United States 7th Circuit Court of Appeals Reports
SMITH v. CASTAWAYS FAMILY DINER, 453 F.3d 971 (7th Cir.
2006) Cyndee SMITH, Plaintiff-Appellant, v. CASTAWAYS
FAMILY DINER and Carrol A. Gonzalez, doing business as
Castaways Family Diner, Defendants-Appellees. No. 05-3467.
United States Court of Appeals, Seventh Circuit. Argued
February 6, 2006. Decided July 18, 2006.
Appeal from the United States District Court for the
Northern District of Indiana, Allen Sharp, J. Page 972
Anna M. Hearn (Argued), Blachly, Tabor, Bozik & Hartman,
Valparaiso, IN, for Plaintiff-Appellant.
J. Thomas Vetne (Argued), Jones Obenchain, South Bend, IN,
for Defendants-Appellees.
Before FLAUM, Chief Judge, and ROVNER and SYKES, Circuit
Judges.
ROVNER, Circuit Judge.
Plaintiff Cyndee Smith filed suit against her former
employer, Castaways Family Diner (“Castaways”) and its sole
proprietor, Carrol A. Gonzalez, under Title VII of the
Civil Rights Act of 1964, 42 U.S.C. § 2000e(b)
(“Title VII” or the “Act”), complaining of discrimination
on the basis of sex, race, and national origin and also
retaliation. The district court entered summary judgment
against Smith on her Title VII claims, concluding that
Castaways and Gonzalez were not “employers” who were
covered by the Act because they did not have at least
fifteen “employees” for the requisite period of time. The
court excluded the two individuals who manage the
restaurant from the tally, reasoning that in view of their
day-to-day authority to operate the business independently
on Gonzalez’s behalf, they should not be counted as
employees of the restaurant. See Clackamas Gastroenterology
Assocs. v. Wells, 538 U.S. 440, 123 S.Ct. 1673, 155 L.Ed.2d
615 (2003). Because the district court erred in excluding
these two individuals from the roster of employees on
summary judgment, we reverse and remand.
I.
Castaways is a family restaurant located in Knox, Indiana.
Gonzalez, the restaurant’s sole proprietor, works full-time
in the health care industry. Her mother, Phyllis Foust, and
her husband, Ricardo Gonzalez (“Ricardo”), manage the
restaurant on a day-to-day basis. Gonzalez does not
supervise their work and does not regulate the manner in
which they work. She does not set their hours or require
them to keep a schedule. Ricardo works full-time in the
kitchen, creates the restaurant’s menu, and orders the
supplies. Foust runs the front of the restaurant, handles
the bookkeeping together with Gonzalez, and has the
authority to issue checks drawn on Castaway’s bank account
(although the record suggests that she rarely if ever
exercises that authority).[fn1] Page 973 Both Foust and
Ricardo have the authority to establish the policies and
procedures to be followed by the restaurant’s employees.
They also have the power to hire, discipline, and fire the
restaurant’s other workers without first securing
Gonzalez’s approval. Like the other people who work at
Castaways, both Foust and Ricardo receive regular
paychecks. Ricardo also shares in the profits and losses of
the restaurant, although the record tells us nothing about
how, why, and to what extent he does so. Gonzalez has never
considered either Foust or Ricardo to be her employee.
Smith worked part-time as a waitress at the restaurant for
a period of approximately four months beginning in March
2003. According to Smith, shortly after she commenced work
at Castaways, two of her co-workers — a cook and a
busboy — began to sexually harass her. The alleged
harassment included both lewd remarks as well as
inappropriate touching and attempts to touch her. Smith
perceived that there were aspects of the alleged harassment
that involved race and national origin as well: the cook
and busboy were of a different race and national origin
than Smith, who is white. Smith represents that she went to
Foust about the harassment but that Foust was unmoved.
“You’re easier to replace than a cook,” Foust allegedly
told her. “I’m not going to do a lot about this.” As Smith
saw it, she had no other option than to quit the diner in
July 2003.
Six months after her departure, Smith filed a charge of
discrimination with the Equal Employment Opportunity
Commission (the “EEOC” or the “Commission”). As later
amended, Smith’s charge asserted that she had suffered
harassment and discrimination on the basis of sex, race,
and national origin. In addition, she contended that
Castaways had retaliated against her for complaining about
the harassment. The EEOC eventually closed its file on the
charge without making any findings and issued Smith a
notice of her right to sue.
Smith filed suit against Castaways and Gonzalez in Indiana
state court. Her original complaint asserted only state-law
claims of battery, negligent hiring and supervision, and
infliction of emotional distress. However, upon receipt of
the EEOC’s notice of her right to sue, Smith amended her
complaint to include Title VII claims of sex, race, and
national origin discrimination as well as retaliation. Once
the complaint was amended to include the federal claims,
Castaways and Gonzalez removed the case to federal court.
Title VII only applies to businesses who employ fifteen or
more employees for at least twenty weeks in a relevant
calendar year, see 42 U.S.C. § 2000e(b), and from
the get-go, the defendants asserted that Castaways did not
meet that threshold. They initially raised this as a
challenge to the district court’s subject-matter
jurisdiction, but consistent with our decision in
Komorowski v. Townline Mini-Mart & Rest., 162 F.3d 962, 964
(7th Cir. 1998) (per curiam), the district court held that
the fifteen-employee minimum was not a jurisdictional
requirement but rather an element of Smith’s prima facie
case of employment discrimination. R. 30, 32. (The Supreme
Court’s recent decision in Arbaugh v. Y & H Corp., ___ U.S.
___, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006), has since
made clear that the requirement is not jurisdictional.) The
parties then engaged in discovery limited to the question
of whether Castaways had employed at least fifteen
individuals for the requisite period of twenty weeks in
either 2003, when the alleged discrimination occurred, or
2002. See § 2000e(b) (employer must meet threshold
either in “the current or preceding calendar year”);
Komorowski, Page 974 162 F.3d at 965-66 (for purposes of
§ 2000e(b), “current calendar year” means the year
in which the alleged discrimination occurred). Review of a
defendant’s payroll records is usually the starting point to
determine whom the defendant employed during the relevant
time period. See Walters v. Metro. Educ. Enters., Inc., 519
U.S. 202, 206-07, 117 S.Ct. 660, 663, 136 L.Ed.2d 644
(1997). Regrettably, multiple alleged computer failures
resulted in the loss of Castaways’ payroll records. Neither
side was able to produce any evidence as to the number of
people Castaways employed in 2002. For 2003, the parties
relied on cancelled Castaways checks, their own
recollections, and other information to try and reconstruct
an employee roster. However, disputes emerged as to whether
Ricardo and Foust should be counted as employees and as to
whether certain other workers who admittedly qualified as
employees were engaged for long enough periods in 2003 to
put Castaways over the fifteen-employee/twenty-week
minimum.[fn2] Ultimately, Castaways moved for summary
judgment contending that the evidence was insufficient on
this score.
The district court concluded that Castaways did not have
fifteen or more employees for a period of twenty weeks in
2003. The pertinent analysis is set forth in the magistrate
judge’s report and recommendation, R. 39, which the
district judge, “[w]ithout taking the trouble to write a
law journal article,” adopted as his own in a brief order,
R. 42 at 2.
First, the court rejected Smith’s assertion that Ricardo
and Foust should be considered employees. Applying the
multi-factor test that the Supreme Court has adopted for
determining whether partners, major shareholders,
directors, and the like qualify as employees, see Clackamas
Gastroenterology Assocs. v. Wells, supra, 538 U.S. at
449-50, 123 S.Ct. at 1680; Solon v. Kaplan, 398 F.3d 629,
632-33 (7th Cir. 2005), the court found it significant that
defendants “d[o] not exercise any control over [Ricardo and
Foust] or their work”; rather than reporting to Gonzalez,
Ricardo and Foust “`run the show.'” R. 39 at 7 (quoting
Gonzalez Aff. § 8). The day-to-day authority that
Ricardo and Foust exercise over the diner’s operation and
workforce convinced the court that they have “much more
influence and control over the company than a regular
manager.” Id. Gonzalez had averred in her affidavit that she
did not consider either of them to be an employee (a
sentiment that Foust shared in her own affidavit), so there
was no evident intent that Ricardo or Foust be treated as
employees. Id. at 8. And finally, Ricardo shared in the
profits and losses of the restaurant, a fact that would
distinguish him from the ordinary employee. Id.
Second, the court concluded that four other employees, who
initially were thought to have been employees of the diner
for the majority of 2003, actually were employed for time
periods too short to put Castaways over the
fifteen-employee/twenty-week threshold. The defendants
themselves, in answer to Smith’s interrogatories, at first
acknowledged that these four people were in their employ
throughout most of 2003. Subsequently, however, the
defendants contended that their acknowledgment was based on
a typographical error in the employee roster they had
relied upon. On further checking, they realized that each
of these employees had only worked at the diner for very
brief amounts of time in 2003: two of Page 975 the
individuals had worked just five days that year, another had
worked for approximately two weeks, and the fourth had
worked for at most one or two months. The defendants
submitted affidavits setting forth these
belatedly-discovered facts. The court rejected Smith’s
contention that the tardiness of the correction left its
veracity open to question. “Although it is unfortunate that
Defendants did not discovery this discrepancy earlier, it
does not appear that Defendants are acting in bad faith by
now attempting to correct the earlier mistake. . . . Aside
from questioning the timing of the correction, Plaintiff
provides no evidence that demonstrates that these
individuals were indeed employed longer than Defendants now
claim.” R. 39 at 9-10.
With Ricardo and Foust excluded altogether from the
employee tally, and with the other four workers removed
from the tally during the weeks they were not actually
employed at Castaways, Smith was unable to show that
Castaways surmounted the fifteen-employee/twenty-week
threshold. By the court’s calculation, the evidence even
construed favorably to Smith indicated that defendants had
fifteen or more employees for only thirteen weeks in 2003.
R. 39 at 10. Smith was therefore unable to establish this
element of a prima facie case under Title VII, mandating
summary judgment in the defendants’ favor on the Title VII
claims. The non-federal claims were remanded to state
court. Id. at 11; R. 42 at 2.
II.
In her appeal, Smith contends that the district court erred
both in concluding that Foust and Ricardo were not the
defendants’ employees and in accepting the defendants’
belated correction as to the length of time the four other
employees had worked at the restaurant in 2003. Because the
case was resolved on summary judgment, our review is of
course de novo. E.g., Payne v. Pauley, 337 F.3d 767, 770
(7th Cir. 2003). As it turns out, our analysis begins and
ends with Foust and Ricardo. The parties agree that all six
of the individuals whose status is at issue in this appeal
must be treated as the defendants have proposed in order to
sustain the district court’s judgment — that is,
Ricardo and Foust must be excluded from the employee tally
altogether, and the other four employees must be included
only for the short periods of time indicated in the
defendants’ corrected tally. Thus, if we conclude that the
district court erred in its treatment of any one of these
individuals, then we must reverse the grant of summary
judgment in the defendants’ favor. For the reasons that
follow, we conclude that on the record before the district
court, Foust and Ricardo were erroneously excluded from the
roster of Castaways employees.
As we have mentioned, Title VII applies only to an employer
who “has fifteen or more employees for each working day in
each of twenty or more calendar weeks in the current or
preceding calendar year.” 42 U.S.C. § 2000e(b). The
Age Discrimination in Employment Act, 29 U.S.C. §
630(b), and the Americans with Disabilities Act, 42 U.S.C.
§ 12111(5), have similar thresholds. The purpose of
these minimums is to facilitate the entry of small
businesses into the marketplace by sparing them “from the
potentially crushing expense of mastering the intricacies
of the antidiscrimination laws, establishing procedures to
assure compliance, and defending against suits when efforts
at compliance fail.” Papa v. Katy Indus., Inc., 166 F.3d
937, 940 (7th Cir. 1999).
