In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 01-3274

RICHARD A. SCHMIDT, M.D.,

Plaintiff-Appellant,

v.

OTTAWA MEDICAL CENTER, P.C.,

Defendant-Appellee.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 00-C-7973—Elaine E. Bucklo, Judge.

____________

ARGUED OCTOBER 28, 2002—DECIDED MARCH 5, 2003

____________

Before KANNE, DIANE P. WOOD, and EVANS, Circuit

Judges.

KANNE, Circuit Judge. Does Dr. Richard A. Schmidt’s

status as a shareholder-director in a closely held professional corporation preclude him from being considered an

“employee” entitled to bring suit under the Age Discrimination in Employment Act? Applying a functional “economic

realities” test, which this Court adopted in EEOC v. Dowd

& Dowd, Ltd., 736 F.2d 1177, 1178 (7th Cir. 1984), and

recently discussed in EEOC v. Sidley Austin Brown &

Wood, 315 F.3d 696 (7th Cir. 2002), the district court

interpreted the relationship between Dr. Schmidt and

Ottawa Medical Center as more like that of a partner to

a partnership, rather than that of an employee to an
2 No. 01-3274

1 Besides the eight shareholder-physicians, there were at the

time of the complaint three nonshareholder-physicians and sixtyfive nonphysician employees working at OMC. Their status

under the Act is not at issue here.

employer. As such, the district court held that Dr. Schmidt

could not entertain suit under the ADEA and granted

summary judgment in favor of Ottawa Medical Center.

Dr. Schmidt appeals, arguing that the economic realities

dictate that he be treated as an employee under the Act.

We affirm.

HISTORY

Ottawa Medical Center (“OMC”) was originally incorporated under the Illinois Medical Practice Act, before it

reorganized itself in 1969 as a professional corporation

under the Illinois Professional Service Corporation Act. 805

ILCS 10/1 et seq. (2002). Dr. Schmidt, a family practice

physician, began his practice with OMC in 1966 and, upon

OMC’s reorganization, became a founding shareholder.

He has remained a shareholder at all relevant times since.

Including Dr. Schmidt, there are eight shareholderphysicians of OMC. Each has the right to an equal vote

on shareholder-physician compensation plans, on proposed

amendments to employment agreements, on the hiring

of nonshareholder-physicians,1

 and any other matter put

to shareholder vote. While being a shareholder-physician

of OMC, Dr. Schmidt has also frequently served as one of

its corporate officers, holding at different times vice-presidential and secretarial positions. Most recently in 1997, Dr.

Schmidt was the corporation’s secretary. During those

periods that he was a corporate officer, Dr. Schmidt

also had a seat on OMC’s board of directors. And in

March 2000, the shareholders voted to amend OMC’s
No. 01-3274 3

bylaws to provide that all shareholders, by virtue of their

shareholder status, would be directors of the corporation.

Accordingly, Dr. Schmidt is once again a director of OMC.

OMC compensates its shareholder-physicians in two

ways. First, every shareholder-physician has executed

employment agreements with OMC. Under his 1976

employment agreement, Dr. Schmidt draws a base salary

of $3700 a month. Second, each shareholder-physician

is also eligible to share in OMC’s profits via shareholder

compensation in addition to whatever base salary his or

her employment contract provides.

The formula for determining the amount of that additional compensation has been amended multiple times

by the shareholder-physicians, and Dr. Schmidt has had

the opportunity to vote on each of those proposals. Most

recently in December 1999, the shareholder-physicians

considered a plan whereby a shareholder-physician’s compensation would equal his or her net medical receipts

after deducting his or her pro rata share of overhead

expenses, pension allocation, and profit-sharing contributions. Because Dr. Schmidt’s net medical receipts would

not have entitled him to any additional compensation

under the proposed plan, he voted against it. He lost.

Moreover, a majority of shareholder-physicians voted in

2000 to adopt new “Shareholder Employment Agreements” to supercede their outstanding employment agreements with OMC. Every shareholder-physician besides

Dr. Schmidt has since entered into this new agreement. As a result of the new compensation structure, Dr.

