'of counsel' share in the profits, losses, and liabilities of the organization? If so, the 'of counsel' will likely be regarded as a non-employee. But if not ' if, for example, the attorney receives a salary ' he or she will probably be deemed an employee.

As should be evident from going through this hypothetical exercise, it will be difficult for many law firms to conclude, with any degree of assurance, that their 'of counsels' are not employees. As such, many law firms may decide to remove 'of counsels' from mandatory retirement policies. They also may conclude that treating these individuals (and other non-associates) like employees, rather than proprietors, is the safest course of action to follow. Some of the practical implications of this result are described below.

Practical Implications of Clackamas

The biggest practical implication of Clackamas is that a law firm may need to start treating some non-associate classes of lawyers, for employment purposes, as employees. This is true for all types of personnel decisions ' from hiring and bonus calculations to transfers and terminations. Otherwise, the risks of liability will increase dramatically.

Accordingly, law firms (like their clients, in all types of enterprises) need to pay closer attention to what I call the Ten Commandments of Litigation Avoidance:

Apply job-related standards to every employment decision ' from hiring to firing.
Utilize sound written rules and work performance standards that are clearly communicated beforehand to all employees.
Be 100% consistent and uniform in following your rules and standards ' no 'double standards.'
Document everything that forms the basis for every employment decision: |
- put it in writing, promptly
- include who, what, where, when, and how
- avoid the why of an employee's actions, unless the employee offers an explanation
- be objective, don't nitpick, and only include essential information
- avoid discriminatory-sounding terminology in your documentation.
Unless it's truly impractical, utilize progressive discipline (and document fully).
Be aware of your personal reactions and feelings toward minority, female, and aged subordinates ' and be sensitive about how you express these feelings (including 'innocent' jokes).
Constantly monitor your personnel practices and handling of personnel relations.
Be sensitive toward people and communicate with them.
Be sure to explore (with the assistance of competent and independent legal counsel) whether employee claims are covered by insurance.
Consider obtaining a general release and covenant not to sue in termination clauses.

There are several important factors to consider in drafting a release:

The release form is a contract and must be supported by adequate consideration. Often this involves a payment of money, to which the individual is not otherwise entitled.
There should be no admission of liability, or any acknowledgement of wrongdoing. Rather, the firm should state the release is signed as a condition of settlement and as part of the departure of the partner.

The departing partner should agree to discharge and release any and all claims against the firm, even if no claims have been asserted. Indeed, this general release should textually state the statutes upon which claims are being waived, including the ADEA. The release should also assert that common-law tort and contract claims are being released.

There should be no agreement to pay attorney fees, and the departing partner should agree to bear all tax consequences associated with any payment from the firm.

Finally, the departing partner should agree that the departure from the firm was strictly voluntary in nature and was a resignation, rather than a termination or discharge.

One additional consideration must be addressed when the partner is releasing claims under the ADEA.

In addition to the standard release language, seven other protections must be granted in order to evidence a voluntary waiver of an ADEA claim.

The release must: be written in plain and understandable language; specifically mention the ADEA and rights or claims thereunder; only waive ADEA claims arising before the date of the release; provide consideration beyond what is actually owed to the employee; advise the partner in writing to consult with an attorney prior to signing the release; provide for a 21-day, or sometimes 45-day, period when the partner can consider the release before requiring signature; and provide a period of at least seven days after the partner signs the release to revoke the agreement.

By following these practical steps, including the use of releases in termination cases, the law firm will be in the strongest possible legal position. Then, even if the Clackamas six-factor analysis results in a finding that an individual is an employee, the law firm will be able to prevail.

Jeffrey P. Ayres is a partner at Venable, Baetjer and Howard, LLP, with offices in Washington, DC, Maryland and Virginia. He is a member of the Editorial Board for The Law Firm Partnership and Benefits Report, and regularly advises management (including law firms) on employment issues.

