Third Circuit Holds That Shareholder-Director Cannot Sue For Discrimination

by Pepper Hamilton LLP
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The Third Circuit Court of Appeals recently ruled that a shareholder-director of a closely held family corporation was not an “employee” under Title VII, and therefore could not sue for discrimination. See Mariotti v. Mariotti Building Products, Inc., No. 11-3148, 2013 WL 1789440 (3d Cir. April 29, 2013).

Mariotti Building Products, Inc. is a “closely held family business” started by Louis S. “Babe” Mariotti in 1947. In the 1960s, Babe’s sons, plaintiff Robert Mariotti, Sr. and his two brothers, Eugene and Louis, joined the business, which eventually grew to be worth more than $60 million. In his more than 45 years with the company, Robert developed a number of business areas, training staff in the day-to-day management of several product lines. He principally managed the manufactured housing sales division, as well as customer credit, bill paying, purchasing, and the inbound transportation of product lines. He was a shareholder and an officer of the corporation, serving as both vice president and secretary and as a member of the board of directors. He was employed pursuant to an agreement that provided for termination only for “cause.”

In 1995, Robert had a religious “spiritual awakening,” which he alleged was derided by the officers, directors and employees of the company. In 2008, Babe passed away. Two days after the funeral, the company’s shareholders convened a meeting in Robert’s absence and voted unanimously to terminate his employment In the letter of termination, the company explained that various benefits would cease, including the use of a company car, health insurance coverage, a cellular telephone, access to company credit cards, and the availability of an office. The letter further indicated that “[y]our share of any draws from the corporation or other entities will continue to be distributed to you.” (The court noted that, in a closely held corporation, a “draw” is a withdrawal of money from the business to the business owner.)

Despite his termination, Robert continued to serve as a member of the company’s board of directors until August 2009, when the shareholders did not re-elect him as a director. Two months later, Robert filed a charge of religious discrimination in violation of Title VII of the Civil Rights Act of 1964. After exhausting his administrative remedies, he filed suit against the company. The company moved to dismiss the complaint, arguing that Robert was not an “employee” for purposes of Title VII. The District Court granted the motion and Robert appealed.

The Third Circuit decided that the six-part test identified by the United States Supreme Court in Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003) (brought under the Americans with Disabilities Act) governs whether Robert was an employee entitled to sue under Title VII. The six Clackamas factors are:

(1) whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work

(2) to what extent the organization supervises the individual’s work

(3) whether the individual reports to someone higher in the organization

(4) 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 a written agreement, and

(6) whether the individual shares in the profits, losses and liabilities of the organization.

The Supreme Court noted that no one factor was dispositive and cautioned against using an individual’s title as a determinative factor.

Applying the Supreme Court’s six-factor test, the Third Circuit determined that Robert’s status as a shareholder, director and corporate officer gave him substantial authority at the company and the right to control the enterprise. He participated in the management, development and governance of the company, and he had the ability to participate in fundamental decisions of the business. After his termination as a day-to-day manager of the company, Robert continued to receive distributions from the corporation in the form of draws. The court also noted that Robert continued to serve as a member of the board of directors. As a result, the court concluded that the complaint failed to allege that Robert was “the kind of person that the common law would consider an employee.” Id. at *5.

While the Mariotti case is helpful to employers, for closely held companies, the issue of whether shareholders who perform work for the company will be given the broad protections afforded employees under the discrimination laws is fact-sensitive. As the Third Circuit warned, such cases rarely are subject to a motion to dismiss. In addition, it should be noted that Pennsylvania and New Jersey have minority shareholder oppression laws that provide protection to minority shareholders in closely held corporations. Accordingly, closely held corporations should carefully review these potential protections with counsel before terminating or significantly altering the services provided to the closely held corporation by a shareholder.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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