The Seventh U.S. Circuit Court of Appeals recently reinstated a Title VII lawsuit against a small employer after holding that two high level managers should be considered employees in determining whether the employer is subject to Title VII.
The Seventh U.S. Circuit Court of Appeals recently reinstated a Title VII lawsuit against a small employer after holding that two high level managers should be considered employees in determining whether the employer is subject to Title VII. See Smith v. Castaways Family Diner (July 18, 2006). The trial court had held that because the managers had more influence and control over the company than a regular manager, they should not be considered employees in determining Title VII coverage. The Seventh Circuit reversed this decision, holding that the right to control test articulated by the U.S. Supreme Court, upon which the trial court relied, does not apply to high level managers who have no ownership interest in the company.
In this case the plaintiff, Smith, worked as a waitress for Castaways, which is solely owned by Carrol Gonzalez. Gonzalez worked full-time in another job and her mother (Foust) and husband (Ricardo) managed the restaurant on a day-to-day basis. Both Foust and Ricardo exercised significant authority over the management of the restaurant, including hiring, disciplining, and firing the other employees without Gonzalaz' approval. However, Foust and Ricardo did not have any type of ownership interest in the restaurant.
Gonzalez did not supervise Foust or Ricardo's work or regulate the manner in which they worked and did not set their hours or require them to keep a schedule. Both Foust and Ricardo received paychecks like the other employees, although there was some evidence that Ricardo also shared in the profits and losses of the restaurant.
Smith claimed that she was sexually harassed by co-workers while she was employed at Castaways and that she complained of the harassment to Foust, who failed to take any action in response. Smith subsequently quit and sued Castaways and Gonzalez claiming gender, race, and national origin discrimination and retaliation in violation of Title VII.
The trial court dismissed the case, holding that Castaways did not employ enough workers to subject it to Title VII. Title VII only applies to businesses that employ 15 or more workers for at least 20 weeks in the relevant calendar year. In determining that Foust and Ricardo were not employees for the purposes of Title VII coverage, the trial court relied on a test articulated by the U.S. Supreme Court for determining whether shareholders should be considered employees for the purpose of Title VII coverage.
In applying the right to control test, the trial court found that Gonzalez exercised no control over Ricardo or Foust or their work and found it significant that Ricardo and Foust have "much more control over the company than a regular manager." Additionally, the trial court found that Gonzalez had no intent to treat either Ricardo or Foust like an employee and noted that Ricardo shared in the profits and losses of the restaurant.
The Seventh Circuit reversed, holding that the Supreme Court's right to control test does not apply where the individuals in question have no ownership interest in the business. While the test may be extended beyond the shareholder context, it is to be used to determine whether those with a nominal ownership interest exercise enough authority in the business to be considered employers rather than employees.
In this case, only the sole proprietor, Gonzalez, had a legal ownership interest in the business. Because the managers exercised authority that Gonzalez delegated to them, rather than authority that was inherent in their right to control the business as an owner, they could not properly be considered employers for the purposes of Title VII coverage. Thus, the Seventh Circuit held that a court must look not only at the extent of the individual's authority in controlling the business, but also the source of the authority in determining whether that person is an employer for the purposes of Title VII coverage.
Employers' Bottom Line:
Small employers in the states covered by the Seventh Circuit (Illinois, Indiana and Wisconsin), and those in other federal jurisdictions if other courts follow the Seventh Circuit's analysis, should take note of this decision if there is a question of whether they are covered by Title VII, especially if that determination depends on the status of someone who essentially "runs" the business but has no legal ownership interest.
It is possible that this litigation could have been avoided if the manager had responded appropriately to Smith's harassment complaints. Thus, even employers who are not subject to Title VII should consider implementing and enforcing a policy prohibiting illegal harassment and training managers on how to respond to harassment complaints. Such policies and training can be effective in precluding expensive litigation, such as this case.
If you have any questions regarding this decision or labor or employment issues in general, please contact the Ford & Harrison attorney with whom you usually work.