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Of Partners And Employees

By Karl G. Nelson and Sarah V. Toraason

In January, the Equal Employment Opportunity Commission (EEOC) sued Sidley Austin Brown & Wood LLP, alleging discrimination in connection with that firm's demotion of a group of equity partners. EEOC v. Sidley Austin Brown & Wood, No. 1:05-cv-00208 (N.D. Ill. filed Jan. 13, 2005). The suit highlights an area of potential uncertainty for law firms and other businesses organized as professional corporations and limited liability partnerships ' whether the shareholders and partners of such businesses are entitled to the protections afforded “employees” under federal and state employment laws. Although the outcome of the EEOC's case may not be known for some time, recent decisions illustrate a developing legal standard that will likely impact the organization of many professional service businesses.

In Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440 (2003), the Supreme Court shed some light on the issue when it considered whether four physician-shareholders practicing in a professional corporation were “employees” for purposes of the Americans with Disabilities Act's 15-employee threshold. The Court noted that professional corporations present “a new type of business entity that has no exact precedent in the common law,” but that “the common law's definition of the master-servant relationship does provide helpful guidance.” Id. at 447-48. Drawing from the common law definition of the term “servant” as one “whose work is controlled or is subject to the right to control by the master,” the Court held that “employee” status should turn on “whether shareholder-directors operate independently and manage the business or instead are subject to the firm's control.” Id. at 448 (quotations and citations omitted). Rejecting a categorical approach, the Court endorsed a multi-factor test suggested by the EEOC and framed in terms of the following inquiries:

  • 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 or contracts.
  • Whether the individual shares in the profits, losses, and liabilities of the organization.

Id. at 449-50 (quoting 2 EEOC Compliance Manual '605:0009 (2000)).

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