Fourth Circuit Refuses to Allow a Law Partner’s Title VII Claim to Proceed – Placing Limits on the Law’s Protections

March 8, 2021 Equity Agreements

A critical point of contention in Lemon v. Myers Bigel, P.A., No. 19-1380 (4th Cir. Jan. 19, 2021) was who is considered an “employee” under Title VII’s anti-discrimination and retaliation provisions.  Shawna Lemon, a then equity partner at the law firm of Myers Bigel, P.A., filed a lawsuit alleging discrimination and retaliation claims under Title VII and race discrimination under Section 1981.

In a forty-three-page opinion, Judge Louise Flanagan of the Eastern District of North Carolina dismissed all of Lemon’s claims and denied Lemon’s request to amend her complaint.  Regarding Lemon’s Title VII claims, the lower court ruled that she was not an “employee” as contemplated by Title VII, given her role as an equity partner.  The Fourth Circuit affirmed – but also recognized that determining who is an employee is a fact-specific inquiry.

Background

Lemon was initially hired by the North Carolina law firm Myers Biger, P.A., in 2001 as an associate.  As an associate, her employment agreement expressly referred to her as an employee.  In 2007, she became an equity partner.  Under the terms of the shareholder agreement, each shareholder received an equal number of shares (5,000) and had the same number of votes.  In 2009, the firm amended its shareholder’s agreement to remove all instances of the word “employee,” but it did not expressly supersede Lemon’s initial employment agreement.

In 2016, the firm investigated gender discrimination allegations, hiring an outside firm to conduct the investigation.  Lemon provided statements to the investigator, which were later shared with the firm’s Board.  After this, Lemon and other shareholders’ relationships deteriorated where one shareholder allegedly claimed that Lemon “played the black card too much.”  

Shortly after that, at a Board meeting, Lemon requested to benefit from the shareholder’s short-term disability plan.  The Board asked that she leave the meeting to discuss her request and the alleged discriminatory and retaliatory acts identified in the investigative report.  The Board voted 17-3 to deny her request for leave.  Lemon alleged the managing shareholder then began discussing ways to “punish[]” her for her “bad behavior.”  Ultimately, Lemon resigned and subsequently sued the firm. 

The district court dismissed Lemon’s Title VII claims because she had failed to allege sufficient facts in her complaint that showed that she was an employee and within Title VII’s scope.  The court dismissed Lemon’s Section 1981 claim because she failed to allege sufficient facts to show that denial of her leave was because of her race.

The Fourth Circuit’s Opinion

Title VII’s anti-discrimination provision makes it “unlawful for an employer to…discriminate against any individual with respect to his compensation, terms, condition, or privilege of employment.”   Likewise, an employer may not discriminate “against any of his employees” because they “opposed any practice made unlawful” under Title VII.  To be protected by these provisions, the individual asserting a claim must show she is an employee. 

Even though Title VII defines “employee” as an “individual employed by the employer,” the Fourth Circuit ruled the definition was “short on substance.”  Relying on the Supreme Court decision, Clackamas Gastroenterology Associations, P.C. v. Wells, 538 U.S. 440 (2003), the appeals court ruled that the common law’s agency principle (the conventional master-servant relationship) defines who is an employee under Title VII.  Labels are not dispositive.  Instead, the integral factor of this relationship is whether the employer has control, which is a fact-specific inquiry evaluated using the Clackamas non-exhaustive six-factor test:

  • Whether the organization has the authority to hire or fire the individual or set the rules and regulations of the individual’s work;
  • Whether and, if so, to what extent the organization supervises the individual’s work;
  • Whether the individual reports to someone higher in the organization;
  • Whether and, if so, to what extent the individual is able to influence the organization;
  • Whether the parties intended that the individual be an employee, as expressed in written agreements and contracts; and
  • Whether the individual shares in the profits, losses, and liabilities of the organization.

According to the Fourth Circuit, applying the Clackamas factors to Lemon’s allegations was not a difficult task.  As a partner and co-equal owner of the firm with an equal vote on all matters impacting the firm, the Fourth Circuit ruled that Lemon was not an employee.  This conclusion was supported by the fact, according to the appeals court, that:

  • No one owned a more significant share of the firm;
  • No one had greater voting power;
  • No one had a greater right to run for election to the Management Committee within the Board; and
  • No one had a greater power to assume any other roles on the Board.

As an equal shareholder, Lemon could set the firm’s “rules and regulations” with her voting power.  Although Lemon claimed that others supervised her work, the appeals court disagreed.  Instead, according to the Court, Lemon enjoyed a “high degree of independence in discharging her duties,” and the review of the quality of her work applied equally to each shareholder, and no other shareholder could require revisions to her work.  She could only be terminated by a majority vote of the full Board (including her vote). 

Lemon pointed to her employment agreement as evidence of her employee status, which the court quickly dismissed.  Even though the shareholder’s agreement did not supersede her initial employment agreement, it was a “written expression of the intention that associates promoted to partners shed their employee status.”  Based on its review of these factors, the Court concluded Lemon was not an employee as contemplated by Title VII because no one exerted control over her.  To decide otherwise “would contradict the image of control” and “treat an individual with so much freedom and so little oversight as an employee.”

Takeaways

Law firms, like many other partnerships, can be complex and involve several hierarchical levels.  This case represents a law firm with a bi-level hierarchy: with associates supervised by junior or senior partners and equity partners at the top.  With facts similar to those in this case, it is more likely than not that equity partners are not employees but are co-owners. 

However, what matters again is how the factors are applied and if a plausible argument can be made that control rests with others.  The Fourth Circuit opinion signaled that even where there are “inevitable differences in personal influence [they] do not negate a partner’s basic standing in the firm.”  In larger firms with a more complex structure with senior associates, of counsel, non-equity partners, department heads, and office heads, the Clackamas factors may weigh in favor of some of these groups being classified as employees – a question left open by the Fourth Circuit’s opinion. 

This is not to say that there may not be any recourse to individuals who are not employees under Title VII.  Like other employment contracts, under state law, shareholder agreements may have an implied duty of good faith and fair dealing.  Section 205 of the Restatement of Contracts recognizes that contracts impose upon each party a duty of good faith and fair dealing in its performance and its enforcement.  This requires parties to be faithful to agreed-upon principles and consistent with justified expectations.  Also, state anti-discrimination laws may extend protection beyond traditional “employees.”

 

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