Can Law Firm Partners Sue the Firm for Employment Discrimination?

Part One of this article discussed why law firms are susceptible to discrimination suits by their partners ' especially large firms. It also covered the threshold requirements for law firm partners to do so. In Part Two, the authors examine case law on determining whether a partner is an “employee” and how a firm's size and type of ownership can affect a partner's ability to sue for employment discrimination.

Sidley: Law Firms are on Notice

In October 2002, the Seventh Circuit decided EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir 2002) (hereinafter Sidley), which should serve as a wake-up call for law firms, especially large firms. In Sidley, the firm demoted 32 of its equity partners to “counsel” or “senior counsel,” prompting the Equal Employment Opportunity Commission (EEOC) to initiate an investigation, sua sponte, to determine whether the demotions violated the Age Discrimination in Employment Act (ADEA). As part of its investigation, the EEOC issued a subpoena seeking documents that would allow it to determine whether the demoted partners were employees and could therefore invoke the ADEA.

Sidley refused to fully comply with the subpoena and the EEOC went to federal court to enforce it. Sidley argued that it had already produced enough documents to show that the 32 were “real” partners and that the EEOC had no basis to continue its investigation. Id. at 698-99. The district court rejected Sidley's argument and granted the EEOC's request to enforce the subpoena. The Seventh Circuit affirmed in relevant part. It held that the demoted partners may be “employees” under the ADEA because, from the documents that were produced, they appeared to lack any meaningful control over the firm's affairs. Id. at 707.

Firms should take note of Sidley for at least two reasons. First, the EEOC's decision to initiate its investigation without receiving a complaint from any of the demoted partners, EEOC v. Sidley & Austin, 2002 WL 206485, at 1, n.2 (N.D.Ill. Feb. 11, 2002), signals the Commission's recently heightened interest in promoting diversity in law firms. (In fact, the EEOC recently published an extensive study of diversity in law firms. See, Diversity in Law Firms, U.S. Equal Opportunity Commission, Oct. 22, 2003, available at www.eeoc.gov/stats/reports/diversitylaw/index.html.) Moreover, Sidley demonstrates that courts are willing to subject law firms to liability for discrimination against partners who are deemed to be “employees.”

Partner-Employer or Employee?

The statutes themselves are of no help in determining a partner's status ' they do not define “employee” in any functional manner. Under Title VII, “employee” is defined as, “an individual employed by an employer.” 42 U.S.C. '2000e (f). The corresponding provisions in the Americans with Disabilities Act (ADA), 42 U.S.C. '12111 (4), and the ADEA, 29 U.S.C. '603 (f) also contain “completely circular” definitions of “employee.” Clackamas Gastroenterology Assoc, P.C. v. Wells, 123 S.Ct. 1673, 1677 (2003).

Prior to Clackamas, courts struggled to articulate a workable approach. With respect to traditional partnerships as well as hybrid business models, most courts agreed that the label, “partner” was not dispositive. Almost all courts applied some variation of an “economic realities test,” examining the nature of the relationship between the partner and the firm. See, Wheeler v. Main Hurdman, 825 F.2d 257 (10th Cir. 1987) (employing an “economic realities” test to a true partnership); Schmidt v. Ottawa Medical Center, P.C., 322 F.3d 461 (7th Cir. 2003) (applying an “economic realities test” to a professional corporation).

On the other hand, some courts adopted rules that emphasized form over substance. The Second and Ninth Circuits adopted the per se rule that the use of any quasi-corporate form precludes a firm from arguing that its lawyers were partners and not employees. Wells v. Clackamas Gastroenterology Assoc., P.C., 271 F.3d 793, 905 (9th Cir. 2001); Hyland v. New Haven Radiology Assoc., P.C., 794 F.2d 793, 798 (2d Cir. 1986). The Ninth Circuit saw “no reason to permit a professional corporation to secure the 'best of both 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 discrimination.” Wells at 905. See also, Burke v. Friedman, 556 F.2d 867, 869 (7th Cir. 1977) (“We do not see how partners can be regarded as employees rather than employers who own and manage the operation of the business”).

