Third Circuit Holds That Shareholder-Director Cannot Sue For Discrimination

by Pepper Hamilton LLP

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.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.