Gray Power in the Gray Area between Employer and Employee: The Applicablility of the ADEA to Members of Limited Liability Companies

By Haguewood, Alan Ross | Vanderbilt Law Review, March 1998 | Go to article overview

Gray Power in the Gray Area between Employer and Employee: The Applicablility of the ADEA to Members of Limited Liability Companies


Haguewood, Alan Ross, Vanderbilt Law Review


I. INTRODUCTION

The American populace is aging.1 At the same time, modern medicine enables Americans to remain productive members of the workforce for a longer period of time.2 The confluence of these two trends augurs increased use of the Age Discrimination in Employment Act ("ADEA"),3 as companies try to force aging employees to retire despite their prolonged productivity.4

Another trend within the past decade has been the rise of various hybrid corporate forms that combine the beneficial aspects of partnerships and corporations, one example of which is the limited liability company ("LLC").5 This increase in the number of different types of corporate entities presents many problems, including the application of statutes, like the ADEA, created long before the advent of the various corporate forms. Facing the same discrimination experienced by some of their peers in more traditional corporate entities, aggrieved aging members of LLCs will soon enter courtrooms to claim ADEA protection. While these complainants will argue they are employees for purposes of the ADEA,6 the companies will likely respond that the unique structure of the LLC makes the members de facto partners,7 or employers, with no standing to sue under the Act.

This Note attempts to give courts the tools necessary to address this approaching dilemma. The second Part of this Note describes the rise of the hybrid corporate form, paying particular attention to the structure of the LLC. In addition, it provides a background for discussing conflicting judicial attempts to define "employee" for purposes of the ADEA. Part III examines decisions affecting the standing of principals in different types of business organizations. In doing so, it points out the effect of choosing to emphasize corporate form or economic reality. By exploring the economic reality of the LLC as well as the nature of the ADEA itself, Part IV attempts to determine how courts should treat members of an LLC under the ADEA. Part V concludes that LLC members, as well as most principals, should be deemed employers as partners have been. Consequently, they should lack standing to sue under the ADEA.

II. LEGAL BACKGROUND

A. Limited Liability Companies: Advent of the Hybrid Corporate Form

Before the advent of hybrid business organizations such as the LLC, professional groups, including those consisting of lawyers, doctors, and accountants, organized themselves mostly as partnerships. While the partnership form offered favorable tax treatment and ease of management,s it also required that all partners be jointly and severally liable for all of the partnership's obligations.9 As a result, when malpractice claims dramatically increased in the 1980s, professional groups petitioned state legislatures for an alternative organizational form. In particular, these groups sought to limit their vicarious liability while preserving their favorable tax treatment.lo State legislatures responded by creating the LLC.ll As no other statutory business form had previously done, the LLC offered limited liability with respect to third-parties,la favored pass-through tax treatment,ls and flexible governance rules. The LLC, therefore, is a hybrid of the corporate and partnership forms, combining the benefits of each.l4

The governance characteristics of the LLC, though still evolving, offer more flexibility than that of other organizational forms.ls LLCs are owned by "members," rather than shareholders or partners. Most LLC statutory default rules assign all management function to the members,ls who, as a result, have powers similar to those of partners in a general partnership.l7 Members may, however, desire more separation of function. To address this desire, LLC statutes usually provide a set of fall-back rules, which take away most of the management powers and authority that members would otherwise possess and assign them to "managers."18 These rules allow the managers to function like officers in a corporation. …

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