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New ADA Ruling

As most LegalBrief subscribers are aware, the Americans with Disabilities Act (ADA) applies to all employers hiring 15 or more employees for at least 20 weeks. When determining if a small business is subject to the ADA, do you count owners of the business that also work in the business?

If you are a long-term reader of works that I have authored or have attended any of my seminars, you know that I am concerned that ADA imposes significant burdens and penalties on employers without clearly defining when the Act applies and what employers are required to do. This 1990 legislation has created a "gotcha" litigation environment.

Employees that do not work out and their attorneys can bring lawsuits without warning, after the fact, for previously unknown disabilities. Often times the cost of litigating frivolous lawsuits induces employers to essentially pay blackmail just to get the case to go away so they can get back to the business of their organization.

If this isn't bad enough, the 13 United States Courts of Appeals for different parts of the country have adopted different rules. The most anti-employer rulings probably come from the Ninth Circuit Court of Appeals. This is the appeals court that reviews the decisions of the federal courts in California, Oregon, Washington, Arizona, Montana, Idaho, Nevada, Alaska, Hawaii, Guam and the Northern Mariana Islands.

Fortunately, the United States Supreme Court is slowly bringing some guidance and some common sense to interpretations of the ADA. Once again, the Supreme Court has overruled the Ninth Circuit Court of Appeals.

Last week, the United States Supreme Court considered whether owners of a business should be counted towards the ADA employee threshold. A former bookkeeper brought suit against the doctors in a small Oregon clinic alleging unlawful discrimination on the basis of disability after she was terminated.

If the four doctors that owned the corporation's stock and served on its board of directors were counted as employees, the corporation would have more than 15 employees and the Americans with Disabilities Act would apply. If the physicians were not counted as employees, then the ADA would not apply and the case could be dismissed.

Under corporate and tax law, owners of a corporation that work in the corporation and draw a salary are also employees. In annual meetings we hold with corporations, we often talk about the different hats that shareholders may wear in small corporations.

In this case, the Court did not look at technical corporate law. Instead, because the ADA statute does not define the term "employee," the Court looked to whether the shareholder-directors operated independently and managed the business or whether they were subject to the firm's control. The Court held that there are six factors that are relevant to determine whether a shareholder-director is an employee.

What does this mean for you? If you are near the 15 employee threshold, this ruling can have a big impact on your business. It's not that small employers want to discriminate against persons with disabilities, that's not it at all. Instead, it means that small businesses can take steps to prevent the risks associated with frivolous ADA lawsuits.

If you are a family business and have family members that are shareholders working in the business, you might be able to avoid ADA claims. The same is true of professional practices such as doctors' clinics, accounting firms, architecture firms, etc. . . . If you have owners that work in the business, you will want to pay careful attention to the six factors listed by the United States Supreme Court.

The Court's six factors are:

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 parties intended that the individual be an employee, as expressed in written agreements or contracts.

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

According to the Court, if a person or group of people owns or manages the enterprise, can hire and fire employees, can assign tasks to employees and supervise their performance and can decide how the profits and losses of the business are to be distributed, these factors should be taken into account in determining whether a shareholder-director is an employee. Just because a shareholder-director has a particular title or has a document labeled an "employment agreement," it does not necessarily mean the person is an employee. Instead, the Court held that the answer depends on "all of the incidents of the relationship . . . with no one factor being decisive."

If the number of employees you hire puts you near the employee threshold for the Americans with Disabilities Act or any other federal employment legislation and the classification of shareholders that work in the business may make a difference, then there are steps you can take to make it more likely that your shareholders will be determined to be employers rather than employees.

Any time the Court prescribes a "balancing test "or an "all of the factors test," careful planning is required. Readers of LegalBriefs know that I like to give practical solutions employers and business people can use to solve problems they may face. Unfortunately, this is not a "do it yourself" area. We are, however, happy to answer any questions you may have and help you develop preventative strategies to avoid problems in this area.

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