When Partners Become Employees:  
The Implications of Recent Federal Employment Decisions

By David A. Kulle   Bio   email
and
María Jimena Rivera   Bio   email
Robinson & Cole LLP

Federal anti-discrimination statutes such as Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act (ADEA) are intended to govern many important aspects of the employer-employee relationship.  These laws attempt to protect against the kind of abuse that can easily occur because of the power differential between employers and their employees.  But who exactly is an “employer” and an “employee” under these federal laws? 

Under Title VII, an “employer” is one who has 15 or more employees.  The ADEA, on the other hand, applies to “employers” with 20 or more employees.  While smaller employers may not be subject to Title VII or the ADEA, they may be covered by state anti-discrimination laws.  Curiously, federal employment laws do not provide much guidance as to who is considered an “employee.”  Both Title VII and the ADEA define “employee” as an individual employed by an employer.  As a result of this circular definition of “employee,” courts have had to develop their own tests to determine which individuals are “employees” with standing to sue under federal employment laws. 

One such judicial test, the “economic realities” test, looks to whether an individual is economically dependent on the business to which she renders services or is in business for herself.  This test considers factors such as the individual’s opportunity for profit or loss, the permanence of the working relationship, and the degree of control exerted by the purported employer over the individual.[1]  Another judicial test, the “hybrid” test, combines aspects of the “economic realities” test with other factors such as whether the individual has ownership in her workplace, how she is compensated, and whether she participates in management.[2]

Though federal courts do not use a single, uniform test to determine when an individual is an employee, most courts have determined that the nature of the jobs of partners in accounting, law, and other professional firms makes them more like “employers” than “employees.”[3]  The late Justice Lewis Powell elaborated on the policy behind the distinct treatment of partners in his concurrence in a 1984 United States Supreme Court case by stating that  “[t]he relationship among [law] partners differs markedly from that between employer and employee … [T]he essence of the [law] partnership is the common conduct of a shared enterprise.”[4]  In fact, many of the early decisions addressing this issue adopted a per se rule that partners, as co-owners of the partnership, could not be considered employees of the partnership.[5] 

However, more recent cases indicate that courts are moving away from de facto conclusions that partners are not employees.  Instead, courts are now examining on a case-by-case basis the particular structure of each partnership.  The United States Court of Appeals for the First Circuit held in a 1997 case that “[a] court must peer beneath the label [of “partner”] and probe the actual circumstances of the person’s relationship with the partnership.”[6]  In so doing, the First Circuit court further found that “partnerships cannot exclude individuals from the protections of Title VII simply by draping them in grandiose titles which convey little or no substance.”[7]

Similarly, the United States Court of Appeals for the Sixth Circuit first addressed the distinction between partners and employees in a 1996 case brought by a discharged accounting firm “partner.”   The Sixth Circuit found that an Ernst & Young “partner” was truly an employee entitled to the protections of the ADEA and Ohio’s anti-discrimination laws because the “partner” had few, if any, meaningful attributes of a partner.  As one of the 2,200 partners at Ernst & Young, the “partner” in the instant case could not participate in personnel decisions, could not vote on the membership of the firm management committee, and did not participate in the firm’s profits.[8]  The Sixth Circuit affirmed the United States Southern District Court of Ohio’s decision that “labeling a plaintiff a ‘partner’ does little to illuminate the actual nature of his employment relationship.”[9] 

Currently, the United States Equal Employment Opportunity Commission (EEOC), the agency responsible for enforcing the nation’s employment anti-discrimination laws, is independently investigating a major Chicago-based law firm, Sidley & Austin, for alleged age discrimination against some of its partners.  The EEOC, on its own initiative - no individual discrimination charge was filed - is investigating whether Sidley & Austin violated the ADEA when it demoted some of its partners and lowered the mandatory retirement age in the fall of 1999.  Just this past February, an Illinois District Court ordered Sidley & Austin to comply with the EEOC’s subpoena for confidential information regarding those partners.  

The firm contends that these partners cannot be considered employees because they have an ownership interest in the firm, they share in the firm’s profits and losses, and they participate in one or more of the firm’s management committees.  Nevertheless, the EEOC argues that its role is to determine whether an individual is an “employee” under federal employment law and that the “economic realities” at the firm demonstrate that not all of the firm’s partners are equal.  Indeed, the EEOC argues, the management of the firm rests almost completely in two particular committees so that partners not on those committees can be properly seen as employees.[10]  

The EEOC looks to the following list of factors to determine whether a partner is an employee, though the EEOC  provides no guidance as to the weight of each factor:[11]

1)                             whether the organization can hire/fire the individual or set the rules and regulations of the individual’s work;

2)                             whether, and to what extent, the organization supervises the individual’s work;

3)                             whether the individual reports to a person higher in the organization;

4)                             whether the individual is able to influence the organization;

5)                             whether the parties intended the individual to be an employee; and

6)                             whether the individual shares in the organization’s profits, losses, and liabilities. 

The ultimate result of this investigation and any subsequent litigation could have significant effects on courts’ determinations of when a partner may be viewed as an employee.  Regardless of the outcome, it is clear from this and other recent decisions that firms must now take a closer look at the roles of their proffered partners.  In particular, firms are well advised to analyze the management duties of their partners in light of the EEOC criteria.

Based on the EEOC’s Sidley & Austin investigation, it certainly is conceivable that as partnerships expand and centralize internal power and authority, their lower-level partners may be seen more as “employees” than as “employers.”  The lack of guidance within federal employment laws themselves as to who is an “employee” and the consequent inconsistency of the judicial tests that have been applied to the question make it likely that courts will continue to render fact-specific decisions based heavily on the individual structures of the firms at issue.  Partnerships increasingly must do their part to ensure that their partners are treated as fellow “employers” or else be prepared to expose themselves to potential liability under the now widening reach of the federal anti-discrimination laws.

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