Opinion ID: 413281
Heading Depth: 1
Heading Rank: 2

Heading: Discriminatory Effect of the Company's Shareholder Preference Plan

Text: 27 The plaintiffs also charge that the Company's shareholder preference plan illegally discriminates against black and Spanish-surnamed employees (1) in assigning the better jobs with higher pay and more guaranteed hours to the shareholder-employees, who were exclusively of Italian ancestry, and (2) by limiting share ownership to persons who were of Italian ancestry and were either members of the family or close friends of a current shareholder. 28 The Company argues that Title VII has no application to discrimination in the sale of corporate stock. Even if this is so, however, it does not help the Company's position here. Since the Company ties preferential wages, hours, and job assignments to ownership of its stock, the shareholder preference plan constitutes a condition of employment subject to the mandate of Title VII. The Company's organization closely entangles stock ownership and employment privilege, but the predominant characteristics are those of employment. The Company describes itself as a membership corporation. At least a quarter of its employees are stockholders, each of whom binds himself or herself under the bylaws and stockholders' agreement to permanent, full-time employment. Stockholders also agree not to withdraw from employment without the express consent of the board of directors. The stock is not freely transferable: Upon the death of a stockholder, his or her shares vest in the board, which then issues them to a successor. Each stockholder owns an equal interest in the company, represented by a block of 100 shares. The shareholders never possess their share certificates, as they are retained by the board of directors. While we decline to lay down an all-encompassing rule, under these circumstances the admittedly discriminatory employment practices of the Company are within the reach of Title VII in spite of the effort to characterize those practices as proprietory rights. 29 Having found Title VII applicable, we analyze the claim of discrimination under the disparate impact theory articulated by the Supreme Court in Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971). As the Company concedes, the shareholder preference plan, while neutral on its face, has a discriminatory impact on the Company's minority employees. In situations such as this, where a facially neutral employment practice, plan, or procedure has a disproportionately adverse effect on minorities, discriminatory intent need not be demonstrated. See, e.g., International Brotherhood of Teamsters v. United States, 431 U.S. 324, 349 n.32, 97 S.Ct. 1843, 1861 n.32, 52 L.Ed.2d 396 (1976); Gibson v. Local 40, Supercargoes & Checkers of the International Longshoremen's and Warehousemen's Union, 543 F.2d 1259, 1268 (9th Cir. 1976). 30 Because the disparate impact of the shareholder preference plan is clear, the burden shifts to the Company to demonstrate that legitimate and overriding business considerations provide justification. See, e.g., Albermarle Paper Co. v. Moody, 422 U.S. 405, 425-35, 95 S.Ct. 2362, 2375-2380, 45 L.Ed.2d 280 (1975); Contreras v. City of Los Angeles, 656 F.2d 1267, 1275-80 (9th Cir. 1980), cert. denied, 455 U.S. 1021, 102 S.Ct. 1719, 72 L.Ed.2d 140 (1982). To meet this burden, the Company points to an allegedly superior interest in protecting and providing for members of the immediate families of the founders of the Company. But Title VII case law has from the beginning made clear that nepotistic concerns cannot supersede the nation's paramount goal of equal economic opportunity for all. 31 The issue has most frequently arisen in the context of nepotistic preferences for union membership. In Local 53 of the International Ass'n of Heat and Frost Insulator & Asbestos Workers v. Vogler, 407 F.2d 1047 (5th Cir. 1969), the Fifth Circuit held that, [i]n pursuing its exclusionary and nepostistic policies, Local 53 engaged in a pattern and a practice of discrimination on the basis of race and national origin both in membership and referrals. Id. at 1050. The court noted that [w]hile the nepotism requirement is applicable to black and white alike and is not on its face discriminatory, in a completely white union the present effect of its continued application is to forever deny to negroes and Mexican-Americans any real opportunity for membership. Id. at 1054. 32 The Fourth Circuit followed Vogler in a similar case involving a nepotistic employment preference, rejecting the union's reliance on a constitutional right to pursue a livelihood: 33 The desire of a union to insure family security by restricting new membership to the sons and close relatives of present members may constitute a legitimate business purpose. But it cannot override the racial impact where present union membership is all-white. 34 Robinson v. Lorillard Corp., 444 F.2d 791, 798 n.5 (4th Cir. 1971). 35 These cases are consistent with the Supreme Court's admonishment that under Title VII, practices, procedures, or tests neutral on their face, and even neutral in terms of intent, cannot be maintained if they operate to 'freeze' the status quo of prior discriminatory employment practices. Griggs, 401 U.S. at 430, 91 S.Ct. at 853. We cited Griggs in Gibson, supra, where we held that an employer's discriminatory practice of assigning jobs partly on the basis of nepotism violated Title VII. 543 F.2d at 1268. Other courts have continued to prohibit nepotistic practices which adversely affect minorities by freezing the discriminatory status quo. See, e.g., Grant v. Bethlehem Steel Corp., 635 F.2d 1007, 1019 (2d Cir. 1980); Domingo v. New England Fish Co., 445 F.Supp. 421, 435-36 (W.D.Wash.1977). 36 We reject the Company's argument that its legitimate interest in protecting its family members overrides the countervailing national interest in eliminating employment discrimination based on race and national origin. To the extent that preferential wages, hours, and job assignments are tied to ownership of the Company's stock, the shareholder preference plan violates Title VII because the plan's effect is 37 to discriminate against [plaintiffs] with respect to [their] compensation, terms, conditions, or privileges of employment because of [their] race, color, ... or national origin. 38 42 U.S.C. Sec. 2000e-2(a). 39 We emphasize that our decision by no means interferes with the capacity of the proprietors of a small family-owned business, or, for that matter, any small business, to conduct its affairs with heightened solicitude toward family or friends. In enacting Title VII, Congress specifically exempted employers with twenty-five or fewer employees from its coverage. Civil Rights Act of 1964, Pub.L.No. 88-352, 78 Stat. 253, Title VII, Sec. 701(b) (codified as amended at 42 U.S.C. Sec. 2000e(b)). In 1972 Congress amended the section to exclude from coverage employers with fifteen or fewer employees, Equal Employment Opportunity Act of 1972, Pub.L.No. 92-261, 86 Stat. 103, Sec. 2(2) (currently codified at 42 U.S.C. Sec. 2000e(b)), though the House version of the bill had originally suggested an even lower threshold. See H.R.Rep. No. 238, 92d Cong., 2d Sess., reprinted in 1972 U.S.Code Cong. & Ad.News 2137, 2155, 2161. The inclusion of this provision demonstrates Congress's due regard for the special concerns of smaller businesses. Here, however, we deal with an enterprise employing nearly 500 people. The family consists of more than 100 members and at one time included as many as 208. We will not dilute Title VII's imperative by altering the balance Congress has already struck. 40 We need not decide whether a restriction on the ability to purchase or own the Company's shares in and of itself would also violate Title VII. We note in passing that under this unusual share ownership plan, the payment of dividends might be equivalent, for purposes of Title VII, to the payment of a wage premium. Every shareholder must be of Italian ancestry. The distribution of dividends to this group of preferred employees might be no different than the payment of a wage premium to the same group of employees and might therefore violate Title VII. We reserve ruling, however, since neither the issue nor the evidence is squarely before us. 41 We reverse the district court's dismissal and remand for a hearing on whether there is any other justification for this discriminatory practice.