Who constitutes an “employee” for purposes of the threshold
is a recurring question in employment discrimination cases.
Like the other federal antidiscrimination statutes, Title
VII unhelpfully defines “employee” Page 976 as “an
individual employed by an employer.” 42 U.S.C. §
2000e(f). The Supreme Court has aptly observed that this
sort of language “is completely circular and explains
nothing.” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318,
323, 112 S.Ct. 1344, 1348, 117 L.Ed.2d 581 (1992). Darden
dealt with who qualifies as an employee for purposes of the
Employee Retirement Income Security Act (“ERISA”), a statute
that defines “employee” in exactly the same way as Title
VII. See 29 U.S.C. § 1002(6). Finding no help in
that definition, the Court in Darden looked to the
common-law definition of the master-servant relationship to
determine who qualifies as an “employee.” Id. at 323-24,
112 S.Ct. at 1348.
Following the Supreme Court’s lead, the EEOC has
articulated a list of sixteen factors derived from Darden’s
common-law test to identify those individuals who qualify
as “employees” for purposes of Title VII and its companion
antidiscrimination statutes. EEOC Compliance Manual (CCH)
§ 7110(A)(1), at 5716-17 (2003). See Slingluff v.
Occupational Safety & Health Com’n, 425 F.3d 861, 867-68
(10th Cir. 2005). These factors touch upon all aspects of
the relationship between employer and worker, but their
collective focus is on “whether the employer controls the
means and manner of the worker’s work performance.” EEOC
Compliance Manual (CCH) § 7110(A)(1), at 5716. In
this way, the multi-factored test distinguishes an
employee, whose work performance is controlled by the
employer, from an independent contractor, who is engaged to
perform work for the employer but has the freedom to choose
the method and manner by which he completes that work. At
common law, that distinction has been an important factor
in determining when an employer is liable to third parties
for the misdeeds of those performing work on the employer’s
behalf. See RESTATEMENT (SECOND) OF AGENCY §§
219, 220, 250 (1957) (hereinafter, the “Restatement”). And
as Darden illustrates, courts have come to rely on the same
distinction to determine when an employer owes statutory
obligations — including the duty of nondiscrimination
— to persons working on its behalf.
But the Darden-derived test turns out not to answer the
question presented by this case. Although defendants have
made much of the independence with which Foust and Ricardo
manage the restaurant, they rely on that autonomy not to
show that Foust and Ricardo are independent contractors
rather than employees, but rather to show that they
exercise so much authority as to be employers rather than
employees. It is on the latter distinction that the Supreme
Court’s decision in Clackamas comes into play.
In Clackamas, 538 U.S. 440, 123 S.Ct. 1673, 155 L.Ed.2d
615, the Supreme Court articulated a test for determining
whether the shareholders and directors of a professional
corporation should be counted as “employees” or rather as
“employers.” The defendant in Clackamas was a medical
clinic that had been sued by its former bookkeeper for
disability discrimination under the ADA. The question
presented was whether the clinic’s four physicians, who
owned the shares of the professional corporation and
constituted its board of directors, qualified as “employees”
for purposes of the ADA’s fifteen-employee threshold. As in
Darden, the Court looked to the common law regarding the
master-servant relationship:
At common law, the relevant factors defining the
master-servant relationship focus on the master’s control
over the servant. The general definition of the term
“servant” in the Restatement (Second) of Agency §
2(2) (1957), for example, refers to a person whose work is
“controlled or is subject to the right to control by the
master.” See also id., Page 977 § 220(1) (“A
servant is a person employed to perform services in the
affairs of another and who with respect to the physical
conduct in the performance of the services is subject to
the other’s control or right to control.”). In addition,
the Restatement’s more specific definition of the term
“servant” lists factors to be considered when
distinguishing between servants and independent
contractors, the first of which is “the extent of control”
that one may exercise over the details of the work of the
other. Id. § 220(2)(a). We think that the
common-law element of control is the principal guidepost
that should be followed in this case.
538 U.S. at 448, 123 S.Ct. at 1679.
In selecting “the common-law element of control” as its
polestar, the Court found itself in agreement with the
EEOC, which itself had considered the circumstances under
which partners, officers, members of boards of directors,
and major shareholders of business organizations might
constitute employees of those organizations. In the EEOC’s
view, the relevant inquiry was “`whether the individual
acts independently and participates in managing the
organization, or whether the individual is subject to the
organization’s control.'” Id. at 449, 123 S.Ct. at 1680
(quoting EEOC Compliance Manual § 605:0009 (2000)).
The Commission had identified six factors to consider in
answering that question:
Whether the organization can 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 or contracts
Whether the individual shares in the profits, losses, and
liabilities of the organization.
Id. at 449-50, 123 S.Ct. at 1680 (quoting EEOC Compliance
Manual § 605:0009 (2000)). The Court in Clackamas
specifically agreed that each of these six factors is
relevant in assessing the status of a shareholder-director.
Id. at 449, 123 S.Ct. at 1680. No one of these factors is
dispositive, the Court emphasized. Id. at 451, 123 S.Ct. at
1681. Rather, a court must look to all aspects of the
relationship between the shareholder-director and the
organization and decide whether the shareholder-director
exerts control (or has the right to exert control) over the
organization and its workforce or is instead herself subject
to the organization’s control. Id. at 450-51, 123 S.Ct. at
1680-81. The former amounts to an employer, and as such
must be excluded from the employee roster for purposes of
the fifteen-employee minimum; only the latter constitutes
an employee who may be counted toward the statutory
threshold. See id. at 445 n. 5, 450-51, 123 S.Ct. at 1677 n.
5, 1680-81.
The defendants, in moving for summary judgment, and the
district court, in granting summary judgment, assumed
without discussion that the Clackamas test can always be
used to determine whether a highly-placed worker like
Ricardo or Foust is an employee for Title VII purposes.
