Participation as a Theory of Employment

By Bodie, Matthew T. | Notre Dame Law Review, December 2013 | Go to article overview

Participation as a Theory of Employment

Bodie, Matthew T., Notre Dame Law Review


The concept of employment is an important legal category, not only for labor and employment law, but also for intellectual property law, torts, criminal law, and tax. The right-to-control test has dominated the debate over the definition of "employee" since its origins in the master-servant doctrine. However, the test no longer represents our modern notion of what it means to be an employee. This change has played itself out in research on the theory of the firm, which has shifted from a model of control to a model of participation in a team production process. This Article uses the theory of the firm literature to provide a new doctrinal definition for "employee" based on the concept of participation rather than control. The participation test better delineates the boundaries of employment and provides a framework for addressing the stresses on firms and workers that are rife within the modern economy.


The concept of employment plays an important role across the legal landscape. Most obviously, labor and employment law protections provided under local, state, and federal law are limited to those contracting parties that are defined as employees. (1) However, many other areas of law draw distinctions based on the fact that the actor was an employee, or that the actions were taken within the scope of employment. Common law doctrines or statutory provisions in intellectual property, (2) criminal law, (3) torts, (4) and tax (5) use the concept of employment in assigning critical rights and liabilities. Although these regimes are not generally thought of as labor and employment law, they invest the employment relationship with even further legal meaning.

Because the same concept of "employment" is used across legal contexts, one's intuition is that the concept would remain largely consistent even in its variegated uses. And this has largely been true. The concept of control has served as the unifying idea behind the use of "employee" and "employment" in different contexts. (6) The common law "control test" comes out of the original conceptions of master and servant from pre-industrial English law, and the Supreme Court has used this test as the default definition of the term "employee" in federal statutes. (7) However, the control test is not the unanimous answer, and in fact it may be losing its firm grip on the category. Courts have long used the "economic realities" test in interpreting the broader definition provided under the Fair Labor Standards Act (FLSA). (8) In addition, the D.C. Circuit recently installed an "entrepreneurial opportunities" test that has received support from the Restatement (Third) of Employment Law. (9) Foreign jurisdictions have looked to the concept of "economic dependence." (10) Other jurists and scholars have argued that there should not be any one definition of employment, and that instead the term should be adapted to fit the needs of the particular statutory, regulatory, or common law regime. (11)

This Article argues that there is a consistent meaning to the idea of employment, but it is not the control test. The meaning comes not from looking at employees but rather at the firm that employs them. Ever since Ronald Coase's The Nature of the Firm, (12) economists and legal scholars have puzzled over why the law created firms that stand outside the market. The purpose of firms, Coase famously answered, is to avoid transaction costs by allowing the parties to organize in a hierarchical manner without the need for prices or specific contracts. (13) As Coase put it: "If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so." (14) Less well known is that Coase then looked to the legal definition of employee to determine whether his transaction costs theory was supported in practice. (15) He found that it was. Since the "control" test was based on the employer's ability to require its employees to take specific actions, he concluded, "[w] e thus see that it is the fact of direction which is the essence of the legal concept of 'employer and employee,' just as it was in the economic concept which was developed above. …

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