Schmidt has since drawn only the $3700-per-month base

salary.

ANALYSIS

An appellate court reviews summary-judgment motions

de novo, viewing the record and all inferences from it in
4 No. 01-3274

the light most favorable to the nonmoving party. McCoy

v. WGN Cont’l Broad. Co., 957 F.2d 368, 370 (7th Cir.

1992). Summary judgment is appropriate only when there

is no genuine issue as to any material fact and where the

moving party is entitled to judgment as a matter of law.

Id. Here, no material facts are in dispute; the parties contest only whether the facts require Dr. Schmidt to

be treated as an “employee” of OMC for purposes of the

ADEA.

The ADEA unhelpfully defines “employee” as “an individual employed by an employer,” and an “employer” as “a

person . . . who has twenty or more employees.” 29 U.S.C.

§ 630(f), (b) (2002). To determine whether an organization has enough “employees” to qualify as an “employer”

under the ADEA, we have already decided that the economic realities of the workplace, rather than mechanical

adherence to state-law corporate forms, shall define the

relationship between the parties. EEOC v. Dowd & Dowd,

Ltd., 736 F.2d 1177, 1178 (7th Cir. 1984). In Dowd, we

found that the “role of a shareholder in a professional

corporation is far more analogous to a partner in a partnership than it is to the shareholder of a general corporation.” Id. We noted that “the economic reality of the professional corporation in Illinois is that the management,

control, and ownership of the corporation is much like

the management, control, and ownership of a partnership.”

Id. Since we did not consider bona fide partners as employees for purposes of Title VII actions, see Burke v.

Friedman, 556 F.2d 867, 869 (7th Cir. 1977) (“[W]e do not

see how partners can be regarded as employees rather

than as employers who own and manage the operation

of the business.”), we saw no reason to treat professionalcorporation shareholders differently, and thus determined that those shareholders should be excluded from

the ADEA employee count. Dowd, 736 F.2d at 1177.
No. 01-3274 5

We must now decide whether Dowd applies when we

are asked to classify an individual shareholder-claimant

as an “employee” entitled to bring suit under the Act. If

it does, and if “economic realities” control here as well,

we must then ask, does Dowd require us always to treat

Illinois professional-corporation shareholders as employers? If not, what factors will determine the actual role of

the claimant-shareholder in the operations of the involved entity? See Fountain v. Metcalf, Zima & Co., 925

F.2d 1398, 1400-01 (11th Cir. 1991).

We recently asked similar questions in EEOC v. Sidley

Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002),

where we held that the EEOC was entitled to continued

enforcement of ADEA-coverage-related requests in a

subpoena, when those requests could not be deemed

unreasonable given continuing doubt over whether 32

demoted partners should be deemed bona fide partners

(and thus employers) or de facto employees of a law firm

in which ultimate decisionmaking authority rested solely

with a few überpartners. In so ruling, we expressly refused to decide the question of the 32’s status, noting that

while they possessed many qualities indicative of bona

fide partners in a partnership under Illinois law (that is,

their income included a share of firm profits, they made

capital contributions to the firm, they were liable for firm

debts, and they had some administrative or managerial

responsibilities), their individual fates at the firm were

controlled entirely by a self-perpetuating executive management committee, which on a whim could fire, promote, demote, or raise and lower the pay of the 32. Id. at 699, 703.

Although we reserved the question of the 32’s status, had

we been prepared to accept a mechanical test—that the

use of the partnership form as recognized under Illinois

state law precluded finding the 32 as anything but partners and, thus, employers under the Act—there would
6 No. 01-3274

2 We are not the first circuit to follow Dowd to this conclusion.

See Fountain v. Metcalf, Zima & Co., 925 F.2d 1398, 1400-01 (11th

Cir. 1991) (holding that a plaintiff shareholder in a professional

corporation of accountants was akin to a partner, precluding his

status as an “employee”); cf. Devine v. Stone Leyton & Gershman,

P.C., 100 F.3d 78, 80-81 (8th Cir. 1996) (following Dowd to

determine employee count).

have been no need to continue the EEOC’s investigation

into the circumstances of the 32’s actual role in the firm.