Certainly our own decision in Solon v. Kaplan, supra, makes
clear that the Clackamas test is not confined to
shareholder-directors, but properly may be applied to
partners, officers, members of boards of directors, and
major shareholders, as the EEOC itself envisioned in framing
the test that Clackamas adopted. 398 F.3d at 633; see EEOC
Compliance Manual (CCH) § 7110(A)(1)(d), at 5718-19.
But the propriety of applying Clackamas Page 978 even more
broadly to managers, supervisors, and other highly-placed
employees is open to question. As we have noted, the purpose
of the Clackamas test is to distinguish “employers” from
“employees.” 538 U.S. at 445 n. 5, 123 S.Ct. at 1677 n. 5.
“Employers” are those whose authority and interests are so
aligned with the business as to render them the legal
personification of the business, i.e., principals rather
than agents. See E.E.O.C. v. Sidley Austin Brown & Wood, 315
F.3d 696, 709-10 (7th Cir. 2002) (Easterbrook, J.,
concurring in the judgment). Those who own an interest in
and/or hold office with the business are the individuals
who may amount to “employers” in this sense, for they
potentially have the right to dictate the decisions of the
business and control the actions of its workers that a mere
“employee” would not have. Of course, ownership or office
can be nominal. Someone can be a called a “partner,” for
example, yet in fact lack any authority to make decisions
for the firm; he might be just as much at the mercy of
those who really run the firm as a clerk would be. See
Clackamas, 538 U.S. at 446, 450-51, 123 S.Ct. at 1678,
1680-81; Sidley Austin Brown & Wood, 315 F.3d at 702
(majority); id. at 709 (concurrence). The six factors set
forth in Clackamas thus serve to distinguish individuals
whose title or ownership in the business comes without
meaningful authority to run the business from those whose
office or stake in the company is genuine.
Notably, however, neither Ricardo nor Foust holds the type
of position that would typically bring the Clackamas test
into play. Unlike the physician-shareholders at issue in
Clackamas, neither of them holds an ownership interest in
Castaways by virtue of being a shareholder or equity
partner, for example. As the sole proprietor of the
business, Gonzalez is the only person who can be described
as an owner. Moreover, neither Ricardo nor Foust occupies
an office (e.g., officer or member of a board of
directors)[fn3] that might carry with it the right to vote
on the decisions taken by Castaways. Legally, Gonzalez as
the sole proprietor is Castaways; she is the individual,
whether by hands-on management or delegation to others of
her choosing, who decides the course of the business. See,
e.g., Pagan v. State, 809 N.E.2d 915, 919 (Ind.Ct.App.
2004) (defining sole proprietorship as a business in which
one person owns all assets, owes all liabilities, and
operates the business in his own personal capacity) (citing
BLACK’S LAW DICTIONARY 1398 (7th ed. 1999)); see also
Moriarty v. Svec, 164 F.3d 323, 336 (7th Cir. 1998)
(Manion, J., concurring) (noting that sole proprietorship
has no legal identity apart from individual who owns it).
What power Foust and Ricardo do have is the authority
delegated to them by Gonzales to run the restaurant on her
behalf. Having a full-time job of her own, Gonzalez has
ceded near-total if not total managerial discretion to
them. Without Gonzalez’s input, they hire and fire other
employees, determine the schedules and rules by which those
employees work, set the menu, and otherwise make the
day-to-day decisions necessary to operate the restaurant.
It was this managerial authority that Foust and Ricardo
exercise in practice that persuaded the district court to
find, pursuant to Clackamas, that neither one of them
qualifies as an “employee” for purposes of Title VII but
rather that both are “employers.”[fn4] That reasoning
assumes that Page 979 Clackamas functions not only to
exclude from the class of “employees” those persons whose
title or ownership in the business carries with it
meaningful authority to participate in the governance of the
business, but also to exclude those individuals who,
although they hold no office or equity within the business,
have been delegated the authority to run the business on
behalf of those who do. This second application of
Clackamas would function as a liberal type of veil-piercing,
treating as an “employer” rather than an “employee” any
individual who exercises a sufficient degree of managerial
authority, irrespective of the source of that authority.
There are reasons to doubt that this application of
Clackamas would be appropriate.
First, consistent with the common-law tradition, the cases
interpreting “employee” for purposes of Title VII and other
statutes concerning the rights of employees typically have
not drawn a distinction between managers or supervisors and
other workers. See, e.g., Galdamez v. Potter, 415 F.3d
1015, 1022-23 (9th Cir. 2005) (Title VII); see also Guthart
v. White, 263 F.3d 1099, 1105 (9th Cir. 2001) (Labor
Management Relations Act). The authority that a supervisor
possesses to act on the employer’s behalf certainly can be
relevant in assessing the employer’s liability to others
for the supervisor’s misdeeds. See Faragher v. City of Boca
Raton, 524 U.S. 775, 802-03, 118 S.Ct. 2275, 2290-91, 141
L.Ed.2d 662 (1998). But that authority does not distinguish
the supervisor in kind from other employees. See id. at
800, 118 S.Ct. at 2289 (“The employer generally benefits
just as obviously from the work of common employees as from
the work of supervisors; they simply have different jobs to
do, all aimed at the success of the enterprise.”); see also
Packard Motor Car Co. v. N.R.L.B., 330 U.S. 485, 488, 67
S.Ct. 789, 792, 91 L.Ed. 1040 (1947) (“Every employee, from
the very fact of employment in the master’s business, is
required to act in his interest.”). As the Restatement
explains:
The word “servant” does not exclusively connote a person
rendering manual labor, but one who performs continuous
service for another and who, as to his physical movements,
is subject to the control or to the right to control of
the other as to the manner of performing the service. The
word indicates the closeness of the relation between the
one giving and the one receiving the service rather than
the nature of the service or the importance of the one
giving it. Thus, ship captains and managers of great
corporations are normally superior servants, differing
only in the dignity and importance of their positions from
those working under them. The rules for determining the
liability of the employer for the conduct of both superior
servants and the humblest employees are the same; the
application differs with the extent and nature of their
duties.