The Supreme Court granted certiorari in Clackamas to resolve this conflict among the Circuits. Clackamas at 1677. In Clackamas, the Court set forth a framework for analyzing the employment status of partners for the purposes of the federal employment discrimination laws. Even more helpful is that the Court's framework can be applied to any business model, establishing, for the first time, a uniform method of analysis.

The issue before the Clackamas Court was whether four physicians, who were shareholders and directors of defendant, a professional corporation, should be counted as “employees.” If the four physicians were not “employees,” defendant's employment roll would not reach the ADA's 15-employee threshold and the ADA would not apply to defendant.

The court below had held that the physicians were automatically “employees” simply because the defendant elected to exist in a corporate form. Clackamas at 1676-77.

The Supreme Court reversed, rejecting the Ninth Circuit's “form over substance” approach. It held that an organization's business model does not determine whether its members are “employees.” Instead, the Court held, courts must examine “all the incidents” of the relationship and look to “the common law's definition of master-servant relationship.” Id. at 1678-81. The “common-law element of control,” the Court held, must be the “principal guidepost” in this analysis. Id. at 1679.

The Court adopted the approach advocated by the EEOC in its Compliance Manual, which focuses on control. The EEOC frames the question as: “whether the individual acts independently and participates in managing the organization, or whether the individual is subject to the organization's control.” It provides that: “if the individual is subject to the organization's control, s/he is an employee.” Id. at 1680 (citing 2 Equal Employment Opportunity Commission, Compliance Manual '605:0008-605:0009, available at www.eeoc.gov/docs/threshold.html).

To focus the inquiry, the Court also adopted the EEOC's six factor test. The following “non-exhaustive” factors are “relevant to the inquiry”:

• 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 supervised 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;
• Whether the individual shares in the profits, losses, and liabilities of the organization.” Clackamas at 1680 (citing EEOC Compliance Manual '605:0009).

Applying this test to the facts before it, the Court noted that some of the district court's findings, including that the partners control the operation of the clinic, that they share in the profits and that they are personally liable for malpractice claims, weighed in favor of the conclusion that the director-shareholder physicians were not employees. Nonetheless, the Court remanded for further factual determinations.

Since Clackamas was decided in April 2003, no reported decisions have thoroughly discussed it. Before Clackamas, however, some courts employed methods that were very similar to the Clackamas test. Not every court included each of the EEOC's six factors in its analysis but, consistent with the approach that Clackamas eventually adopted, most pre-Clackamas decisions focused on control.

Size Matters

Because of the Supreme Court's emphasis on control, as general rule, the larger the law firm, the more likely that some of its partners/shareholders will be considered employees under the anti-discrimination statutes. In large firms, whether true partnerships or hybrid business models, management is often centralized in a small executive committee or management committee. The ability of most partners, especially junior partners and other types of lower-tier partners, to exert any influence over firm affairs is negligible. As a result, many lawyers who are partners in name have little or no control over firm matters, including their own terms and conditions of employment.

On the other hand, courts are more likely to hold that partners in small law firms are not employees. In small firms, individual partners are more likely to have the ability to influence the firm's management. Even in small firms in which partners do not have an equal vote, or their opinions are not adopted, courts have held that the partner is not an employee as long as she has a meaningful opportunity to express her views and cast her vote.

Large Firms

In Simpson v. Ernst & Young, 100 F.3d 436 (6th Cir. 1996), the court applied a test with factors similar to those endorsed by Clackamas and held that the plaintiff was an employee, not a partner, of the large national accounting firm. The court carefully examined the plaintiff's ability to influence the firm, noting that the plaintiff could not participate in personnel decisions, had no voice in compensation decisions, and had no vote in firm governance matters. Id. at 441. Instead, despite his “partner” title, the plaintiff was “relegated to the virtually absolute, unilateral control of the Management Committee.” Id.

Likewise, in Sidley, as discussed earlier, the Seventh Circuit stressed the importance of the degree of a partner's control over the firm in determining whether the partner is an employee. It held that the demoted partners may be “employees” under the ADEA because all of the power over the 500-partner firm's affairs resided in a small unelected executive committee. Moreover, the partners who were not members of the executive committee were at the committee's mercy with respect to the terms of their employment, including hiring, firing, compensation, promotion, and demotion. Sidley at 702-4. Although the demoted partners shared in the profits of the firm, were potentially liable for the firm's debts, and had some administrative functions, the “economic realities” of the demoted partners' relationship to the firm left enough doubt about whether the demoted partners were covered by the ADEA to entitle the EEOC to enforcement of its subpoena. Id. at 707.

