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Shareholder-Directors of Close Corporation Can Be Employees under Title VII

    Client Alerts
  • January 26, 2007

Over the past several years, the U.S. Supreme Court and lower federal courts have faced a series of cases involving covered employees and employers under Title VII.  The statute only applies to employers with 15 or more employees.  Federal courts have struggled with classifying who is an employee and should therefore be counted toward this total for jurisdictional purposes.  Last week, the First Circuit Court of Appeals concluded that shareholder-directors of a close corporation can be employees for this counting purpose.  The claim was filed by a terminated employee who alleged pregnancy discrimination.  The employer moved to dismiss the claim based on lack of jurisdiction under Title VII.  The legal question turned on whether two owners of the company were employees as defined by the statute.


The First Circuit concluded that the shareholder-directors could be Title VII employees.  The court was heavily influenced by the fact that the company listed both owners on its regular payroll.  The court rejected the employer’s argument that these owners more closely resembled partners in a partnership rather than corporate employees.  Instead, it analyzed whether the shareholder-directors in question exercised control over the organization.  The Supreme Court recently concluded that this control test determined whether physicians in a professional corporation were Title VII employees.  The First Circuit applied this same test to close corporations, and concluded in this case that summary judgment for the defendant was inappropriate.  This case illustrates the continuing deterioration of business organization as a defense against federal civil rights claims.  Persons who appear to be engaged in employment will be covered under the law, regardless of the nature of the business entity.