RESTATEMENT § 220(1), comment a; see also id. Ch. 7,
tit. B, Introductory Note (“[F]ully employed but highly
placed employees of a corporation . . . are not less
servants because they are not controlled in their
day-to-day work by other human beings. Their physical
activities are controlled by their sense of obligation to
devote their time and energies to the interests of the
enterprise.”); id. § 2, comment c. At a fundamental
level, then, a supervisor or manager, however highly
placed, is still an employee. Like any other employee,
Page 980 he serves the employer’s interests and, like other
employees, he has interests as a servant that are distinct
from those of the employer.
This is a point that the Supreme Court recognized in
Packard Motor Car. The question in that case was whether
foremen on automobile production lines should be treated as
“employees” with the right to organize or rather as
“employers” who could not invoke the advantages of the
National Labor Relations Act (“NLRA”). The Court described
as “too obvious to be labored” the notion that a foreman
qualified as an employee both “in the most technical sense
at common law as well as in common acceptance of the term.”
Id. at 488, 67 S.Ct. at 791. The Court acknowledged that a
foreman acts on his employer’s behalf in a number of
respects. Id. at 488-89, 67 S.Ct. at 791-92. (The record in
Packard Motor Car indicated that the foremen were
responsible for maintaining production output and quality
as well as the promotion, demotion, and discipline of line
workers. See id. at 487, 67 S.Ct. at 791.) But a foreman’s
supervisory duties, in the Court’s view, did not so align
his interests with those of his employer as to render the
foreman himself an “employer” for purposes of the NLRA:
Even those who act for the employer in some matters,
including the service of standing between management and
manual labor, still have interests of their own as
employees. Though the foreman is the faithful
representative of the employer in maintaining a production
schedule, his interest properly may be adverse to that of
the employer when it comes to fixing his own wages, hours,
seniority rights or working conditions. He does not lose
his right to serve himself in these respects because he
serves his master in others. . . .
Id. at 489-90, 67 S.Ct. at 792.[fn5]
Second, a distinction must be drawn between the power that
a supervisor or manager exercises as of right and the power
that he exercises by delegation. It is not at all unusual
for the owner of a business enterprise to bring someone
else in to run the business on her behalf, just as Gonzalez
has done. In practice, that person may be given virtually
unbounded day-to-day discretion and authority in operating
the business. Nonetheless, he exercises that discretion and
authority at the pleasure of the business owner; he has no
inherent right, as the owner does, to control the business.
In that respect, his position is no different from that of
any other worker: he could be overruled (and, depending on
the terms of his employment contract, fired) just as
summarily as the lowest ranked employee. By contrast, the
owner of a business, even if he chooses not to exercise it,
always has the right to control the direction and operation
of the business. See Schmidt v. Ottawa Med. Ctr., P.C., 322
F.3d 461, 466 (7th Cir. 2003) (“`Ownership involves the
power of ultimate control.'”) (quoting REV. UNIFORM
PARTNERSHIP ACT § 202(a), cmt. (1997)); see also
RESTATEMENT § 2(1) (“A master is a principal who
employs an agent to perform service in his affairs and who
controls or has the right to control the physical conduct
of the other in the performance of the service.”) (emphasis
supplied). It is not happenstance, then, that the EEOC has
articulated a special test for determining when partners,
corporate officers, members of boards of directors, Page
981 and major shareholders qualify as employees for
purposes of Title VII: those are the types of individuals
who, if their status is not purely titular, have a right to
participate in the governance of the business and to
control the work of its employees that is not wholly
dependent on the acquiescence of their superiors. See
Schmidt, 322 F.3d at 466-67 (discussing the power that
partners have to participate in governance of business).
And that is precisely why the Supreme Court adopted the
EEOC’s test in Clackamas: to determine whether the
physicians’ status as shareholders and directors of a
professional corporation gave them sufficient control over
the business of the corporation as to render them
“employers” rather than “employees”. See Clackamas, 538 U.S.
at 442, 123 S.Ct. at 1676 (“The question in this case is
whether four physicians actively engaged in medical
practice as shareholders and directors of a professional
corporation should be counted as `employees.'”); id. at 445
n. 5, 123 S.Ct. at 1677 n. 5 (“our inquiry is whether a
shareholder-director is an employee or, alternatively, the
kind of person that the common law would consider an
employer”).
Given that Ricardo and Foust have no apparent ownership
interest or office in Castaways, the test that the Supreme
Court and the EEOC have articulated for owners, partners,
directors and the like would seem to be inapposite. Again,
so far as the record reveals, any authority that Foust and
Ricardo exercise they wield by delegation rather than by
right. Gonzalez, as the sole proprietor of the business,
enjoys the inherent power to overrule their decisions and,
for that matter, send them both packing. See Schmidt, 322
F.3d at 466 (“The defining characteristic of the
master-servant relationship is the possession in the one of
the right to control the work of the other.”); RESTATEMENT
§ 2(1). Certainly their skill and experience (and
her own full-time job) might dissuade Gonzalez from taking
such a step, but the point is that she as the sole owner of
the business has the prerogative to do so. The record
discloses no fact suggesting that Foust and Ricardo enjoy
any authority comparable to that of a partner or director
— e.g., the right to bring Gonzalez’s business
decisions to a vote, or to dissolve the business. See
Schmidt, 322 F.3d at 466-67. Without Gonzalez’s
acquiescence in their decisions, their authority over the
business would be no greater than that of any other
employee.
