Labor & Employment Law Daily Law firm shareholder not an ‘employee’ under Title VII
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Friday, January 22, 2021

Law firm shareholder not an ‘employee’ under Title VII

By Robert Margolis, J.D.

Holding otherwise would effectively “refashion” a prevailing structure of the legal practice, according to appellate court.

An equity shareholder in a law firm was not an “employee” who can bring a claim under Title VII, ruled the Fourth Circuit in affirming a district court’s grant of summary judgment dismissing the lawyer’s Title VII and Section 1981 claims against her former law firm. As a partner/shareholder, she held the same ownership interest as other partners, there was no higher rank or responsibility than partnership, and she possessed the same vote on all matters coming before the firm’s board as the other partners. The appeals court also affirmed the dismissal of the lawyer’s Section 1981 claim that she was discriminatorily denied employment benefits, when she was denied short-term leave (Lemon v. Myers Bigel, P.A., January 19, 2021, Wilkinson, J.).

The lawyer, an African-American woman, practiced as a patent lawyer at the law firm, first as an associate and then as a shareholding partner, equity owner, and member of the law firm’s board of directors. Approximately ten years after she became a shareholder and board member, she applied for short-term leave, which the firm’s board denied. Believing that the denial was motivated by race and retaliatory animus, she resigned and sued the law firm.

The lawyer brought claims for race- and gender-based discrimination under Title VII and racial discrimination under Section 1981. The district court granted the law firm’s motion to dismiss her Title VII claim, finding that she failed to allege sufficient facts to demonstrate that she was an employee within the scope of Title VII. Her Section 1981 was dismissed because she did not plausibly allege that her termination was motivated by race.

Shareholder status. When the lawyer was elevated from associate to partner in 2007, she purchased shares in the firm and executed a shareholder agreement. She owned the same number of shares as all other partners, and had the same voting power as other board members. Like the other partners, her compensation was based on a formula derived from the firm’s profits and losses. She was subject to the firm’s shareholder quality control policy, and became equally eligible with other partners to serve on the firm’s Management Committee and hold officer positions.

She served on the Management Committee in 2011, and as the firm’s Vice President and Secretary in 2016. While the shareholder agreement did not expressly supersede the employment agreement that the lawyer (and other associates) signed when hired by the firm as an associate, after the lawyer was promoted to shareholder she and the firm’s board voted to remove from the shareholder agreement all references to shareholders as “employees.”

Investigation. The lawyer’s relationship with her partners started to sour when the firm hired an outside attorney to investigate gender discrimination at the firm, the lawyer sought permission to review the outside attorney’s report, and the firm denied that permission. The lawyer then hired her own attorney to advise her in connection with the investigation, and she made certain statements in her interview with the outside attorney that became known to the firm’s board. At one board meeting, when it was discussing the outside attorney’s report, one shareholder allegedly said that the lawyer “played the black card too much.”

Leave request. Later that same year, the lawyer submitted her request for short term leave, citing a health condition and other “qualifying events.” Her request was denied by a 17-3 vote. She alleged that similar requests were routinely granted to white attorneys.

Employee status. In evaluating her Title VII claim, the Fourth Circuit started from the statute’s text, barring an employer from discriminating “against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race,” or from discriminating “against any of his employees … because he has opposed any practice made unlawful by this subchapter.”

This language “makes clear” that Title VII’s protections “extend only to employees,” the appeals court pointed out. Title VII defines “employee” as “an individual employed by an employer,” a definition that the Supreme Court has called “completely circular” and which “explains nothing,” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992). Thus, these words should be interpreted to “describe the conventional master-servant relationship as understood by common-law agency doctrine,” Clackamas Gastroenterology Associations, P.C. v. Wells, 538 U.S. 440, 445 (2003). The Supreme Court specified that “common-law control” is the determinant of whether someone is an employee, as gauged by a six-part test, as articulated in Clackamas.

The appeals court deemed the application easy in this case. As a partner and co-owner of the law firm, having an equal vote on firm matters, the lawyer could not be an employee, it held. Any other holding would “stretch the concept of ‘employee’ well past its breaking point,” “needlessly upend[ing]” the understandings central to firm partnerships. As a partner/shareholder, she held the same ownership interest as other partners, there was no higher rank or responsibility than partnership, and she possessed the same vote on all matters coming before the firm’s board as the other partners. No other partner, by virtue of their status, had a superior claim to serve on the management board or as a firm officer, and the lawyer in fact did so. She was not paid a salary, but compensated under a formula based on firm profits and losses. Under the circumstances, it was implausible to allege that she lacked control so as to be an employee, the court held.

The lawyer’s reliance on the employment agreement she signed when hired as an associate was unavailing, since the shareholder agreement was amended to remove the references to shareholders as “employees.”

Partnerships. The appeals court found this outcome to be “expected” given the nature of equity partnerships. While some partners may wield more influence than others, or own more partnership shares than others, all are collectively responsible for firm administration and setting the rules and standards. As the appeals court concluded, to find an equity partner in a conventionally-structured law firm to be an “employee” would effectively “refashion[] the foundation of a prevailing form of legal practice.”

Section 1981. The appeals court also affirmed the dismissal of the lawyer’s Section 1981 claim that she was discriminatorily denied employment benefits, when she was denied short-term leave. It called her allegations too “sparse” to plausibly allege race discrimination. It deemed her complaint wholly conclusory on the claim element that she was “eligible” for the benefits, since she failed to identify the “health condition” that qualified her for the benefits, or what the “additional qualifying events” were. The appeals court also found lacking any allegations that race was the but-for cause of the board’s denial of her leave. The single stray remark, a complaint that she played “the black card,” which occurred four months before the decision, was not sufficiently tied to it, in the court’s estimation.

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