Court: Shareholders and equity partners cannot sue for discrimination under Title VII.

stop hand by b farias from the Noun Project

One of the proudest days in an attorney’s legal career is making partner. There are two tiers of partnership in most law firms: (1) non-equity/contract partner; and (2) shareholder/equity partner. Ascending to that second shareholder tier means that you own part of the business. How cool is that?

But, if things eventually go sideways, the shareholder may be SOL.

Among other things, an owner lacks standing to sue for discrimination under Title VII of the Civil Rights Act of 1964, according to this recent Fourth Circuit decision.

Was the plaintiff mistreated because of her race or gender?

Both the lower court and the appellate court adjudicated the case based on facts pled in the complaint. So, they considered the following facts to be true.

The plaintiff alleged that she started in her law firm as an associate, an at-will employee who had to comply with her employer’s policies and procedures.

But, eventually, the plaintiff became a partner. In 2007, she executed a shareholder agreement and, with it, she purchased 5,000 shares of the law firm. She owned the same share of the firm as all other partners, and the voting power of her seat on the firm’s Board of Directors was likewise the same. Like all other partners, the plaintiff was not paid a salary. Instead, she was compensated according to a formula whose output varied with the profits and losses of the firm.

In sum, she was an owner.

In 2016, the firm hired an outside attorney to investigate gender discrimination at the firm. The plaintiff, who was not the complainant, wanted to view the memorandum summarizing the investigation’s findings before its circulation to the full Board. This request was denied. Later, at a meeting at which the Board discussed the investigating attorney’s full report, one shareholder allegedly remarked to another that the plaintiff “played the black card too much.”

On another occasion, the plaintiff claims that the firm denied her a request for leave that it ordinarily would have provided to white attorneys. She also alleged that the Management Committee had “openly discussed racial and gender discrimination and its retaliatory actions” against her.

Eventually, she resigned and sued for race and gender discrimination under Title VII.

But does she have the standing to sue for discrimination?

Title VII permits “employees” to pursue claims of discrimination. Title VII defines an employee as “an individual employed by an employer.” The Court acknowledged that the definition of employee is “completely circular and explains nothing.”

Fortunately, however, the Supreme Court clarified this issue in Clackamas Gastroenterology Associations, P.C. v. Wells. In Clackamas, the Court identified six factors that help dictate whether an individual is an employee:

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

So, Fourth Circuit applied each of these six factors to the plaintiff. I’m not going to go through all six. Otherwise, this post will go on too long and you’ll miss the start of Tom and Jerry #TeamTom. But here are a few items that caught the Fourth Circuit’s attention.

The firm could only fire the plaintiff with a shareholder vote.
The plaintiff enjoyed a high degree of independence in discharging her duties as a partner.
The plaintiff shared equal voting power with others.
The plaintiff shared in the firm profits with others.

Ultimately, the court concluded that “[the plaintiff] is a partner and equal owner of the firm, not an employee, and she is not within the scope of Title VII’s coverage.”

Takeaways for employers.

The basic premise of promoting someone to partner is at odds with a claim of mistreatment or discrimination. But, these allegations do arise from time to time, and the Fourth Circuit decision is not limited to law firms. Clackamas, for example, involved a medical practice. So, if your business encounters a similar set of circumstances, Title VII may act as a shield. However, other laws could provide traction for the plaintiff. Section 1981 could apply in race discrimination cases. Additionally, state and local laws could come into play.

Therefore, the best course of action — other than treating people fairly and with respect — is to apply those anti-discrimination rules to everyone and take all discrimination complaints seriously, no matter the complainant.