One argument for applying the Clackamas test to a highly
placed worker who holds no ownership interest or office in
the enterprise might be to determine whether the named
owners, directors, and officers of the business are mere
marionettes whose strings are being pulled by the purported
employee. It is not unheard of for businesses to be
established in the name of nominal owners and directors
whose purpose is to hide the identity of the real power
behind the throne. This has been done to shield a
business’s income and assets from creditors, for example,
see, e.g., Scott v. Comm’r of Internal Revenue, 70 T.C. 71,
82-85, 1978 WL 3380 (Tax Ct. 1978), and to fraudulently
secure public contracts reserved for women- and
minority-owned businesses, see, e.g., Matt O’Connor & Ray
Gibson, U.S. Alleges Huge Fraud in Chicago Minority Pacts,
CHICAGO TRIBUNE, Sept. 26, 2003, available at 2003 WLNR
13862720; Ray Gibson & Matt O’Connor, Controller describes
Duff firms’ workings, CHICAGO TRIBUNE, Jan. 25, 2005,
available at 2003 WLNR 23444528.[fn6] In such situations,
it might be appropriate to use the Clackamas test as a
veil-piercing tool and to designate the person who truly is
running the business an “employer” Page 982 rather than
an “employee.” But no one is suggesting that Gonzalez’s
ownership of Castaways is a sham. By all accounts, she is
the one and only owner of the business; she simply has
delegated to others the authority to run it in her stead.
Our decision in Solon, 398 F.3d 629, illustrates the
significance of having the right rather than the privilege
of participating in the governance of the business. The
plaintiff in Solon was a former law firm partner who, in
relevant part, alleged that he had been removed from the
partnership in violation of Title VII in retaliation for
speaking out against sexual harassment allegedly taking
place within the firm. Because the plaintiff had been a
general partner in the firm, we sustained the district
court’s determination that he was not an employee who could
sue for relief under Title VII. See id. at 631-32
(assuming, in light of parties’ agreement, that Title VII
protects “employees” but not “employers,” and collecting
cases). A total of twenty-one attorneys had worked for the
firm, including general partners, special partners, and
associates. The power attendant to the plaintiff’s position
as a general partner figured prominently in our decision
that he constituted an employer under Clackamas:
By 1998, Solon was one of only four general partners. The
partnership agreement allowed for his involuntary
termination only by a two-thirds vote of the general
partners, meaning that the other three had to agree
unanimously to remove him. Holding one quarter of the
total voting power, Solon also exercised substantial
control over how to allocate the firm’s profits, and
whether to require additional capital contributions, make
financial commitments, amend the partnership agreement,
and dissolve the firm. Because special or general partners
could be added to the firm only by a unanimous vote of the
existing general partners, Solon possessed a unilateral
veto power over new admissions. In addition to his voting
rights, Solon held an equity interest in the firm, shared
in its profits, attended the partnership meetings, and
had access to private financial information. Each of
these benefits distinguished him from the firm’s special
partners and associates.
Id. at 633. The plaintiff had also served as the firm’s
managing partner for several years until just prior to his
removal, and we cited the additional powers he exercised in
that capacity as further support for our conclusion. Id.
The plaintiff had argued that the powers conferred on him
by the partnership agreement were illusory because, in
practice, the firm routinely ignored that agreement. We
found no factual support for that contention, however. Id.
The record also failed to support the plaintiff’s
contention that notwithstanding his status, he had no
actual authority over the firm’s affairs because in
practice he was supervised closely by the other partners:
Solon had substantial control over the firm; control that
he exercised in fact as managing partner, and control that
he had the right to exert by virtue of the partnership
agreement. Plaintiff’s assertion that he consulted with
his fellow partners before making major decisions may
demonstrate that he was passive, but it does not show that
he was powerless. Nor does his contention that he was
outvoted undermine the conclusion that he was an employer.
Plaintiff was one of four general partners who, by virtue
of his voting rights, substantially controlled the
direction of the firm, his employment and compensation,
and the hiring, firing, and compensation of others. He
played an active role in the operation of the firm as
trustee of its 401(k) account, as managing partner, and
informally thereafter. Under Page 983 the facts of this
case, he was an employer as a matter of law.
Id. at 634 (citation omitted).
Our opinion in Schmidt v. Ottawa Med. Ctr., supra, 322 F.3d
461, likewise highlights the significance of an
individual’s right to have a say in the decisions of the
business. As in Clackamas, the issue in Schmidt was whether
the plaintiff, a physician and shareholder-director in the
professional corporation that operated the medical center
where he worked, should be treated as an employer for
purposes of the ADEA. The plaintiff sought to challenge the
medical center’s shareholder compensation plan pursuant to
the ADEA; whether he was properly classified as an
“employer” or “employee” determined whether he was entitled
to bring suit. See Sidley Austin Brown & Wood, 315 F.3d at
698 (“the ADEA protects employees but not employers”). At
the time of our decision, Clackamas had not yet been
decided, and we acknowledged uncertainty as to what factors
ought to guide our assessment of a shareholder-director’s
status. 322 F.3d at 463-65. What persuaded us that the
plaintiff should be classified as an employer regardless of
which methodology was used was the plaintiffs right, as
both a shareholder and director, to participate in the
governance of the corporation:
As a shareholder, he possessed an equal vote in all
matters put to shareholder vote, including the hiring of
nonshareholder-physicians and shareholder compensation.
Presumably as a director, he has in the past and now also
enjoys a voice in all matters put before the board.
Throughout his relationship with OMC and continuing to the
present day, Dr. Schmidt has thus had ample opportunity to
share in the management and control of OMC.
And the mere fact that lately his preferences on
shareholder-compensation proposals have not secured the
majority opinion of his fellow shareholders does not alter
the fact that with each vote he has exercised this right
to control. Even though Dr. Schmidt rejected the current
plan because he would be adversely affected by its
passage, he nevertheless had the opportunity to
participate in revising and voting on it. . . .
Id. at 467.
In short, Solon and Schmidt confirm that the source of an
individual’s authority has an important bearing on whether
he is appropriately classified as an employer or employee.
In both cases, the plaintiff occupied a position (partner
or shareholder/director) which by right gave him a vote in
the affairs of the organization. That right did not
necessarily enable the plaintiff to impose his own will on
the organization: in Solon, the plaintiff had been removed
from the partnership, and in Schmidt, an unfavorable
compensation plan had been adopted over the plaintiff’s
objection. But in each case the plaintiff’s status entitled
him to a say in the fundamental decisions of the business
that other workers (e.g., associates, special partners, and
non-shareholders) did not enjoy.