Small Firms

The result is often different with respect to smaller firms where each partner has a greater opportunity to influence firm policy. Before Clackamas, the prevailing test was one of control ' but not necessarily equal control. Several courts held that a partner's participation rights need not be equal to render her a non-employee for the purposes of the employment discrimination laws. Because Clackamas does not speak to the amount of control necessary to render a partner a non-employee, these cases are still good law.

For example, in Devine v. Stone Leyton & Gershman, 100 F.3d 78, 81 (8th Cir. 1996), the court held that shareholders of a small law firm organized as a professional corporation were not “employees” under the Title VII because the shareholders “participated in all management decisions and set firm policy,” as well as contributing to firm capital and bearing responsibility for firm debts. Id. at 82. The court held that participation rights need not be equal. The test is whether the partner has “a meaningful voice in decision-making.” Id. at 81.

Likewise, in Fountain v. Metcalf, Zima & Co., 925 F.2d 1398 (11th Cir. 1991), the Eleventh Circuit held that plaintiff, one of five member/shareholders in a small accounting firm, was not an employee under the ADEA despite the “domination by [one] autocratic partner.” Plaintiff's “participation in the firm's management, control, and ownership,” including his right to vote on admission of new shareholders, changes in compensation, amendment of the firm's agreement, and dissolution of the firm, carried the day. Id. at 1401. See also, Serpion v. Martinez, 119 F.3d 982, 992 (1st Cir. 1997) (holding that “the fact that others in the firm may wield more power” than plaintiff does not automatically render plaintiff an employee).

Moreover, if a partner has the opportunity to share in the management and control of a small firm, a court is not likely to deem the partner an “employee,” even if the partner's particular views regarding firm affairs are consistently rejected. In Schmidt v. Ottawa Medical Center, P.C., 322 F.3d 461 (7th Cir. 2003), the court held that the plaintiff, one of eight physician/ shareholders in a professional corporation, was not an employee under the ADEA even though his views on the proper method of shareholder compensation never prevailed. The court noted that the plaintiff's vote was equal to that of the other seven shareholders, he was allowed to vote on all matters put to a vote including the hiring of non-shareholder physicians and shareholder compensation, and he was a member of the board of directors. The court held that “the mere fact that his preferences on shareholder-compensation proposals have not secured the majority opinion of his fellow shareholders does not alter the fact that with each vote he has exercised this right to control.” Id. at 467.

Ownership

Before Clackamas, some courts placed great emphasis on factors related to a partner's ownership interest in the firm, including whether the partner contributed capital to the firm, whether the partner shared in the profits of the firm, and whether the partner was personally liable for the debts of the firm. The cases that focus almost exclusively on ownership probably do not survive Clackamas because of the Supreme Court's emphasis on control. Only one of the six factors in the Clackamas test addresses ownership. Clackamas at 1680.

In Wheeler, for example, the Tenth Circuit's approach is contrary to that in Clackamas. While purporting to examine the “total bundle of partnership characteristics,” the Wheeler court focused almost exclusively on the partner's financial relationship with the 502-partner accounting firm. The court emphasized factors such as profit sharing, contributions to capital, part ownership of partnership assets, and assumption of the risk of loss and liabilities. Wheeler at 274. The court minimized the importance of control and explicitly rejected the theory that “any individual who is organizationally or economically dominated is an employee.” Id. at 273.

Likewise, the First Circuit's approach in Serpion was probably too heavily weighted towards ownership. There, the plaintiff held an equity interest in the firm, her compensation was based in substantial part on the firm's profits, and she was potentially liable for the firm's losses. Id. at 991. The court relied on these facts heavily in holding that the plaintiff was not an employee. The court's statement that, “[a] person with the requisite attributes of proprietary status is … not an employee, regardless of the fact that others in the firm may wield more power,” has likely been abrogated by Clackamas and its emphasis on control.

