|
|
|
|
|
Legal News
NECN >
Legal News >
Article
Are partners 'employees'?
written by Elliot H. Shaller with the Washington, D.C., law firm of Krukowski & Costello,
S.C.
The protections of the employment discrimination statutes apply only to "employees." But it isn't always clear whether certain people who work for a
company should be treated as employees. The statutes themselves aren't much help. Many of the federal employment discrimination statutes define
"employee" in an incredibly circular way, i.e., as "an individual employed by any employer."
Are lawyers who serve as partners in a law firm "employees" and thereby protected by the employment discrimination statutes? Are they actually
employers because of their ownership interests, liability for firm debt, and decisionmaking authority, in which case the partnership is free to
discriminate against them?
In the Washington, D.C., metropolitan area, which is home to numerous law firms, medical practices, and other professional service partnerships and
corporations, the implications are huge. A recent court of appeals decision involving one of the country's largest law firms addressed this issue.
Background
Sidley, Austin, Brown & Wood is a large Chicago-based law firm with offices in Washington, D.C., and other cities in the United States. The firm
is governed by an executive committee, which controls all personnel matters concerning partners. The committee has authority to terminate, promote,
demote, and determine the compensation of the partners. It delegates to nonmember partners certain responsibilities regarding employment matters of
individuals who work for the firm who aren't partners, including hiring, termination, promotion, and compensation. Equity partners each have capital
accounts, and they're responsible for the firm's liabilities in proportion to their capital in the firm.
In 1999, Sidley demoted 32 equity partners to "counsel" positions. The Equal Employment Opportunity Commission (EEOC) initiated an investigation to
determine whether the firm discriminated against some or all of those partners on the basis of age in violation of the Age Discrimination in
Employment Act (ADEA). Sidley resisted the information request on the basis that before their demotions, the 32 individuals weren't "employees"
because of their status as partners. Accordingly, the firm reasoned, they weren't protected by the ADEA, so the EEOC had no authority to continue the
investigation or compel the production of information. The EEOC sought a court order requiring disclosure, and the district court ordered the firm to
comply with the information request.
Court of appeals' decision
Sidley appealed the case to the Seventh U.S. Circuit Court of Appeals. It argued that the individuals weren't "employees" for purposes of the ADEA
because (1) their income included a share of the firm's profits, (2) they contributed to the capital of the firm, (3) they were liable for firm debts,
and (4) they had administrative or managerial responsibilities.
The court of appeals ruled that even though the 32 individuals were truly partners under state partnership law, they still might be considered
"employees" for purposes of the ADEA because of the reality that they had such limited authority. The court likened their authority to the authority
possessed by executives in corporations, who are clearly employees: - Although the partners can commit the firm by writing opinion letters, so
too can employees of a corporation who, when acting within the scope of employment, commit the corporation to contractual obligations and tort (or
wrongful act) liability.
- Although the partners share in the firm's profits, many corporate executives have their compensation linked to corporate
profits.
- Although the partners participate on committees, those committees have administrative functions similar to committees on which employees
in corporations serve.
- Although the partners owned some of the firm's capital, executive-level employees often own stock in their corporations.
The court observed that perhaps the most "partneresque" feature of the 32 partners' relation to the firm is their personal liability for firm
debts. But the court stated that despite such liability, the partners might still be employees for purposes of the ADEA when other factors are
considered. Those include the extent of their ownership interests, their participation in profits and losses, whether they exercised any significant
management control, and whether they had meaningful voting rights in firm decisions.
The court of appeals didn't definitively rule on whether the partners were employees for purposes of the ADEA. But it held that because the question
of their coverage under the Act was murky, the EEOC was entitled to information regarding coverage. It ordered Sidley to comply with the commission's
request for information on how unevenly profits were spread across the entire firm. That, according to the court, might show whether the profits are
so concentrated in a smaller or larger number of partners that other partners occupy the same position as an employee of a corporation. Equal
Employment Opportunity Commission v. Sidley Austin Brown & Wood, C.A. NO. 02-1604, October 24, 2002.
Bottom line
It's clear from the court's decision that just because someone is labeled a "partner" or is a bona fide partner for purposes of state law doesn't mean
she can't be an "employee" for purposes of coverage under the discrimination laws. The decision, however, reflects the uncertainty in the law
regarding how partners in a law firm, or shareholders in a corporation, will be treated under those laws. At least for now, it appears that the courts
will be deciding whether these individuals are "employees" and thereby protected by the laws on a case-by-case basis, leaving law partnerships
(particularly large firms run by executive committees) and professional corporations in limbo regarding the status of many "partners" or
"shareholders."
One potential problem area is that many partnership agreements have mandatory retirement provisions. Those are unlawful under the ADEA to the extent
that they apply to partners who are at some point deemed to be employees.
In the meantime, in analyzing whether and which of your firm's partners may really be "employees" for purposes of the discrimination statutes, we
suggest that you pay particular attention to provisions in partnership agreements on the extent of the authority vested in any executive committee or
other type of management committee. The committee's authority over personnel decisions affecting partners, particularly with respect to hiring,
termination, and compensation, may be critical. Other critical factors are the extent to which individual partners: - have ownership
interests;
- share in profits and losses;
- exercise management control; and
- have meaningful voting rights on firm matters.
If
there's doubt about the status of certain partners, it would be prudent to err on the side of assuming that they're employees. Thus, employment
decisions should be made on the basis of performance and firm needs, not race, religion, sex, age, national origin, or any other basis prohibited by
federal, D.C., or other applicable local law. Regular and candid performance evaluations should be maintained, and the reasons for personnel actions
should be documented.
Some help may be on the way. The U.S. Supreme Court recently agreed to review a case addressing whether physician-shareholders in a medical
corporation should be considered "employees" under the Americans with Disabilities Act. Washington, D.C. Employment Law Letter will keep you informed
of important developments in this area.
|
