Third Circuit Rules: Big Cheese Is No Employee

26 August 2013 Labor & Employment Law Perspectives Blog

In its 2003 decision in Clackamas Gastroenterology Associates, P.C. v. Wells, the United States Supreme Court utilized a six-factor analysis, with no one factor being determinative, to assess whether a shareholder-director of a professional corporation is also considered an “employee” for purposes of the ADA. The Supreme Court outlined the following six-factors in the case:

  1. Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work
  2. Whether and, if so, to what extent the organization supervises the individual’s work
  3. Whether the individual reports to someone higher in the organization
  4. Whether and, if so, to what extent the individual is able to influence the organization
  5. Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts
  6. Whether the individual shares in the profits, losses, and liabilities of the organization

With its recent opinion in Mariotti v. Mariotti Bldg. Prods. Inc., the U.S. Court of Appeals for the Third Circuit joined two other appellate courts that had expanded the applicability of the Supreme Court’s six-factor Clackamas test. Specifically, following in the footsteps of the First Circuit (which concluded that the test is applicable to close corporations in the Title VII context) and the Seventh Circuit (which concluded that the test also could be applied to other business entities), the Third Circuit ruled that the Clackamas analysis also applies to business entities other than professional corporations in a Title VII employment action.

In Mariotti, despite acknowledging that the Supreme Court’s analysis applied on its face only to professional corporations charged with violating the ADA, the Third Circuit concluded that the Supreme Court’s Clackamas test relied on broadly applicable notions of a master’s control over a servant, as well as guidelines from the EEOC that are not unique to professional corporations or ADA discrimination claims. Consequently, the Third Circuit determined that the application of the Clackamas analysis to a Title VII claim brought against a closely held corporation was appropriate.

The net effect of Mariotti’s expanded application of the six-factor test was the dismissal (at the motion to dismiss stage) of the employee’s religious discrimination claim due to his status as a “founder,” “officer,” and “member of the board of directors” of the employer. In other words, the Third Circuit found that because the employee had substantial authority at the company and possessed the right to control the enterprise, he could not be deemed an employee under the six-factor analysis.

The Mariotti decision and the previous appellate decisions suggests a growing likelihood that the Clackamas test applies to discrimination claims brought under Title VII and other employment claims against both closely held corporations and other types of business entities. When such claims involve high-level personnel, the six-factor analysis may present an important defense opportunity. However, employers should be mindful that while the Third Circuit affirmed the application of the Clackamas test in Mariotti at the motion to dismiss stage, since the analysis of whether an individual is an employee for purposes of a Title VII claim is a “fact intensive one,” use of the test “may generally require resolution at the summary judgment stage, rather than at the motion to dismiss stage.”

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