On the other hand, as explained above, in Sidley, the Seventh Circuit's emphasis on control was more in tune with the Supreme Court's Clackamas holding a year later. With respect to ownership, the Sidley court reasoned that ownership should not be emphasized in making the employee/employer determination because an ownership interest in a business entity does not necessarily come with any measure of control over the company ' corporate employees often own stock in their companies without holding any power over management whatsoever. Sidley at 703. The court similarly deemphasized the partners' personal liability for the firm's debts. While noting that unlimited liability was the “most partneresque feature of the 32 partners' relation to the firm”, the partners are certainly “not empowered by virtue of bearing large potential liabilities.” Id. at 704.

Conclusion

It will be interesting to observe how courts apply the Clackamas test to law firms, especially as many firms continue to evolve from egalitarian partnerships into huge centrally governed entities. The more that firms give their partners a meaningful right to participate in management of the firms' affairs, the less the risk of liability to their partners for employment discrimination.

Ceding such control will not completely insulate firms from discrimination suits, however. Some statutes do not require that a discrimination victim be an employee in order to have a remedy. For example, the Civil Rights Act of 1866, 42 U.S.C. '1981(a) (Section 1981) prohibits racially motivated interference with a person's right to make and enforce contracts. Section 1981 is applied similarly to Title VII, except that Section 1981 does not require an employment relationship and therefore protects even true partners who would be excluded from Title VII coverage by the Clackamas test. Additionally, some state and local employment discrimination laws are not limited to protecting employees. See, eg, NYC Admin. Code '8-107 (a) (protecting any “person”); Jowers v. DME Interactive Holdings, Inc., 2003 WL 230739 (S.D.N.Y. Feb. 4, 2003) (NYC Administrative Code applies to “natural persons” who “carry out work in furtherance of an employer's business enterprise”).

Of course, the best way for firms to avoid liability is not to discriminate. To this end, firms should:

• Take note of the low representation of women and minorities in their partnership ranks;
• Endeavor to provide mentoring, training, and networking opportunities to all associates and partners without respect to gender, race, and other protected categories;
• To the extent possible, set forth objective criteria for promotion and other benefits to limit the potential for stereotypes to influence decision making; and
• Provide training for partners on the subtle ways that stereotypes and other discrimination can affect lawyers' careers.

Part One of this article discussed why law firms are susceptible to discrimination suits by their partners ' especially large firms. It also covered the threshold requirements for law firm partners to do so. In Part Two, the authors examine case law on determining whether a partner is an “employee” and how a firm's size and type of ownership can affect a partner's ability to sue for employment discrimination.

Sidley: Law Firms are on Notice

In October 2002, the Seventh Circuit decided EEOC v. Sidley Austin Brown & Wood , 315 F.3d 696 (7th Cir 2002) (hereinafter Sidley), which should serve as a wake-up call for law firms, especially large firms. In Sidley, the firm demoted 32 of its equity partners to “counsel” or “senior counsel,” prompting the Equal Employment Opportunity Commission (EEOC) to initiate an investigation, sua sponte, to determine whether the demotions violated the Age Discrimination in Employment Act (ADEA). As part of its investigation, the EEOC issued a subpoena seeking documents that would allow it to determine whether the demoted partners were employees and could therefore invoke the ADEA.

Sidley refused to fully comply with the subpoena and the EEOC went to federal court to enforce it. Sidley argued that it had already produced enough documents to show that the 32 were “real” partners and that the EEOC had no basis to continue its investigation. Id. at 698-99. The district court rejected Sidley's argument and granted the EEOC's request to enforce the subpoena. The Seventh Circuit affirmed in relevant part. It held that the demoted partners may be “employees” under the ADEA because, from the documents that were produced, they appeared to lack any meaningful control over the firm's affairs. Id. at 707.

Firms should take note of Sidley for at least two reasons. First, the EEOC's decision to initiate its investigation without receiving a complaint from any of the demoted partners, EEOC v. Sidley & Austin, 2002 WL 206485, at 1, n.2 (N.D.Ill. Feb. 11, 2002), signals the Commission's recently heightened interest in promoting diversity in law firms. (In fact, the EEOC recently published an extensive study of diversity in law firms. See, Diversity in Law Firms, U.S. Equal Opportunity Commission, Oct. 22, 2003, available at www.eeoc.gov/stats/reports/diversitylaw/index.html.) Moreover, Sidley demonstrates that courts are willing to subject law firms to liability for discrimination against partners who are deemed to be “employees.”

