January 25, 2022, Vol. 12
by Marc Campsen

Business Owners Generally Do Not Qualify For Federal Discrimination Protections

Federal discrimination statutes including Title VII, the ADA and the ADEA, among others, prohibit a wide range of discriminatory activities against an “individual” based on race, color, religion, sex, national origin, disability or age. While the language of the various statutes slightly varies, courts have conclusively agreed that an “individual” means an employee. This raises the question of whether a business owner is also considered an employee protected by federal discrimination statutes. The answer – it depends but probably not.

This scenario most often arises in disputes involving smaller businesses co-owned by several shareholders, medical practices owned by a group of physicians and law firms owned by a group of equity partners.  In ownership disputes that end-up in litigation, it is not uncommon for an owner to include in their grievances discrimination claims that open up the possibility of recovering statutory compensatory and punitive damages and attorney’s fees.  This creates a potentially significant additional monetary liability beyond the underlying ownership dispute.

To be clear, an ownership stake – alone – is not the controlling factor. Instead, courts follow the “principal guidepost” of who controls who. Typically, courts look to the following non-exhaustive factors to determine if an owner is also an employee:

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

By way of example, an equal co-owner of a business that shares in profits, that does not report directly to any individual in the business, that has equal voting rights on matters impacting the business and who cannot be unilaterally terminated by any other co-owner (i.e., requiring majority vote of co-owners) will likely not be considered an employee. In that scenario, the federal discrimination laws will not apply.

Confusion often arises even in an apparently clear-cut example as described above when the owner also enters into an employment agreement with the business. However, courts have cautioned that the “mere existence” of a document styled as an employment agreement does not override the complete analysis of the factors identified above.

In sum, co-equals among owners will rarely be considered “employees” protected by federal discrimination statutes. Notwithstanding, to avoid any unforeseen dispute regarding an owner’s status, best practices are to maintain current, comprehensive and unambiguous corporate governance documents.

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About The Author:

Marc A. Campsen is an attorney at Wright, Constable & Skeen, LLP, where he focuses his practice primarily on litigating employment and business law matters. He is recognized as a Maryland Super Lawyer.

DISCLAIMER: The materials available on this blog are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem.

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