When Are Shareholders Also Employees? (Disney-Themed Version)

When are shareholders considered employees

I have always believed that in the song made famous by Happy, Dopey, Sneezy and friends, they were saying “Off to work we go,” but I just checked a few sites for lyrics and the lyrics all show the dwarves singing, “It’s home from work we go.” Can this be true? Have I been mixed up all these years about which way the dwarves were going to dig dig dig with a shovel or a pick?

Work can be confusing. A non-cartoon-dwarf scenario that can be confusing is trying to determine whether shareholders in a business are also employees of that business. In today’s post, we examine that question by celebrating the 15th anniversary of a 2003 Supreme Court case. (Happy Anniversary, case! 🎂)

Like many tests for determining Who Is My Employee?, this one comes down to control and the familiar Right to Control Test.

In Clackamas Gastroenterology Associates, P. C. v. Wells, an employee of this Oregon-based medical clinic tried to sue for disability discrimination under the federal Americans with Disabilities Act (ADA). To bring claim under the ADA, though, the plaintiff must show that her employer has 15 or more employees.

The clinic had four owner/shareholders who were also physicians. If they were also employees, then the clinic had 15 employees and Ms. Wells could pursue her ADA lawsuit. If these physicians were just shareholders and not employees, then the clinic had fewer than 15, and Ms. Wells would be SOL.

The dispute made its way to the U.S. Supreme Court. The Court ruled that the proper way to determine whether the physician/shareholders counted as employees was to apply a Right to Control Test. But which version?

The standard Right to Control Test tries to distinguish between an employee and an independent contractor. Because the question here is a bit different, the test had to be adapted to fit the situation.

The Court decided that these six factors were most important for deciding whether the physician/shareholders were also employees:

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

Like the traditional Right to Control Test, this is a balancing test. Some factors may weigh in one direction, some may tilt the other way. Ultimately, a judge (or jury) needs to weigh the factors and make a determination.

In this case, the Supreme Court did not do the weighing. Instead, it articulated the test and sent the case back to the Oregon district court to weigh the factors.

So for Ms. Wells, the case left the Supreme Court and went back to the federal court in Oregon. And so the real question is: For Ms. Wells after the Supreme Court’s ruling, was it “off to court we go” (headed back to Oregon) or “home from court we go” (leaving D.C.)? I bet she never thought about that.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 188 other followers

Here’s a Tip a Cartoon Cat Would Love: Try This Edit to Your Independent Contractor Agreements

Independent contractor misclassification cat“Whenever he gets in a fix, he reaches into his bag of tricks!” Yes, boys and girls, I am talking about Felix the Cat, whose magical bag of tricks could be transformed to get him out of any treacherous situation. Don’t you wish you had one of those?

Well, I won’t share mine, but I can offer this tip, which may help you avoid a treacherous situation.

This weekend I was reading a California decision on independent contractor misclassification. (I do other, more fun things in my free time too, so don’t make fun. Ok, you should make fun a little.) While analyzing Right to Control factors, the court ruled that the worst fact for the business was that it could terminate the contractor at will. The ability to terminate a relationship at will, the court ruled, was the “ultimate” form of control! Really? I agree it’s a factor among many, but the “ultimate factor”? Come on.

Anyway, this problem is easily avoided with some creativity. Allow me to reach into my bag of tricks.

Continue reading

D.C. Court Doesn’t Fall for NLRB’s Lollipop Trick, Deems FedEx Drivers Independent Contractors

img_1042Act I, Scene 1

Location: Anywhere, USA

Boy: Can I have a red lollipop?

Mom: No, we’re eating dinner in half an hour.

Boy: (eats blue lollipop)

Mom: What are you doing? I said no!

Boy: I only asked about the red lollipop.

Too cute by half, right? Mom is no fool and easily sees through the simple trick. The boy is grounded.

Act I, Scene 2

Location:  D.C. Court of Appeals

NLRB: These FedEx drivers in Massachusetts are employees, not independent contractors.

D.C. Circuit (2009): No, they’re independent contractors.

NLRB: Ok, Connecticut then. The FedEx drivers in Connecticut are employees, not independent contractors.

D.C. Circuit (2017): Are you kidding me? We already ruled they are independent contractors.

NLRB: Last time I only asked about the drivers in Massachusetts.

Continue reading

Can You Pay a Contractor Overtime? Should You?

independent-contractor-questionsLet’s talk about good old-fashioned 1099 Independent Contractors — you know, those individuals who are happy to be called contractors until they’re released and then decide they should have been treated as employees.

When retaining a contractor, one of the goals, of course, is to ensure that the contractor is properly classified and is not really (factually) an employee. A secondary goal, however, is to limit liability if the contractor is misclassified.

Today’s question sits at the intersection of these two goals. Continue reading

How Does the IRS Determine Who is an Employee?

accountant-accounting-adviser-advisor-159804

The IRS uses a Right to Control Test to determine whether a worker is an employee for tax purposes.

If the employer has the right to control the worker, that individual is deemed an employee and the company is subject to employment tax obligations. If the company does not exercise control over the worker but instead gives that worker significant independence, then the worker is generally viewed as an independent contractor. The more control and supervision by the employer, the more likely the worker will be deemed an employee.

Continue reading

What are Right to Control Tests?

marionetteLet’s start with some basics.  Although there are many tests for determining whether a worker is an employee, the most common types of tests are Right to Control Tests.

These tests seek to determine who has the right to control the means and manner by which work is performed.  If the company has more control, the worker is generally an employee.  If the worker has more control, the worker is more likely an independent contractor.  That’s an overstatement, but it captures the gist of the issue.

Continue reading