Owner Exclusion from Title VII

A recent case from the Third Circuit, the federal appellate court covering Pennsylvania, clarifies the limitations of employment laws for owners of closely-held corporations.

Mariotti v. Mariotti Building Products, Inc., No. 11-3148, 2013 WL 1789440 (3d Cir. April 29, 2013).

Plaintiff, Robert Mariotti, was an officer, shareholder, and director of Mariotti Building Products, Inc. (MBP) which was a closely held family business started by Plaintiff’s father, Louis Mariotti.  The Plaintiff served as both vice-president and secretary to the company.  Plaintiff and his brothers were employed in the business pursuant to an agreement which provided for termination “only for cause.”  In 1995, Plaintiff had a “spiritual awakening” which he claimed resulted in “systematic antagonism” from the company’s officers, directors, and some employees. 

In early 2009, after the death of Plaintiff’s father, Eugene Mariotti, Plaintiff’s brother, derided Plaintiff and his faith.  At the funeral, Plaintiff gave a eulogy, which included comments about his faith, which upset some family members.  Two days later, the shareholders of MBP convened without the Plaintiff and voted unanimously to terminate his employment.  On January 10, 2009, the Plaintiff received notice of his termination in a letter that explained that certain benefits would cease, including health insurance and access to company credit cards.  The letter further indicated that Plaintiff would continue to receive a draw from the corporation.

After his termination, Plaintiff remained a member of MBP’s board of directors until August 2009 when the shareholders did not reelect him as a director.  The Plaintiff then filed a charge of religious discrimination and hostile work environment in violation of Title VII of the Civil Rights Act of 1964 against MBP.  MBP moved to dismiss the claim, arguing that the Plaintiff was not an employee under Title VII and therefore could not invoke its protections.  The District Court granted the motion and Plaintiff appealed.

The Third Circuit upheld the District Court’s dismissal, holding that the Supreme Court’s test in Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003) applies to business entities that are not professional corporations.  The Third Circuit, applying Clackamas, looked to the following six factors from the Equal Employment Opportunity Commission (EEOC) to determine whether Plaintiff was an employee for purposes of Title VII:

[1.] Whether the organization can hire or fire the individual or set the rules and regulations of the individual's work

[2.] Whether and, if so, to what extent the organization supervises the individual's work

[3.] Whether the individual reports to someone higher in the organization

[4.] Whether and, if so, 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

[6.] Whether the individual shares in the profits, losses, and liabilities of the organization.

The Third Circuit concluded that the Plaintiff was not an employee for purposes of Title VII.  The court noted that the analysis focused on the amount of control and the source of the individual’s authority.  After reviewing the Plaintiff’s complaint, the Third Circuit found that his status as a shareholder, director, and corporate officer gave him significant control and authority at MBP.  As a director and corporate officer, Plaintiff had the ability to participate in fundamental decisions of the business. In addition, the Plaintiff continued to serve on the board of directors after his termination until August 2009. The court further noted that the termination letter did not cease Plaintiff’s salary.  The Third Circuit therefore concluded that the Plaintiff was not an employee for purposes of Title VII.

Take Away

Business owners do not receive all of the legal protection of employees.  The Clackamas / Mariotti line makes clear that business owners do not receive the protections of the Americans with Disabilities Act (“ADA”) or Title VII.  Similarly, a business owner is not entitled to collect unemployment compensation upon termination.  Whether a person is a “business owner” for these purposes depends on the level of control they can exert over the business and ownership alone is not dispositive.

The business owner need not be at the mercy of a group of fellow shareholders however.  There are contractual ways for an owner to protect him or herself.  Shareholder agreements that require other shareholders to purchase the shares of a terminated shareholder is one such alternative.  Employment agreements that incorporate the ADA and Title VII by reference may also create a breach of contract claim that is co-extensive with the statutory rights that the business owner would otherwise be ineligible.