Id. at 707 (listing additional information sought by the

EEOC that “would bear on the unavoidably multifactored

determination” of whether the 32 should be treated

as employers or employees). Our holding in Sidley, therefore, must be read to apply Dowd’s functional test

of employee status to determinations of whether an individual claimant qualifies as an employee under the ADEA.2

What remains is deciding which factors, in what we

anticipated would be a multifactored analysis, see id. at

18, shall be important to determine whether Dr. Schmidt

should be treated as an employer or an employee. Dowd

provides little guidance—there, we matter-of-factly observed that “the economic reality of the professional

corporation in Illinois is that the management, control, and

ownership of the corporation is much like the management,

control, and ownership of a partnership.” Dowd, 736 F.2d

at 1178. While that may be true, as we observed in Sidley,

all partnerships are not created equal, and, because of

this, all partners may not always be employers for purposes of the federal-discrimination statutes. Sidley, 313

F.3d at 702; see also Burke, 556 F.2d at 869 (finding

only bona fide partners exempt from the federal-discrimination statutes). We will not, therefore, interpret Dowd

to require us always to treat shareholders in Illinois

professional corporations as employers; such a result

would stand Dowd on its head, favoring, in the end, labels

over realities.
No. 01-3274 7

If not to Dowd, then where are we to look? An exhaustive discussion of the relevant case law in Sidley revealed

alternate lines of precedent suggesting this multifactored analysis could be conducted either with an eye

towards statutory purpose, see Sidley, 313 F.3d at 702 (citing Robinson v. Shell Oil Co., 519 U.S. 337, 346 (1997)

(looking to “consistency with a primary purpose of antiretaliation provisions” in deciding whether former employees were “employees” under Title VI)), or under the

general common law of agency, see id. at 705 (citing Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 323-25

(1992) (resolving the circularity of ERISA’s definition of

“employee” by incorporating into federal law commonlaw agency criteria for identifying master-servant relations)). But we could not fairly decide which approach

should govern on the facts of the case then before us: our

task was only to decide whether continued enforcement

of the coverage-related requests in the EEOC’s subpoena

was justified. The observation that the law regarding

coverage was unsettled led us to conclude that the

EEOC was entitled to investigate the issue further. Id.

at 707.

 The Supreme Court may ultimately resolve this tension between statutory purpose and agency principles

since it has granted certiorari in Wells v. Clackamas

Gastroenterology Assoc., in which the Ninth Circuit rejected Dowd’s economic-realities test in holding that

the conscious adoption of the corporate form dictated

that shareholder-physicians in closely held professional

corporations be treated as employees. 271 F.3d 903,

905 (9th Cir. 2001), cert. granted 123 S. Ct. 31 (2002).

Citing the “broad purpose” of the federal employmentdiscrimination statutes, the Ninth Circuit refused to

allow the shareholders to reap the tax, employment benefits, and civil-liability advantages of the corporate form,

while avoiding federal employment-discrimination liability by asserting that they were really partners in a
8 No. 01-3274

3 The question in Darden was whether the claimant should

be classified as an employee or an independent contractor for

ERISA purposes. And like they had done elsewhere when

“Congress has used the term ‘employee’ without defining it,” see,

e.g., Cmty. for Creative Non-violence v. Reid, 490 U.S. 730, 739

(1989) (Copyright Act of 1976, 17 U.S.C. § 101); Kelly v. S. Pac.

Co., 419 U.S. 318, 322-23 (1974) (Federal Employers Liability Act,

45 U.S.C. §§ 51-60); Baker v. Tx. & Pac. R.R. Co., 359 U.S. 227,

228 (1959) (same), the Justices “concluded that Congress intended

to describe the conventional master-servant relationship as

understood by common-law agency doctrine.” Darden, 503 U.S. at

322-23. The Court rejected the lower court’s argument that the

term should be defined in light of the purposes of the Act. Id. at

324. Although the Court had previously taken this approach

in defining “employee” for purposes of the National Labor

Relations Act, see NLRB v. Hearst Publications, Inc., 322 U.S.