Partner-Employer or Employee?

The statutes themselves are of no help in determining a partner's status ' they do not define “employee” in any functional manner. Under Title VII, “employee” is defined as, “an individual employed by an employer.” 42 U.S.C. '2000e (f). The corresponding provisions in the Americans with Disabilities Act (ADA), 42 U.S.C. '12111 (4), and the ADEA, 29 U.S.C. '603 (f) also contain “completely circular” definitions of “employee.” Clackamas Gastroenterology Assoc, P.C. v. Wells , 123 S.Ct. 1673, 1677 (2003).

Prior to Clackamas, courts struggled to articulate a workable approach. With respect to traditional partnerships as well as hybrid business models, most courts agreed that the label, “partner” was not dispositive. Almost all courts applied some variation of an “economic realities test,” examining the nature of the relationship between the partner and the firm. See , Wheeler v. Main Hurdman , 825 F.2d 257 (10th Cir. 1987) (employing an “economic realities” test to a true partnership); Schmidt v. Ottawa Medical Center, P.C. , 322 F.3d 461 (7th Cir. 2003) (applying an “economic realities test” to a professional corporation).

On the other hand, some courts adopted rules that emphasized form over substance. The Second and Ninth Circuits adopted the per se rule that the use of any quasi-corporate form precludes a firm from arguing that its lawyers were partners and not employees. Wells v. Clackamas Gastroenterology Assoc., P.C. , 271 F.3d 793, 905 (9th Cir. 2001); Hyland v. New Haven Radiology Assoc., P.C. , 794 F.2d 793, 798 (2d Cir. 1986). The Ninth Circuit saw “no reason to permit a professional corporation to secure the 'best of both 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 discrimination.” Wells at 905. See also , Burke v. Friedman , 556 F.2d 867, 869 (7th Cir. 1977) (“We do not see how partners can be regarded as employees rather than employers who own and manage the operation of the business”).

The Supreme Court granted certiorari in Clackamas to resolve this conflict among the Circuits. Clackamas at 1677. In Clackamas, the Court set forth a framework for analyzing the employment status of partners for the purposes of the federal employment discrimination laws. Even more helpful is that the Court's framework can be applied to any business model, establishing, for the first time, a uniform method of analysis.

The issue before the Clackamas Court was whether four physicians, who were shareholders and directors of defendant, a professional corporation, should be counted as “employees.” If the four physicians were not “employees,” defendant's employment roll would not reach the ADA's 15-employee threshold and the ADA would not apply to defendant.

The court below had held that the physicians were automatically “employees” simply because the defendant elected to exist in a corporate form. Clackamas at 1676-77.

The Supreme Court reversed, rejecting the Ninth Circuit's “form over substance” approach. It held that an organization's business model does not determine whether its members are “employees.” Instead, the Court held, courts must examine “all the incidents” of the relationship and look to “the common law's definition of master-servant relationship.” Id. at 1678-81. The “common-law element of control,” the Court held, must be the “principal guidepost” in this analysis. Id. at 1679.

The Court adopted the approach advocated by the EEOC in its Compliance Manual, which focuses on control. The EEOC frames the question as: “whether the individual acts independently and participates in managing the organization, or whether the individual is subject to the organization's control.” It provides that: “if the individual is subject to the organization's control, s/he is an employee.” Id. at 1680 (citing 2 Equal Employment Opportunity Commission, Compliance Manual '605:0008-605:0009, available at www.eeoc.gov/docs/threshold.html).

To focus the inquiry, the Court also adopted the EEOC's six factor test. The following “non-exhaustive” factors are “relevant to the inquiry”:

• 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 supervised 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;
• Whether the individual shares in the profits, losses, and liabilities of the organization.” Clackamas at 1680 (citing EEOC Compliance Manual '605:0009).

Applying this test to the facts before it, the Court noted that some of the district court's findings, including that the partners control the operation of the clinic, that they share in the profits and that they are personally liable for malpractice claims, weighed in favor of the conclusion that the director-shareholder physicians were not employees. Nonetheless, the Court remanded for further factual determinations.

