Schmidt v. Ottawa Medical Center, P.C.

• Decision Date: 05 March 2003
• Docket Number: No. 01-3274.,01-3274.
• Citation: 322 F.3d 461
• Parties: Richard A. SCHMIDT, M.D., Plaintiff-Appellant, v. OTTAWA MEDICAL CENTER, P.C., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

322 F.3d 461

Richard A. SCHMIDT, M.D., Plaintiff-Appellant, v. OTTAWA MEDICAL CENTER, P.C., Defendant-Appellee.

No. 01-3274.

United States Court of Appeals, Seventh Circuit.

Argued October 28, 2002.

Decided March 5, 2003.

Gary R. Garretson (Argued), Morris, IL for Plaintiff-Appellant.

Michael T. Reagan (Argued), Herbolsheimer, Lannon, Henson, Duncan & Reagan, Ottawa, IL, for Defendant-Appellee.

Before KANNE, DIANE P. WOOD, and EVANS, Circuit Judges.

KANNE, Circuit Judge.

Does Dr. Richard A. Schmidt's status as a shareholder-director in a closely held professional corporation preclude him from being considered an "employee" entitled to bring suit under the Age Discrimination in Employment Act? Applying a functional "economic realities" test, which this Court adopted in EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177, 1178 (7th Cir.1984), and recently discussed in EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir.2002), the district court interpreted the relationship between Dr. Schmidt and Ottawa Medical Center as more like that of a partner to a partnership, rather than that of an employee to an employer. As such, the district court held that Dr. Schmidt could not entertain suit under the ADEA and granted summary judgment in favor of Ottawa Medical Center. Dr. Schmidt appeals, arguing that the economic realities dictate that he be treated as an employee under the Act. We affirm.

HISTORY

Ottawa Medical Center ("OMC") was originally incorporated under the Illinois Medical Practice Act, before it reorganized itself in 1969 as a professional corporation under the Illinois Professional Service Corporation Act. 805 ILCS 10/1 et seq. (2002). Dr. Schmidt, a family practice physician, began his practice with OMC in 1966 and, upon OMC's reorganization, became a founding shareholder. He has remained a shareholder at all relevant times since.

Including Dr. Schmidt, there are eight shareholder-physicians of OMC. Each has the right to an equal vote on shareholder-physician compensation plans, on proposed amendments to employment agreements, on the hiring of nonshareholder-physicians,¹ and any other matter put to shareholder vote. While being a shareholder-physician of OMC, Dr. Schmidt has also frequently served as one of its corporate officers, holding at different times vice-presidential and secretarial positions. Most recently in 1997, Dr. Schmidt was the corporation's secretary. During those periods that he was a corporate officer, Dr. Schmidt also had a seat on OMC's board of directors. And in March 2000, the shareholders voted to amend OMC's bylaws to provide that all shareholders, by virtue of their shareholder status, would be directors of the corporation. Accordingly, Dr. Schmidt is once again a director of OMC.

OMC compensates its shareholder-physicians in two ways. First, every shareholder-physician has executed employment agreements with OMC. Under his 1976 employment agreement, Dr. Schmidt draws a base salary of $3700 a month. Second, each shareholder-physician is also eligible to share in OMC's profits via shareholder compensation in addition to whatever base salary his or her employment contract provides.

The formula for determining the amount of that additional compensation has been amended multiple times by the shareholder-physicians, and Dr. Schmidt has had the opportunity to vote on each of those proposals. Most recently in December 1999, the shareholder-physicians considered a plan whereby a shareholder-physician's compensation would equal his or her net medical receipts after deducting his or her pro rata share of overhead expenses, pension allocation, and profit-sharing contributions. Because Dr. Schmidt's net medical receipts would not have entitled him to any additional compensation under the proposed plan, he voted against it. He lost. Moreover, a majority of shareholder-physicians voted in 2000 to adopt new "Shareholder Employment Agreements" to supercede their outstanding employment agreements with OMC. Every shareholder-physician besides Dr. Schmidt has since entered into this new agreement. As a result of the new compensation structure, Dr. Schmidt has since drawn only the $3700-per-month base salary.

ANALYSIS

An appellate court reviews summary-judgment motions de novo, viewing the record and all inferences from it in the light most favorable to the nonmoving party. McCoy v. WGN Cont'l Broad. Co., 957 F.2d 368, 370 (7th Cir.1992). Summary judgment is appropriate only when there is no genuine issue as to any material fact and where the moving party is entitled to judgment as a matter of law. Id. Here, no material facts are in dispute; the parties contest only whether the facts require Dr. Schmidt to be treated as an "employee" of OMC for purposes of the ADEA.