111, 120-29 (1944), and the Social Security Act, United States

v. Silk, 331 U.S. 704, 713 (1947) (construing the term “in the light

of the mischief to be corrected and the end to be attained”), the

(continued...)

partnership. Id. (citing Hyland v. New Haven Radiology

Assocs., 794 F.3d 793, 796 (2d Cir. 1986) (rejecting Dowd)).

But the Ninth Circuit admitted it would not in all instances adhere mechanically to state-law forms: echoing

Justice Powell’s concurrence in Hishon v. King & Spalding, 467 U.S. 69 (1984), it would not allow a firm to

avoid liability for discrimination by labeling the bulk of

its employees “partners”. Clackmas, 271 F.3d at 905; see

also Hishon, 467 U.S. at 79 n.2 (Powell, J., concurring)

(“[A]n employer may not evade the strictures of Title

VII simply by labeling its employees as ‘partners.’ ”). The

Ninth Circuit did not discuss what approach it would

take to separate true partners from fake ones, nor did

it discuss the presumption announced in Darden that

traditional agency principles define who is an employee

unless Congress speaks otherwise. Sidley, 313 F.3d at

711 (Easterbrook, J., concurring).3
No. 01-3274 9

3 (...continued)

Court noted that after each decision was announced, Congress

had amended the statute at issue to clarify that it had meant

for traditional common-law agency principles to govern the

term’s definition. Darden, 503 U.S. at 324. That circumstance

brought about the conclusion in Darden that the agency-law

presumption announced in Reid in the wake of Congress’s action in response to Hearst and Silk had “signaled [the Court’s]

abandonment” of the purposes-focused analysis of the earlier

cases. Id. at 325.

In any event, we need not attempt to resolve this tension

here. It makes little difference in this case whether we

are guided in our analysis of the economic realities by

adherence to common-law agency principles or by attention to statutory purpose. Under either approach, we

must conclude that Dr. Schmidt’s shareholder-physician

role was akin to that of a bona fide partner-employer

rather than that of an employee.

It is beyond reproach that both agency-law principles

and statutory purpose would consider control over employment opportunities to be a relevant factor. Certainly,

in describing the master-servant relationship, agency

law focuses on control: The defining characteristic of

the master-servant relationship is the possession in the

one of the right to control the work of the other. That is,

“the relation presupposes the right of the master to

have the work executed in such manner as he directs and

a correlative duty on the part of the servant to perform

as expressly or impliedly directed by the master.”

HAROLD GILL REUSCHLEIN ET AL., THE LAW OF AGENCY

AND PARTNERSHIP at 102 (2d ed. 1990). Conversely, “[t]he

essence of [a] partnership is the common conduct of a

shared enterprise,” and as a result the recognition that

decisions important to that enterprise are made by common agreement. Hishon, 467 U.S. at 79-80 (Powell, J.,
10 No. 01-3274

concurring). Which is to say, the sharing of the control of

the enterprise, and by extension each other’s fate in it, is

the sine qua non of partnership. REV. UNIF. PARTNERSHIP

ACT § 202(a), cmt. (1997) (“[T]he attribute of co-ownership

distinguishes a partnership from a mere agency relationship . . . . Ownership involves the power of ultimate control.

To state that partners are co-owners of a business is

to state that they each have the power of ultimate control.”

(citing UNIF. PARTNERSHIP ACT § 6(1) cmt.)).

As for statutory purpose, the Supreme Court has opined

that the congressional intent behind the federal

antidiscrimination laws was to prohibit those entities

where “control over access to the job market may reside”

from “exerting any power [they] may have to foreclose, on

invidious grounds, access by an individual to employment opportunities otherwise available to him.” Ex rel.

Doe v. St. Joseph’s Hosp., 788 F.2d 411, 422-23 (7th

Cir. 1986) (discussing Sibley Mem. Hosp. v. Wilson, 488

F.2d 1338, 1340-1341 (D.C. Cir. 1973)). Perhaps it was

this recognition of statutory purpose that led Justice

Powell to conclude in Hishon that bona fide partners

cannot be considered “employees” for purposes of Title

VII because a relationship among the partners that “ ‘contemplates that decisions will be made by common agreement or consent . . . ,’ has a governance structure different from one contemplated or assumed by Title VII.”