Since Clackamas was decided in April 2003, no reported decisions have thoroughly discussed it. Before Clackamas, however, some courts employed methods that were very similar to the Clackamas test. Not every court included each of the EEOC's six factors in its analysis but, consistent with the approach that Clackamas eventually adopted, most pre-Clackamas decisions focused on control.

Size Matters

Because of the Supreme Court's emphasis on control, as general rule, the larger the law firm, the more likely that some of its partners/shareholders will be considered employees under the anti-discrimination statutes. In large firms, whether true partnerships or hybrid business models, management is often centralized in a small executive committee or management committee. The ability of most partners, especially junior partners and other types of lower-tier partners, to exert any influence over firm affairs is negligible. As a result, many lawyers who are partners in name have little or no control over firm matters, including their own terms and conditions of employment.

On the other hand, courts are more likely to hold that partners in small law firms are not employees. In small firms, individual partners are more likely to have the ability to influence the firm's management. Even in small firms in which partners do not have an equal vote, or their opinions are not adopted, courts have held that the partner is not an employee as long as she has a meaningful opportunity to express her views and cast her vote.

Large Firms

In Simpson v. Ernst & Young , 100 F.3d 436 (6th Cir. 1996), the court applied a test with factors similar to those endorsed by Clackamas and held that the plaintiff was an employee, not a partner, of the large national accounting firm. The court carefully examined the plaintiff's ability to influence the firm, noting that the plaintiff could not participate in personnel decisions, had no voice in compensation decisions, and had no vote in firm governance matters. Id. at 441. Instead, despite his “partner” title, the plaintiff was “relegated to the virtually absolute, unilateral control of the Management Committee.” Id.

Likewise, in Sidley, as discussed earlier, the Seventh Circuit stressed the importance of the degree of a partner's control over the firm in determining whether the partner is an employee. It held that the demoted partners may be “employees” under the ADEA because all of the power over the 500-partner firm's affairs resided in a small unelected executive committee. Moreover, the partners who were not members of the executive committee were at the committee's mercy with respect to the terms of their employment, including hiring, firing, compensation, promotion, and demotion. Sidley at 702-4. Although the demoted partners shared in the profits of the firm, were potentially liable for the firm's debts, and had some administrative functions, the “economic realities” of the demoted partners' relationship to the firm left enough doubt about whether the demoted partners were covered by the ADEA to entitle the EEOC to enforcement of its subpoena. Id. at 707.

Small Firms

The result is often different with respect to smaller firms where each partner has a greater opportunity to influence firm policy. Before Clackamas, the prevailing test was one of control ' but not necessarily equal control. Several courts held that a partner's participation rights need not be equal to render her a non-employee for the purposes of the employment discrimination laws. Because Clackamas does not speak to the amount of control necessary to render a partner a non-employee, these cases are still good law.

For example, in Devine v. Stone Leyton & Gershman , 100 F.3d 78, 81 (8th Cir. 1996), the court held that shareholders of a small law firm organized as a professional corporation were not “employees” under the Title VII because the shareholders “participated in all management decisions and set firm policy,” as well as contributing to firm capital and bearing responsibility for firm debts. Id. at 82. The court held that participation rights need not be equal. The test is whether the partner has “a meaningful voice in decision-making.” Id. at 81.

Likewise, in Fountain v. Metcalf, Zima & Co. , 925 F.2d 1398 (11th Cir. 1991), the Eleventh Circuit held that plaintiff, one of five member/shareholders in a small accounting firm, was not an employee under the ADEA despite the “domination by [one] autocratic partner.” Plaintiff's “participation in the firm's management, control, and ownership,” including his right to vote on admission of new shareholders, changes in compensation, amendment of the firm's agreement, and dissolution of the firm, carried the day. Id. at 1401. See also , Serpion v. Martinez , 119 F.3d 982, 992 (1st Cir. 1997) (holding that “the fact that others in the firm may wield more power” than plaintiff does not automatically render plaintiff an employee).