There is no evidence in this record suggesting that either
Foust or Ricardo possesses a comparable status with
Castaways. If there were, then it would be appropriate to
apply Clackamas. But in the absence of evidence that an
individual occupies a position in the enterprise that may
give him or her the right to exercise control over the
enterprise and its workers, the Clackamas test strikes us
as inapposite. This is not to say that supervisors,
managers, and other highly placed employees like Foust and
Ricardo do not exercise substantial authority in practice,
but rather that they do so subject to the delegation and
acquiescence of owners, directors, and the like who have a
right rather than a privilege to control the business.
Clackamas, Page 984 we believe, is aimed at identifying
the latter category of individuals.
All this may simply be another way of saying that the
Clackamas test, even if it properly can be applied to an
individual who, like Foust and Ricardo, occupies no
position within an enterprise akin to partner, shareholder,
or director that might confer on him the right to exert
control over the enterprise, was misapplied here.
Determining whether an individual controls or has the right
to control an enterprise, and thus constitutes an employer,
must take into account not only the authority that person
wields within the enterprise but also the source of that
authority. Specifically, a court must consider whether the
individual exercises the authority by right, or whether he
exercises it by delegation at the pleasure of others who
ultimately do possess the right to control the enterprise.
Compare RESTATEMENT § 2(1) (“A master is a principal
who employs an agent to perform service in his affairs and
who controls or has the right to control the physical
conduct of the other in the performance of the service.”)
(emphasis supplied); with id. § 2(2) (“A servant is
an agent employed by a master to perform service in his
affairs whose physical conduct in the performance of the
service is controlled or is subject to the right to control
by the master.”) (emphasis supplied); see also Clackamas,
538 U.S. at 448, 123 S.Ct. at 1679.
This consideration is absent from the district court’s
analysis. The court instead looked at the day-to-day
authority over the restaurant that Foust and Ricardo
exercise, without asking whether they exercise that power
by right, as a partner of Gonzalez’s might, or rather at
her delegation and discretion. Similarly, the court found
it significant that Gonzalez does not supervise their work
and that they do not report to her, overlooking the point
that as the sole owner of the business, she of course has
the right to exercise such oversight. So far as the record
reveals, Foust and Ricardo’s ability to run the business is
dependent upon Gonzalez’s willingness to acquiesce to their
actions. They have no status comparable to hers as an owner
that would convey an independent right to participate in
decisions affecting the business. Gonzalez has chosen to be
a hands-off owner, but consider what could happen if she
changed her mind. As the owner of Castaways, it would be her
prerogative to direct and supervise the work of Foust and
Ricardo, to assume responsibility for hiring, firing, and
discipline of employees, to establish rules for Foust,
Ricardo, and the rest of the staff to follow, and for that
matter to fire Foust and Ricardo. For their part, Foust and
Ricardo would have no right, as a fellow owner, partner, or
director might have, to overrule or at least vote upon
Gonzalez’s decisions. In that respect, they are as subject
to control by Gonzalez as any other employee of the
restaurant. See RESTATEMENT § 2(2). And to that
extent, their interests are not congruent with, and are
potentially adverse to, Gonzalez’s interests as the
business owner. See Packard Motor Car Co., 330 U.S. at
489-90, 67 S.Ct. at 792.
We are, of course, aware that neither Clackamas nor the
EEOC test that it adopted mentions the source of the
individual’s authority as a relevant consideration. It is
hinted at in at least one of the test’s six factors: the
first question posed is “[w]hether the organization can
hire or fire the individual or set the rules and
regulations of the individual’s work,” 538 U.S. at 449, 123
S.Ct. at 1680 (emphasis ours), a phrasing that suggests a
court should consider whether an individual is subject to
being overruled or discharged, even if in practice he
appears to enjoy substantial autonomy. See RESTATEMENT
§ 2(2). More to the point, the significance of the
source of an individual’s authority is Page 985 implicit
in the framing of the test as one for partners, major
shareholders, directors, and the like. For as we have
discussed, those are the types of individuals whose status
within an enterprise potentially gives them authority that
is not dependent on the acquiescence of others. Clackamas
itself speaks not only of the control that an employer
exercises but his right to exert such control. Id. at 448,
123 S.Ct. at 1679 (quoting RESTATEMENT § 2(1)).
Referencing the right to control implicitly acknowledges
that employer may choose not to exert it, as by delegation.
See RESTATEMENT § 220(1) comment d (“In some types
of cases which involve persons customarily considered as
servants, there may . . . be an understanding that the
employer shall not exercise control.”).
The district court noted one fact as to Ricardo —
that he shared in the profits and losses of Castaways with
Gonzalez — that is consistent with his being an
employer. Generally speaking, sharing in the profits,
losses, and liabilities of an enterprise is an indicum of
ownership, and an owner can qualify as an employer. See
Clackamas, 538 U.S. at 450, 123 S.Ct. at 1680. Of course,
the fact that Castaways is a sole proprietorship is
inconsistent with the notion that the business might have
any owner other than Gonzalez. But putting aside that
conundrum, what matters for our purposes is the lack of
elaboration in the record as to how and why Ricardo shares
in the profits and losses of the business. We don’t know,
for example, whether he does so simply by virtue of his
marital relationship with Gonzalez or whether he has some
type of agreement with her that gives him a cognizable
stake in the business. Without more information, the mere
fact that he “shares” in the profits and losses of the
business tells us very little about whether his status is
closer to that of an employer than an employee, particularly
in view of the additional fact that Ricardo and Foust
otherwise receive regular paychecks just like other
employees of the restaurant. In theory, further evidence as
to Ricardo’s sharing in the profits and losses of the
business might reveal that he has something like an
ownership interest in the business, and such an interest
might lend additional weight to the notion that he is an
employer rather than an employee. But on this record, the
evidence is insufficient to support the finding that he is
the former rather than the latter.
