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Employment Law Alert: Claims that a Partner or Shareholder-Director of a Closely Held Company is an Employee Under Federal

 

 
When a partner or shareholder-director of a closely held company is pushed out, they may consider invoking the protection of Federal employment law in lieu of their limited rights under corporate governance rules or the partnership agreement.  Such legal actions, however, are rarely brought on behalf of these individuals because they are generally not considered employees.  However, because of a recent decision by the Third Circuit Court of Appeals, a claim by these individuals under the Federal employment law may be more likely to survive at least until the summary judgment stage of litigation, changing the economics of such an action.
 
In Mariotti v. Mariotti Bldg. Products, Inc., the Plaintiff was former shareholder-director of a closely held family company who sued the company for employment discrimination under Title VII.  The Third Circuit looked beyond the Plaintiff’s title and decided that a fact-specific analysis based upon the common law of employee was needed.  Accordingly, relying on 2003 Supreme Court’s ADA holding in Clackamas Gastroenterology Associates, P.C. v. Wells, the Third Circuit applied a six-factor fact-specific analysis to determine whether the Plaintiff was in reality an employer or an employee who merely exercised authority by delegation at the direction of others who ultimately possessed the right to control.
 
Generally, the six relevant factors identified in Mariotti are: 
 
1. Whether the organization could hire or fire the individual or set the rules and regulations of the individual’s work;
2. To what extent the organization supervises the individual’s work; 
3. Who the individual reports to in the organization; 
4. 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; and
6. Whether the individual shares in the profits, losses, and liabilities of the organization. .
 
  In its analysis, Third Circuit determined that the Mariotti was not an employee under Title VII and dismissed the case.  However, the Court’s opinion is still noteworthy.  In its Decision the Third Circuit noted that the analysis can be used for determining whether partners or shareholder-directors in other kinds of business entities are employees other Federal employment statutes, including the ADA, ADEA, and Fair Pay Act.  Thus, now there is more incentive to bring such actions because the threat of a protracted litigation helps one’s bargaining position.
 
  The full Mariotti v. Mariotti Bldg. Products, Inc., Third Circuit Court of Appeals Decision and Opinion can be found at http://www.ca3.uscourts.gov/opinarch/113148p.pdf.


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