The Clackamas Decision

Law firm management often assumes that some attorneys, such as partners, shareholders and of counsels, are not covered by various civil rights statutes, eg, the Age Discrimination in Employment Act (ADEA) and the Americans With Disabilities Act (ADA). As firms which have been sued by such attorneys or which have faced broad Equal Employment Opportunity Commission (EEOC) investigations have learned, however, such assumptions are often not well founded.

The U.S. Supreme Court recently rendered a decision that provides further proof that, depending upon the circumstances, some partners, of counsels and shareholders will be regarded as 'employees' to whom federal employment statutes provide protection. That decision, Clackamas Gastroenterology Associates, P.C. v. Wells, No. 01-1435 (April 22, 2003), was authored by Justice Stevens. Clackamas involved four physicians who were actively engaged in the practice of medicine as owners/shareholders and directors of a professional corporation. The issue was whether they should be counted as 'employees' for purposes of establishing the 15-employee threshold for ADA coverage. A disabled bookkeeper who was terminated by the medical practice argued that the physicians should be counted. If she was right, then the ADA applied. Otherwise, it did not.

The District Court held that the physicians were not employees, but the Ninth Circuit (with one dissenting judge), held that they were. The District Court relied upon the 'economic realities' test set forth in EEOC v. Dowd & Dowd, Ltd. , 736 F.2d 1177 (7th Cir. 1984), in holding that the four physicians were 'more analogous to partners in a partnership than to shareholders in a general corporation.' The Ninth Circuit disagreed, though, seeing 'no reason to permit a professional corporation to secure the 'best of both possible worlds' by allowing it to assert its corporatestatus 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.' 271 F.3d 903, 905.

The Supreme Court reversed the Ninth Circuit's decision and remanded the case for further proceedings consistent with the new test that it announced in Clackamas. Citing Hishon v. King & Spalding, 467 U.S. 69, 80 n.2 (1984) (Powell, Jr., concurring) and other cases, the Court observed that '[t]oday 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.' Slip Op. at 6. On the other hand, the Court recognized that the 'congressional decision to limit the coverage of the legislation to firms with 15 or more employees has its own justification that must be respected ' namely, easing entry into the market and preserving the competitive position of smaller firms.' Id. at 7.

Accordingly, the Court struck a balance and adopted the EEOC's position that 'the common-law element of control is the principal guidepost that should be followed in this case.' The Court was persuaded by the following six factors identified by the EEOC as relevant to the issue of whether the physicians were employees (and covered by the ADA) or proprietors (and not):

'Whether the organization can hire or fire the individuals 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 or contracts'; and
'Whether the individual shares in the profits, losses, and liabilities of the organization.'

Slip Op. at p. 10, quoting EEOC Compliance Manual '605:0009.

The Supreme Court in Clackamas then reviewed the District Court's factual findings. Some seemed 'to weigh in favor of a conclusion that the four director-shareholder physicians in this case are not employees of the clinic. For example, they apparently control the operation of their clinic, they share the profits, and they are personally liable for malpractice claims.' Slip Op. at 11. On the other hand, the Supreme Court noted, other factors pointed toward the conclusion that the doctors were employees. 'For example, the record indicates that the four director-shareholders receive salaries, ' that they must comply with the standards established by the clinic, ' and that they report to a personnel manager.' Id. at 11, n.11. Consequently, the Supreme Court remanded the case for further proceedings consistent with the EEOC's standards that the Supreme Court adopted.

The Impact of Clackamas

Clackamas will have an impact upon all shapes and sizes of law firms. This impact will be both legal and practical in nature.

Legal Implications

On the legal side, it is telling that the Supreme Court adopted the entire EEOC position regarding the appropriate test for deciding whether someone is an employee or a proprietor. Particularly with the EEOC's interest in mandatory attorney retirement ages at large law firms, Clackamas may trigger an increase in EEOC investigations and subpoenas or private litigation regarding this important issue. See , eg, EEOC v. Sidley, Austin, Brown & Wood , 315 F.3d 696 (7th Cir. 2002).