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Supreme Court Agrees to Decide Whether Shareholders Should be Counted as Employees

By Lindsay F. Wiley [Bio]

January 13, 2003 - The Supreme Court has agreed to decide whether shareholders of a professional corporation, who are actively engaged in running the business, should count as “employees” for purposes of determining whether the corporation has enough employees to be sued under Title I of the ADA. The Court will review Wells v. Clackamas Gastroenterology Associates, P.C., 271 F.3d 903 (9th Cir. 2001) cert. granted, 123 S.Ct. 31 (2002), in which the Ninth Circuit counted four physician-shareholders of a medical corporation toward the 15-employee coverage threshold.
In finding that the physician-shareholders were employees, the Ninth Circuit panel noted that the doctors actively participated in the medical practice’s operation and management and that they “literally were employees” pursuant to employment agreements. The court asserted that professional corporations should not be allowed to reap the tax and civil liability benefits of their corporate status while simultaneously avoiding liability for discrimination by asserting that they are partnerships.
The Supreme Court granted certiorari to resolve a circuit split. The Ninth Circuit followed the Second Circuit approach, which holds that courts should look beyond the corporate status of the defendant to determine whether it is an “employer.” In contrast, the Seventh Circuit has used the economic realities test, which looks at whether shareholders actually function as partners, in which case they cannot be counted as employees. The Court’s resolution of this issue will affect not only ADA claims, but also claims raised under several other federal statutes triggered by a minimum number of employees, including the Age Discrimination in Employment Act and Title VII.