Moreover, if a partner has the opportunity to share in the management and control of a small firm, a court is not likely to deem the partner an “employee,” even if the partner's particular views regarding firm affairs are consistently rejected. In Schmidt v. Ottawa Medical Center, P.C. , 322 F.3d 461 (7th Cir. 2003), the court held that the plaintiff, one of eight physician/ shareholders in a professional corporation, was not an employee under the ADEA even though his views on the proper method of shareholder compensation never prevailed. The court noted that the plaintiff's vote was equal to that of the other seven shareholders, he was allowed to vote on all matters put to a vote including the hiring of non-shareholder physicians and shareholder compensation, and he was a member of the board of directors. The court held that “the mere fact that his preferences on shareholder-compensation proposals have not secured the majority opinion of his fellow shareholders does not alter the fact that with each vote he has exercised this right to control.” Id. at 467.

Ownership

Before Clackamas, some courts placed great emphasis on factors related to a partner's ownership interest in the firm, including whether the partner contributed capital to the firm, whether the partner shared in the profits of the firm, and whether the partner was personally liable for the debts of the firm. The cases that focus almost exclusively on ownership probably do not survive Clackamas because of the Supreme Court's emphasis on control. Only one of the six factors in the Clackamas test addresses ownership. Clackamas at 1680.

In Wheeler, for example, the Tenth Circuit's approach is contrary to that in Clackamas. While purporting to examine the “total bundle of partnership characteristics,” the Wheeler court focused almost exclusively on the partner's financial relationship with the 502-partner accounting firm. The court emphasized factors such as profit sharing, contributions to capital, part ownership of partnership assets, and assumption of the risk of loss and liabilities. Wheeler at 274. The court minimized the importance of control and explicitly rejected the theory that “any individual who is organizationally or economically dominated is an employee.” Id. at 273.

Likewise, the First Circuit's approach in Serpion was probably too heavily weighted towards ownership. There, the plaintiff held an equity interest in the firm, her compensation was based in substantial part on the firm's profits, and she was potentially liable for the firm's losses. Id. at 991. The court relied on these facts heavily in holding that the plaintiff was not an employee. The court's statement that, “[a] person with the requisite attributes of proprietary status is … not an employee, regardless of the fact that others in the firm may wield more power,” has likely been abrogated by Clackamas and its emphasis on control.

On the other hand, as explained above, in Sidley, the Seventh Circuit's emphasis on control was more in tune with the Supreme Court's Clackamas holding a year later. With respect to ownership, the Sidley court reasoned that ownership should not be emphasized in making the employee/employer determination because an ownership interest in a business entity does not necessarily come with any measure of control over the company ' corporate employees often own stock in their companies without holding any power over management whatsoever. Sidley at 703. The court similarly deemphasized the partners' personal liability for the firm's debts. While noting that unlimited liability was the “most partneresque feature of the 32 partners' relation to the firm”, the partners are certainly “not empowered by virtue of bearing large potential liabilities.” Id. at 704.

Conclusion

It will be interesting to observe how courts apply the Clackamas test to law firms, especially as many firms continue to evolve from egalitarian partnerships into huge centrally governed entities. The more that firms give their partners a meaningful right to participate in management of the firms' affairs, the less the risk of liability to their partners for employment discrimination.

Ceding such control will not completely insulate firms from discrimination suits, however. Some statutes do not require that a discrimination victim be an employee in order to have a remedy. For example, the Civil Rights Act of 1866, 42 U.S.C. '1981(a) (Section 1981) prohibits racially motivated interference with a person's right to make and enforce contracts. Section 1981 is applied similarly to Title VII, except that Section 1981 does not require an employment relationship and therefore protects even true partners who would be excluded from Title VII coverage by the Clackamas test. Additionally, some state and local employment discrimination laws are not limited to protecting employees. See, eg, NYC Admin. Code '8-107 (a) (protecting any “person”); Jowers v. DME Interactive Holdings, Inc., 2003 WL 230739 (S.D.N.Y. Feb. 4, 2003) (NYC Administrative Code applies to “natural persons” who “carry out work in furtherance of an employer's business enterprise”).

Of course, the best way for firms to avoid liability is not to discriminate. To this end, firms should:

• Take note of the low representation of women and minorities in their partnership ranks;
• Endeavor to provide mentoring, training, and networking opportunities to all associates and partners without respect to gender, race, and other protected categories;
• To the extent possible, set forth objective criteria for promotion and other benefits to limit the potential for stereotypes to influence decision making; and
• Provide training for partners on the subtle ways that stereotypes and other discrimination can affect lawyers' careers.