Richard A. Schmidt, M.D. v. Ottawa Medical Center, P.C.
Docket: 01-3274
Court: Court of Appeals for the Seventh Circuit; March 5, 2003; Federal Appellate Court
Dr. Richard A. Schmidt, M.D., a shareholder-director of Ottawa Medical Center (OMC), appealed a district court ruling that deemed him not an "employee" under the Age Discrimination in Employment Act (ADEA). The court applied a functional "economic realities" test, likening Schmidt's relationship with OMC to that of a partner in a partnership rather than an employee-employer relationship. Consequently, the court granted summary judgment in favor of OMC, precluding Schmidt from pursuing his claim under the ADEA.
OMC, incorporated originally under the Illinois Medical Practice Act and later reorganized as a professional corporation in 1969, has eight shareholder-physicians, including Schmidt, who has remained a shareholder since its inception. Each shareholder has equal voting rights on compensation, amendments to employment agreements, and hiring decisions. Schmidt has served in various corporate officer roles, including secretary, and is currently a director due to a bylaw amendment that automatically grants director status to all shareholders.
OMC compensates shareholder-physicians through employment agreements and profit-sharing. Schmidt's 1976 employment agreement provides a base salary of $3,700 per month. Additionally, shareholder-physicians can receive profit-sharing compensation, which Schmidt has influenced through his voting rights. A proposed compensation plan in 1999, which would have affected Schmidt's earnings negatively, was voted down by the majority. In 2000, a new "Shareholder Employment Agreement" was adopted, but Schmidt did not sign it, resulting in his continued compensation being limited to the base salary.
An appellate court reviews summary-judgment motions de novo, favoring the nonmoving party's interpretation of the record. Summary judgment is warranted only when there are no genuine disputes over material facts and the moving party is entitled to judgment as a matter of law. In this case, the only contention is whether Dr. Schmidt qualifies as an "employee" of OMC under the Age Discrimination in Employment Act (ADEA). The ADEA defines "employee" as someone employed by an employer, who must have twenty or more employees. The court has ruled that the economic realities of the workplace, not strict adherence to state corporate forms, dictate this relationship. In EEOC v. Dowd, it was established that shareholders in professional corporations resemble partners more than shareholders in general corporations, and thus should not be counted as employees for Title VII purposes. The court is now tasked with determining if this rationale applies to classify a shareholder-claimant as an "employee" under the ADEA and what factors would define the claimant's role in the organization. This inquiry echoes previous concerns in EEOC v. Sidley Austin, where the status of demoted partners was debated, highlighting the complexities of defining employment status when control resides with a limited group of partners.
The excerpt addresses the legal classification of the 32 individuals in question under Illinois law, specifically whether they should be categorized as partners or employees under the Age Discrimination in Employment Act (ADEA). Acknowledging the complexity of this classification, the document notes that a mechanical test would unambiguously categorize the 32 as partners and, consequently, employers, thereby eliminating the need for further investigation by the Equal Employment Opportunity Commission (EEOC). However, the decision in Sidley emphasizes the application of Dowd's functional test to assess individual claimant status, indicating that not all partnerships equate to an employer-employee relationship under federal discrimination statutes.
The analysis suggests that the determination of whether an individual, such as Dr. Schmidt, is an employer or employee will require a multi-factored approach, although Dowd offers limited guidance on which specific factors to prioritize. The text references that while partnerships may share similar management and ownership characteristics, they differ in their implications for employer status, as evidenced by case law stipulating that only bona fide partners are exempt from federal discrimination statutes.
It further posits that the appropriate framework for this classification could either align with the statutory purpose of antiretaliation provisions or adhere to common law agency principles. However, the court refrained from deciding which approach to adopt in this instance, concluding that the unsettled nature of the law warranted the EEOC's continued investigation into the matter.
The Supreme Court may address the conflict between statutory purpose and agency principles in Wells v. Clackamas Gastroenterology Assocs., where the Ninth Circuit rejected the economic-realities test from Dowd. The court determined that shareholder-physicians in closely held corporations should be considered employees rather than partners to prevent them from evading federal employment-discrimination liability while benefiting from corporate advantages. The Ninth Circuit acknowledged it would not rigidly adhere to state-law forms, citing that a firm cannot avoid discrimination liability by labeling employees as "partners." However, the court did not clarify how to distinguish true partners from those improperly labeled as such, nor did it address the presumption from Darden that traditional agency principles define employee status unless Congress specifies otherwise.
Regardless of the framework applied—common-law agency principles or statutory purpose—the conclusion remains that Dr. Schmidt's role as a shareholder-physician resembled that of a genuine partner-employer rather than an employee. Control over employment opportunities is critical in agency law, which defines the master-servant relationship by the master’s right to direct the work. In contrast, partnerships are characterized by shared control and decision-making, with co-ownership being a distinguishing feature that grants partners ultimate control over the enterprise.
The Supreme Court has indicated that the purpose of federal antidiscrimination laws is to prevent entities that control access to employment from unfairly denying opportunities based on discriminatory grounds. In Hishon, Justice Powell determined that bona fide partners cannot be classified as "employees" under Title VII due to their unique governance structure that involves mutual agreement on decisions. Dr. Schmidt has been a founding shareholder-physician of OMC and has consistently participated in its management and governance, including holding a corporate officer position and a director's seat. He has equal voting rights on shareholder matters, including compensation, and although his preferences on compensation have not always prevailed, he has nonetheless exercised his voting rights. In partnership governance, majority rules apply, meaning individual partners can be bound by majority decisions. Dr. Schmidt contends that his employment agreement, which labels him as an employee and grants the board authority over patient assignments, indicates a loss of control. However, as a board member, he retains decision-making power regarding these matters, including treatment decisions for assigned patients. Thus, while he does not have sole authority over employment conditions, he shares significant control akin to that of his fellow shareholder-physicians, unlike nonshareholder-physicians, who lack such control.
The conclusion outlines that the absence of control alone does not definitively distinguish bona fide partner-employers from disguised employees, particularly when other factors may indicate a partnership. It references the case Sidley, highlighting differing views on the significance of control versus profit-sharing and liability in determining employment status. The court affirms that an individual who has the opportunity for shared control and profit in a closely held professional corporation will be considered a bona fide employer under the Age Discrimination in Employment Act (ADEA). The district court's decision is upheld, with additional notes indicating that the employment status of other non-shareholder physicians and employees is not in question. Comparisons are drawn to other cases that have similarly addressed the classification of shareholder status in professional corporations, reinforcing that such shareholders are not typically considered employees. The excerpt also discusses the Supreme Court's approach in Darden regarding the definition of "employee" as it relates to the common-law agency doctrine, emphasizing a traditional interpretation rather than one focused on legislative intent or purpose.
