Opinion ID: 723910
Heading Depth: 3
Heading Rank: 1

Heading: Directors as Employees

Text: 33 The issue here does not involve any disputed facts; there are no material facts in dispute. Rather, we are called on to determine the legal significance of the terms and conditions of a director of J & H for purposes of the ADEA. Accordingly, we review de novo the district court's finding that J & H directors are employees for the purposes of the ADEA. 34 J & H argues that even if the EEOC acted within its authority in filing suit, the ADEA does not apply to the retirement policy because its directors are not employees within the meaning of the statute. J & H claims that the owner-officer-directors are de facto partners, and should be treated as such for purposes of the Act. We have previously held that individuals properly classified as partners are exempt from the provisions of the ADEA. Hyland v. New Haven Radiology Assocs., 794 F.2d 793, 797 (2d Cir.1986). 35 However, we also stated in Hyland that the partnership exemption is limited to actual de jure partnerships and would not be extended to closely-held corporations or other organizations whose structure resembles that of a partnership. There, we held that a plaintiff radiologist who was a corporate officer and director of a professional corporation in which there were only four stockholders, who divided profits and losses equally among themselves, was still an employee within the meaning of the ADEA, and we declined the defendants' invitation to disregard the chosen corporate form: 36 The fact that certain modern partnerships and corporations are practically indistinguishable in structure and operation ... is no reason for ignoring a form of business organization freely chosen and established.... Having made the election to incorporate, they should not now be heard to say that their corporation is essentially a medical partnership among co-equal radiologists. 37 Id. at 798. The court continued: [W]here the individual involved is a corporate employee ... we hold that every such employee is 'covered' for purposes of the ADEA and that any inquiry respecting [his] partnership status would be irrelevant. Id; see also Johnson v. Cooper, Deans & Cargill, P.A., 884 F.Supp. 43, 45 (D.N.H.1994) (following Hyland in holding that a corporate defendant is precluded from arguing that it is entitled to be treated as a de facto partnership for purposes of 42 U.S.C. § 2000e(b)). But see Fountain v. Metcalf, Zima & Co., P.A., 925 F.2d 1398, 1400-01 (11th Cir.1991) (declining to follow Hyland and applying economic realities of management, control, and ownership to determine whether member/shareholder of professional corporation should be treated as a de facto partner); EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177, 1178 (7th Cir.1984) (holding that economic realities should be examined to determine whether attorney-shareholders of a professional corporation are employees or partners for purposes of Title VII). 38 J & H argues that our opinion in Frankel v. Bally, Inc., 987 F.2d 86 (2d Cir.1993), suggests that the Hyland rule requiring strict adherence to the defendant's chosen form of organization has been undercut and that the court should look to common law principles and assess whether J & H's owner-director-officers should be treated as partners or employees. As the district court noted, see Johnson & Higgins, 887 F.Supp. at 687 n. 7, this argument is without merit. The Frankel decision, following the Supreme Court's holding in Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992), decided that the question of whether an individual is an employee or an independent contractor within the meaning of the ADEA must be determined by reference to common law agency principles, and not to a more liberal construction aimed at achieving the Act's remedial purposes. Frankel, 987 F.2d at 89-90. J & H correctly notes that the Hyland court began its analysis with a recitation of the liberal construction language subsequently rejected in Darden and Frankel, 987 F.2d at 90. However, Hyland did not turn on the court's adoption of an unduly broad definition of an employee or its deviation from the common law agency test for employment. While the court did discuss the definition of an employee and the various tests used to distinguish an employee from an independent contractor, that discussion was not directly related to its simple holding that the partnership exemption from the ADEA was unavailable to a corporate enterprise. While those who own shares in a corporation may or may not be employees, they cannot under any circumstances be partners in the same enterprise because the roles are mutually exclusive. Hyland, 794 F.2d at 798. Accordingly, Hyland remains good law, and J & H is precluded from arguing that it is exempt from the ADEA because it is a de facto partnership. 39 While Hyland prevents J & H from claiming that its directors are partners, that case does not preclude the argument that J & H should be exempt from the ADEA on account of their position as directors. The argument goes as follows: If J & H's directors are more akin to employers than employees, then they should be exempt from the provisions of the ADEA as directors, regardless of the inapplicability of the partnership exception. In other words, J & H's directors do not satisfy the definition of employees under the ADEA. 40 The ADEA's statutory definition of an employee sheds little light on this inquiry. Under 29 U.S.C. § 630(f), an employee is defined as an individual employed by any employer. Indeed, the definition of an employee under analogous statutes such as Title VII and the FLSA is equally circular. See 42 U.S.C. § 2000e(f) (defining employee as an individual employed by an employer); 29 U.S.C. § 203(e)(1) (same). Accordingly, we turn to decisional law to aid us in our inquiry into whether and under what circumstances a director may be considered an employee for purposes of the ADEA. 41 Several courts have held that, although corporate directors are traditionally viewed as employers, they may also be considered employees depending upon their position and responsibilities within the corporation. In Chavero v. Local 241, 787 F.2d 1154, 1157 (7th Cir.1986), the Seventh Circuit held that [a] director may accept duties that make him also an employee, noting that the primary consideration is whether an employer-employee relationship exists. See also Zimmerman v. North American Signal Co., 704 F.2d 347, 352 (7th Cir.1983) (holding that employee should be defined by reference to common law principles of employment and that definition should not include persons who are no more than directors of a corporation or unpaid, inactive officers). Similarly, the Sixth Circuit has held that officers and directors who also performed traditional employee duties, such as maintaining records, preparing financial statements, and managing the organization's daily business, should be considered employees for the purposes of the ADEA--regardless of their role as policy makers on the board of directors. EEOC v. First Catholic Slovak Ladies Ass'n, 694 F.2d 1068, 1070 (6th Cir.1982), cert. denied, 464 U.S. 819, 104 S.Ct. 80, 78 L.Ed.2d 90 (1983). 