The Small Firm Exemption and the Single Employer Doctrine in Employment Discrimination Law

Article excerpt


Laws prohibiting discrimination in employment often make an exception for the small firm. Title VII,1 which is the model for many other federal and state discrimination laws, sets a threshold for employer coverage at fifteen employees.2 A firm employing fewer employees is exempt. As long as it employs no more than fourteen, it can refuse to hire women, Moslems, or disabled persons, and it will not be in violation of federal discrimination law.3 If it employs as many as nineteen, but no more, it can terminate and refuse to hire anyone over the age of forty.4

The practice of exempting small firms from employment laws began long before Title VII. Early occupational safety laws5 and workers' compensation laws typically exempted small firms.6 New Deal-era laws such as the Wagner Act7 and Fair Labor Standards Act of 1938 ("FLSA')8 originally lacked small firm exemptions, but amendments and administrative practices created protective niches for small firms.9 As a result, an exempt small firm can pay less than the statutory minimum wage, refuse to pay overtime rates, discharge union supporters, and reject collective bargaining regardless of the wishes of its employees.10

The most popular explanation for these exemptions is that a small firm might be overwhelmed by the burden of compliance.11 The exemption, however, relieves only the smallest of the small. An exempt firm is a fraction of the size that could qualify as small for many other regulatory or statistical purposes. The Small Business Administration, for example, regards a firm employing up to 500 employees as "small,"12 but under this standard a firm could be more than thirty times too large to be exempt from Title VII. Exempt firms, therefore, tend to be the sort that provide self-employment as much as profits for their owners. Nearly all of the congressional debates that preceded enactment of the major employment laws with small firm exemptions were animated with references to "corner" stores, entrepreneurs working out of their garage, family-owned retail and service operations, and other independent business people struggling to provide work for themselves as well as jobs for others despite stifling government regulation.13 But legislative favoritism for small firms has important implications for the effectiveness of federal labor policy. Firms small enough to be exempt from Title VII employ more than 19 million employeesequal to the entire population of the State of New York or more than sixteen percent of the national workforce.14 The exemption may be one reason why small firms are much less likely than larger firms to hire a representative number of black employees.16 According to one recent study, blacks constitute 13.3% of the workforces of employers of more than 500 employees, but only 7.9% of the workforces of fewer than ten employees.16 These figures might obscure the real situation if, as some observers have suggested, small business owners of all races tend to discriminate in favor of their own race, so that minority employees in the small firm sector are disproportionately employed by minority businesses.17 Small firms might be much less diverse than large ones.

The right to claim the small firm exemption-and with it an affirmative defense against a charge of discrimination-is an important advantage for firms that qualify, and a disappointment for their applicants and employees. Not surprisingly, the issue of small firm status is frequently contested in employment discrimination cases, even though the test for exemption-a headcount of employees-might seem to be simple and straightforward. Sometimes there are issues about who counts as an employee, especially if the employer has delegated a substantial amount of work to 'independent contractors,"18 'partners,"19 or other putative non-employees. In other cases there are issues about what entity or set of entities constitute the "employer, "a problem that is the main topic of this article. …