Sidley, slip op. at 17 (emphasis added) (quoting Hishon, 467

U.S. at 79-80 (Powell, J., concurring)).

Here, Dr. Schmidt throughout his career has shared

in the management and control of OMC. He was a founding shareholder-physician of the corporation and has

remained one at all relevant times since. During most of

the last decade he was also a corporate officer and held

a seat on OMC’s board, and he once again holds a director’s seat now by virtue of his enduring status as a shareholder. As a shareholder, he possesses an equal vote in
No. 01-3274 11

all matters put to shareholder vote, including the hiring

of nonshareholder-physicians and shareholder compensation. Presumably as a director, he has in the past and

now also enjoys a voice in all matters put before the

board. Throughout his relationship with OMC and continuing to the present day, Dr. Schmidt thus has had

ample opportunity to share in the management and control of OMC.

And the mere fact that lately his preferences on

shareholder-compensation proposals have not secured

the majority opinion of his fellow shareholders does not

alter the fact that with each vote he has exercised this

right to control. Even though Dr. Schmidt rejected the

current plan because he would be affected adversely by

its passage, he nevertheless had the opportunity to participate in revising and voting on it. It is hornbook law

that majority rules dictate the governance of partnerships (in the absence of an act in contravention of the

partnership agreement or extraordinary matters), and

thus partnership law anticipates that individual partners may be bound by adverse majority decisions of the

partnership as a whole. REUSCHLEIN ET AL., supra, at 276.

It is common for partners to vote on compensation that

reflects each partner’s economic contributions to the firm.

See Hishon, 467 U.S. at 79 n.3 (Powell, J., concurring)

(“Divisions of partnership profits, unlike [common] shareholders’ rights to dividends, involve judgments as to each

partner’s contribution to the reputation and success of

the firm.”). That appears to be what has happened in

this case.

Against this conclusion, Dr. Schmidt argues that his

employment agreement, which repeatedly refers to him

as an employee, signifies a relinquishment of control

over his employment since, among other things, it vests

sole authority of patient assignment in OMC’s board.

But Dr. Schmidt is also a member of the board, which
12 No. 01-3274

confers upon him decisionmaking authority with respect

to these matters, including patient assignments. Moreover, his employment agreement vests in him absolute

authority for the treatment of his patients once assigned

to him. Therefore, while Dr. Schmidt may not possess

sole authority over the conditions of his employment

(that is, he only shares that complete authority in equal

parts with other members of the board), he does exercise significant control. And since each of the seven

other shareholder-physicians are governed by similar

employment agreements, Dr. Schmidt exercises as much

control over his employment as any other member of

OMC. By contrast, the nonshareholder-physicians have

no ability to exercise any control over patient assignments or any other matter put to the directors or shareholders.

CONCLUSION

We need not determine here whether the absence of

control in and of itself will distinguish bona fide partneremployers from disguised employees when the presence

of other factors may favor partnership. Compare Sidley,

313 F.3d at 702-03 (discussing the absence of control as

a factor weighing in favor of classifying the 32 demoted

partners as employees), with id. at 709-10 (Easterbrook, J.,

concurring) (relying on the presence of profit-sharing

and the spectre of unlimited liability as characteristics

in favor of treating the 32 as bona fide partner-employers),

and REUSCHLEIN ET AL., supra, at 250 (“Many decisions

permit management to be centralized in one partner, or

a small committee of partners. Where this is done, coownership is still found to exist frequently but only if

the other factors are consistent with partnership.”). We

only hold that when an individual claimant-shareholder enjoys the opportunity for shared control of the
No. 01-3274 13

closely held professional corporation, including the opportunity to share in its profits, we will treat him or her

as a bona fide employer for purposes of the ADEA. The

decision of district court is therefore AFFIRMED.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—3-5-03