42 While the court in Hyland held that status as a corporate director/shareholder and status as a partner are mutually exclusive for purposes of exemption from the ADEA, it did not imply, much less hold, that all directors must be viewed as employees. Directors who do not possess the common law indicia of employment are clearly not employees. Thus the Hyland court looked to the director's role in the company to determine whether there existed an employment relationship in addition to the role of director. Hyland, 794 F.2d at 798. The two can often exist side by side, as [t]here is nothing inherently inconsistent between the coexistence of a proprietary and an employment relationship. Id. at 796 (quoting Goldberg v. Whitaker House Coop., Inc., 366 U.S. 28, 32, 81 S.Ct. 933, 936, 6 L.Ed.2d 100 (1961) (alteration in original)). 43 In assessing whether a director has assumed duties that make him an employee for purposes of the anti-discrimination laws, courts have molded the somewhat nebulous common law agency test of employment--which requires a broad examination of the totality of the circumstances--into a more manageable three-factor test: (1) whether the director has undertaken traditional employee duties; (2) whether the director was regularly employed by a separate entity; and (3) whether the director reported to someone higher in the hierarchy. Lattanzio v. Security Nat'l Bank, 825 F.Supp. 86, 90 (E.D.Pa.1993); see also Chavero, 787 F.2d at 1157 (finding no employee relationship where members of board of directors did not oversee daily operations and reported to no superior body or individual); Zimmerman, 704 F.2d at 351-52 (finding no employee relationship where directors took no active role in daily affairs of corporation and received payment only for directorial duties); First Catholic Slovak Ladies Ass'n, 694 F.2d at 1070 (finding employee relationship where members of board maintained records, prepared financial statements, managed the office, were responsible for the work to the governing body of organization, and drew salaries for their daily responsibilities); EEOC v. Pettegrove Truck Serv., Inc., 716 F.Supp. 1430, 1433 (S.D.Fla.1989) (finding employee relationship where director served essentially as manager of operations and worked for company as her full time occupation); Schoenbaum v. Orange County Ctr. for the Performing Arts, Inc., 677 F.Supp. 1036, 1038 (C.D.Cal.1987) (finding no employee relationship where trustees were active in other business pursuits and devoted only a relatively small portion of [their] time to the organization). 44 Because all three of these prongs are satisfied in this case, we conclude that, as a matter of law, J & H's directors are also employees for purposes of the ADEA. First, it is clear that J & H's directors performed traditional employee duties. They are chosen from people in senior managerial positions, and while they do take on additional oversight and policy-making responsibilities by virtue of their positions as directors, they also continue their daily duties as senior officers or managers. For example, Gardner Mundy was employed as J & H's general counsel and corporate secretary both before and after his election to the J & H Board of Directors. As such, he was responsible for overseeing the firm's legal affairs, and for keeping corporate records for J & H. Second, J & H's directors all work full time for J & H. Unlike the directors in Zimmerman, 704 F.2d at 351, and Schoenbaum, 677 F.Supp. at 1038, they are not primarily engaged in other pursuits and they devote the vast majority of their working time to their positions as senior managers or officers of the organization. Third, although the Board itself is the highest authority within J & H, the individual directors, in their capacity as officers and managers, each report to the senior members of the Board, who are responsible for their annual performance evaluations. 4 While the compensation of J & H's directors consists of a percentage of the annual profits--suggesting that they do not have a traditional employment relationship--their compensation is tied to their performance as evaluated by the senior members of the Board. This authoritative evaluation by their superiors suggests that J & H directors are employees under the common law test. Most telling is J & H's own admission that, upon election, a J & H director will continue in J & H's active service as an officer and employee of J & H or one of its subsidiaries. (Emphasis added.) 45 We attach no particular significance to the fact that a director's employment by J & H is but an aspect of the fundamentally entrepreneurial relationship that the Directors have among themselves and to the firm as a whole. This merely indicates, as the district court held, that J & H's directors have a dual status as employees and directors. Johnson & Higgins, 887 F.Supp. at 685, 688. In an unrelated ADEA suit by a former director against J & H, the Third Circuit similarly acknowledged that whether the ADEA would apply to J & H's directors is a function of [the directors'] duties and not [their] title[s]. Sempier v. Johnson & Higgins, 45 F.3d 724, 728 n. 4 (3d Cir.), cert. denied, --- U.S. ----, 115 S.Ct. 2611, 132 L.Ed.2d 854 (1995). 46 We hold the ADEA to be applicable here insofar as the mandatory retirement policy requires J & H's directors to retire as officers and managers employed by the firm. An employer cannot require senior-level employees to retire merely because they have reached the age of 60 or 62. Congress has specifically stated that the minimum mandatory retirement age for senior-level employees is 65. See 29 U.S.C. § 631(c). Simply put, any policy that requires such employees to retire, solely on account of age, before they reach 65, violates the ADEA. 47 As the district court well noted, J & H can comply with the ADEA by severing the link between the individual's employee status and his director status. Once so severed, non-employee directors are not subject to the ADEA as employees. Additionally, J & H is free to implement a mandatory retirement policy that requires them to sell their stock and cease service on the Board at any age. See 29 U.S.C. §§ 623 (no provision in this section, Prohibition of age discrimination, protecting employers from the type of discrimination at issue in this case), 630(f) (ADEA definition of employee as one employed by any employer).