When is a Shareholder an Employee?

June 27, 2003 Advisory

In Clackamas Gastroenterology Associates, P.C. v. Wells, decided on April 22, 2003, the United States Supreme Court held that physicians who perform medical services and manage a relatively small medical practice in the form of a professional corporation may or may not be "employees" under the Americans With Disabilities Act (the "ADA"), depending on whether or not they enjoy the "right to control" the work of others. Although this case involved a medical practice, its holding should be of great interest to professional corporations of all types. Moreover, the Court's "right to control" test undoubtedly will be used by lower courts to determine who is an "employee" under other federal employment laws.

The Holding
The Supreme Court held that the right to control test should have been used to determine if the physician-shareholders were "employees." The Court determined that, unlike the partnership analogy used by the District Court, the right to control test better suits the remedial purposes of the ADA by focusing on the nature and extent to which an individual sets the terms and conditions of employment. It summarized the test as follows: "if the shareholder-directors operate independently and manage the business, they are proprietors and not employees; if they are subject to the firm's control, they are employees." Moreover, the fact that a person holds a title of partner, officer or director or is subject to an employment agreement is not dispositive of the issue. Since this test had not been applied to the physician-shareholders of Clackamas, the Court remanded the case to the District Court for further fact-finding.

Why this is Important
The definition of "employee" that courts choose to apply is important in two respects. First, as in this case, it determines whether an employer meets the threshold for ADA coverage. Second, it also determines whether the shareholders themselves will be able to invoke the protections of these laws. This holds true not only for the ADA, but, as the Supreme Court noted, also Title VII, and the ADEA. Perhaps most importantly, shareholders of professional corporations can no longer assume that they are not employees within the meaning of federal employment laws. Because the right to control test enunciated by the Supreme Court is fact-based, the employee status of shareholders in professional corporations will vary from corporation to corporation, and perhaps even from person to person within the same corporation. Careful attention will have to be paid to the extent to which the corporation controls or dictates the manner in which professional services are performed, or leaves the manner of performance to the complete discretion of the shareholder.