The ADEA unhelpfully defines "employee" as "an individual employed by an employer," and an "employer" as "a person ... who has twenty or more employees." 29 U.S.C. § 630(f), (b) (2002). To determine whether an organization has enough "employees" to qualify as an "employer" under the ADEA, we have already decided that the economic realities of the workplace, rather than mechanical adherence to state-law corporate forms, shall define the relationship between the parties. EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177, 1178 (7th Cir.1984). In Dowd, we found that the "role of a shareholder in a professional corporation is far more analogous to a partner in a partnership than it is to the shareholder of a general corporation." Id. We noted that "the economic reality of the professional corporation in Illinois is that the management, control, and ownership of the corporation is much like the management, control, and ownership of a partnership." Id. Since we did not consider bona fide partners as employees for purposes of Title VII actions, see Burke v. Friedman, 556 F.2d 867, 869 (7th Cir.1977) ("[W]e do not see how partners can be regarded as employees rather than as employers who own and manage the operation of the business."), we saw no reason to treat professional-corporation shareholders differently, and thus determined that those shareholders should be excluded from the ADEA employee count. Dowd, 736 F.2d at 1177.

We must now decide whether Dowd applies when we are asked to classify an individual shareholder-claimant as an "employee" entitled to bring suit under the Act. If it does, and if "economic realities" control here as well, we must then ask, does Dowd require us always to treat Illinois professional-corporation shareholders as employers? If not, what factors will determine the actual role of the claimant-shareholder in the operations of the involved entity? See Fountain v. Metcalf, Zima & Co., 925 F.2d 1398, 1400-01 (11th Cir.1991).

We recently asked similar questions in EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir.2002), where we held that the EEOC was entitled to continued enforcement of ADEA-coverage-related requests in a subpoena, when those requests could not be deemed unreasonable given continuing doubt over whether 32 demoted partners should be deemed bona fide partners (and thus employers) or de facto employees of a law firm in which ultimate decisionmaking authority rested solely with a few überpartners. In so ruling, we expressly refused to decide the question of the 32's status, noting that while they possessed many qualities indicative of bona fide partners in a partnership under Illinois law (that is, their income included a share of firm profits, they made capital contributions to the firm, they were liable for firm debts, and they had some administrative or managerial responsibilities), their individual fates at the firm were controlled entirely by a self-perpetuating executive management committee, which on a whim could fire, promote, demote, or raise and lower the pay of the 32. Id. at 699, 703.

Although we reserved the question of the 32's status, had we been prepared to accept a mechanical test — that the use of the partnership form as recognized under Illinois state law precluded finding the 32 as anything but partners and, thus, employers under the Act — there would have been no need to continue the EEOC's investigation into the circumstances of the 32's actual role in the firm. Id. at 707 (listing additional information sought by the EEOC that "would bear on the unavoidably multifactored determination" of whether the 32 should be treated as employers or employees). Our holding in Sidley, therefore, must be read to apply Dowd's functional test of employee status to determinations of whether an individual claimant qualifies as an employee under the ADEA.²

What remains is deciding which factors, in what we anticipated would be a multi-factored analysis, see id. at 1178, shall be important to determine whether Dr. Schmidt should be treated as an employer or an employee. Dowd provides little guidance — there, we matter-of-factly observed that "the economic reality of the professional corporation in Illinois is that the management, control, and ownership of the corporation is much like the management, control, and ownership of a partnership." Dowd, 736 F.2d at 1178. While that may be true, as we observed in Sidley, all partnerships are not created equal, and, because of this, all partners may not always be employers for purposes of the federal-discrimination statutes. Sidley, 315 F.3d at 702; see also Burke, 556 F.2d at 869 (finding only bona fide partners exempt from the federal-discrimination statutes). We will not, therefore, interpret Dowd to require us always to treat shareholders in Illinois professional corporations as employers; such a result would stand Dowd on its head, favoring, in the end, labels over realities.

If not to Dowd, then where are we to look? An exhaustive discussion of the relevant case law in Sidley revealed alternate lines of precedent suggesting this multifactored analysis could be conducted either with an eye towards statutory purpose, see Sidley, 315 F.3d...