We add that Ricardo’s status as Gonzalez’s spouse, and
Foust’s status as her mother, does not support the finding
that they are employers. Their relationships with Gonzalez
certainly may explain why Gonzalez has delegated to them
the authority to run the restaurant on her behalf. But
their ties to Gonzalez do not give them any more of a right
to control the business than any other manager Gonzalez
might have hired; their authority is entirely dependent on
her acquiescence. Again, one need only consider what might
happen if they became estranged from Gonzalez: she would
have every right as the owner to give them the boot, and
they would have no authority, as a partner, director, or
major shareholder might, to resist that decision.
We conclude our analysis with a few words about the
interplay between our holding and the underlying purposes
of Title VII. See Sidley Austin Brown & Wood, 315 F.3d at
702 (majority) (“[s]tatutory purpose is relevant” in
considering whether partners of large law firm should be
treated as employees or employers). As a statute aimed at
preventing and remediating invidious discrimination in the
workplace, Title VII (like its companion
anti-discrimination statutes) should be liberally
construed. E.g., Komorowski v. Townline Mini-Mart & Rest.,
supra, 162 F.3d at 965; Veprinsky v. Fluor Daniel, Page
986 Inc., 87 F.3d 881, 888-89 (7th Cir. 1996).
Characterizing someone as an employer rather than an
employee directly affects the reach of Title VII in two
different ways. First, categorizing an individual as an
“employer” may well preclude that individual from filing
suit under Title VII, as it is thought that only an
“employee” is entitled to invoke the protections of the
statute. See Solon, 398 F.3d at 631-32 (assuming without
deciding that Title VII does not protect those individuals
who constitute “employers”); Sidley Austin Brown & Wood,
315 F.3d at 698 (ADEA). Second, as this case demonstrates,
treating an individual as an employer excludes him or her
from the workers who will be counted towards the
fifteen-employee threshold, and consequently may altogether
remove a firm from the coverage of Title VII. In our view,
both ramifications serve to demonstrate why it is
inappropriate to focus on the authority and independence
that an individual exerts within an enterprise while being
blind to whether that authority and independence is
exercised by right or by delegation.
Without some status as an owner, partner, director or the
like that grants a worker the right to vote and participate
in the management of the enterprise, that worker’s
influence ultimately is dependent on those who do have such
a right. And because the worker is at their mercy, she is
just as vulnerable as any other employee to employment
decisions that may be discriminatory. Like any other
employee, then, she ought to be able to invoke the
protections of Title VII. Cf. Sidley Austin Brown & Wood,
315 F.3d at 702 (majority) (“it can be argued that partners
should be classified as employers rather than employees for
purposes of the age discrimination law because partnership
law gives them effective remedies against oppression by
their fellow partners . . .”).
Similarly, an individual who is given managerial or
supervisory authority but has no right comparable to that
of a partner, owner, or director to govern the business has
interests that are distinct from those who do enjoy that
right and are congruent with the interests of lower-ranking
employees. See Packard Motor Car Co., 330 U.S. at 489-90,
67 S.Ct. at 792. As we have observed, highly placed
employees who have no inherent right to participate in the
governance of the business are as subject to the control of
the business principals as any other employee. Their
decisions might be overruled, their pay might be docked,
their hours might be altered, their positions might be
eliminated. Ibid. In the fundamental sense that they lack
the right to control the enterprise, they are like other
employees and should be counted as such in determining
whether the business meets the fifteen-employee minimum. A
small business owner like Gonzalez has the option of running
the business herself, without the need for persons like
Foust or Ricardo to act in her stead. In that way, she
might keep the number of employees below Title VII’s
threshold. If instead, she chooses to engage another person
to run the business on a day-to-day basis for her, without
giving him a stake in the business that lets him share the
power to control it, then she is taking on an additional
employee that may put her workforce over the statutory
threshold, just as if she had taken on an additional cook,
server, cashier, or busboy.
We noted at the outset of our analysis that if the district
court erred in excluding from the employee tally any one of
the individuals whose status was disputed, then the error
would require the reversal of the summary judgment entered
in the defendants’ favor. For the reasons we have
articulated, the undisputed facts do not support the
district court’s finding that Foust and Ricardo are
employers rather Page 987 than employees. The court
therefore erred in granting summary judgment on this basis.
We need not and do not reach the other employees whose
status is disputed.
III.
The district court erred in determining on summary judgment
that Phyllis Foust and Ricardo Gonzalez constitute
employers rather than employees. As the inclusion of one or
both of these two individuals suffices to put Castaways
over Title VII’s fifteen-employee threshold, the entry of
summary judgment in favor of defendants Castaways and
Carrol Gonzalez was in error. We REVERSE the entry of
summary judgment in defendants’ favor and REMAND for
further proceedings consistent with this opinion.
[fn1] Of the many photocopied checks in the record issued by
Castaways in 2003, none was signed by Foust.
[fn2] There is a high turnover among Castaways employees.
Evidently it is not uncommon for individuals to work for
the restaurant for a matter of weeks or even days, in some
cases just long enough for them to pay their rent or buy
groceries.
[fn3] As a sole proprietorship, of course, Castaways has no
formal corporate structure.
[fn4] The district court did not explicitly label Foust and
Ricardo as “employers,” but that finding is implicit in the
court’s determination that their authoritative role in the
business excludes them from the definition of “employee.”
The purpose of the Clackamas test, after all, is to
distinguish an “employer” from an “employee.” 538 U.S. at
445 n. 5, 450-51, 123 S.Ct. at 1677 n. 5, 1680-81; Solon,
398 F.3d at 632-33.
[fn5] The Court in Packard Motor Car ultimately sustained
the National Labor Relation Board’s determination that
foremen qualified as “employees” with the right to organize
under the NLRA. 330 U.S. at 491-93, 67 S.Ct. at 793-94.
Congress subsequently amended the NLRA to expressly exclude
foremen and other supervisory employees from the NLRA’s
definition of “employee”. See 29 U.S.C. § 152(3).
Title VII, of course, contains no such exclusion for
supervisory employees.
[fn6] Citations to “WLNR” are to the Westlaw NewsRoom
database.