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Title VII and Small Businesses: The Supreme Court Addresses the Employer-Size Requirement For Federal Employment Discrimination Claims

Tuesday, Jan. 10, 2006

Tomorrow, January 11, the Supreme Court will hear oral argument in Arbaugh v. Y&H Corporation. The case involves the proper interpretation of Title VII, the main federal anti-discrimination statute.

Title VII applies only to employers with at least fifteen employees - thus exempting small "Mom and Pop" establishments. The Supreme Court will have to decide exactly what that minimum means.

Does it mean that a plaintiff suing an employer that is too small will simply lose her case if the employer establishes that fact and uses it to move for summary judgment? Or does it mean that the court lacks jurisdiction to even hear the plaintiff's case in fist place?

This issue - on which federal appellate courts have disagreed for a long time -- may sound like the ultimate legal technicality. But as I will explain, it turns out to make a great deal of a difference in real-life litigation.

Arbaugh v. Y&H Corporation: The Plaintiff Wins at Trial

Here's how the issue arose in the particular case before the Supreme Court:

Plaintiff Jennifer Arbaugh was a waitress at "The Moonlight Café" in Louisiana. She alleged that her workplace was a sexually hostile environment, and thus that she had been the victim of sexual harassment, in violation of both Title VII and state tort law. Specifically, she alleged that she was assaulted by one of the restaurant's co-owners, was subjected to other forms of harassment and, that, ultimately, these offenses forced her to resign.

A jury agreed. After a two-day trial, it awarded Arbaugh $5,000 in back pay, $5,000 in compensatory damages, and $30,000 in punitive damages. Based on this verdict, the trial judge entered judgment against the defendant, Y&H Corporation.

The Defendant Belatedly Raises the Employee-Minimum Issue

Seventeen days after the trial concluded, the defendant, Y&H, claimed that it did not have the minimum fifteen employees Title VII requires. But this claim directly contradicted its prior admission, in pre-trial pleadings, that it did indeed have that number of employees.

So did the judge just hold Y&H to what it had originally said? Ordinarily, with a fact conceded by the defendant, that's exactly what would have happened.

But here, the number of employees wasn't just a fact. It was also, Y&H argued, a jurisdictional fact - that is, a fact necessary for the court to hear the case in the first place. If that fact wasn't true, Y&H argued, then the court never had jurisdiction, and thus its judgment against Y&H was void.

The court felt that it had to address this claim, even though it was raised very belatedly. It did not want to have exceeded its jurisdiction; jurisdiction, after all, depends on factual circumstances - not on what the parties may or may not have said. That's why a court can examine whether it has jurisdiction on its own - whether or not any party has asked it to do so.

So the parties went on, even after trial was over, to clash on the employee-minimum issue.

Arbaugh claimed that the restaurant's delivery drivers, the owners, and the owner's wives all constituted "employees" - which would be enough to satisfy the minimum. But Y&H said only the waitpersons and kitchen staff should count - meaning the minimum was not satisfied, and thus the court had never had jurisdiction in the first place.

Who was right, Arbaugh or Y&H? To figure that out, the court re-opened fact discovery - the process by which parties in litigation obtain documents and other information from one another - on this issue alone.

Finally, at the end of a five-month process, the court ruled that Y&H had fewer than 15 employees and was therefore not covered by Title VII. As a result, the court - which viewed itself as never having had subject matter jurisdiction - vacated its own judgment, which had given the jury's verdict in favor of Arbaugh the force of law.

Is Employer Size a Jurisdictional Fact?

Arbaugh appealed to the less-than-plaintiff-friendly United States Court of Appeals for the Fifth Circuit. In considering how to count employees, the Fifth Circuit applied the "economic realities" test - which tries to determine the extent of control an employer has over an individual to determine "employee" status. Under this test, it concluded that the delivery drivers and owner's wives were not "employees," (some were considered independent contractors, others passive partners) and thus that the fifteen-employee minimum had not been met.

(As a side note, the question of who qualifies as an "employee" is not before the Supreme Court in Arbaugh's case, but it is being separately tested in a different case, EEOC v. Sidley & Austin. In that case, which involves the legality of mandatory retirement policies, the EEOC argues that some less-powerful law firm partners still qualify as employees for federal anti-discrimination law purposes. If the EEOC prevails, and some preliminary rulings suggest that it may well do so, a huge class of lawyers and other professionals who work in similar institutional structures would suddenly be eligible for protection under a wide range of federal anti-discrimination laws - and may, among other things, be able to fight mandatory retirement on the ground that it constitutes age discrimination.)

Returning to Arbaugh's case, the question the Court will focus on is the jurisdictional one: Is the fifteen-employee minimum a jurisdictional fact?

The Fifth Circuit thought so. But other appeals courts have disagreed. Right now, the split is 6-5 - with six thinking the minimum is indeed a jurisdictional prerequisite, and five disagreeing.

What Will - And Should - the Supreme Court Decide on this Issue?

How is this issue likely to play out in the Supreme Court?

To begin, Title VII's language provides little help. And several Supreme Court precedents suggest that statutory requirements like this one are not jurisdictional. Indeed, that is the position the United States - which filed a brief in support of Arbaugh - has taken. And when even the conservative Bush Administration takes a pro-plaintiff stance, you can bet the law is quite clear.

Policy arguments favor Arbaugh's side too. Recall that she had brought not only federal, but also state law tort claims. (Federal courts can assert supplemental jurisdiction over state law claims when they arise out of the same facts as federal claims.) If the court lacked jurisdiction, then it lacked jurisdiction over all these claims. And that could put Arbaugh in a difficult position: If she attempted, after the federal judgment on all the claims was vacated, to re-file her state claims in Louisiana state court (as she always has had the right to do), she might find Y&H arguing that the statute of limitations had expired, or trying to bar those claims based on other defenses.

Put simply, if the federal employee-minimum is deemed jurisdictional, then it may end up extinguishing valid state-law claims - creating a problem not only of justice, but of federalism. Even if Arbaugh had no federal claim, Louisiana still had an interest in seeing her state-law rights vindicated.

Characterizing the number of employees as a "jurisdictional" fact can also be outcome-determinative. In Arbaugh, for example, the defendant's attempt to raise the employer-size question after entry of judgment in favor of the plaintiff would have been barred, but for that characterization. So, for Jennifer Arbaugh, her complete victory became a complete loss on this question alone.

Finally, there is little to be said for Y&H's argument. It is tied not to statutory language, or precedents as to which facts are jurisdictional, but rather to a handful of scattered references in prior decisions to employers as "immune" or "exempt" from coverage if they have fewer than the requisite number of employees. This argument is just as weak as it sounds.

Is there anything to be said for Y&H's argument from a policy standpoint? There is one policy point that can be made: If the employee-minimum is jurisdictional, that could mean Mom-and-Pop businesses could get out of litigation more quickly by filing a motion to dismiss for lack of jurisdiction - and the minimum's whole purpose is to protect small businesses from such suits.

But this argument is a bit of a red herring: Even if the employee-minimum is not jurisdictional, a Mom-and-Pop business could easily ask the court to divide discovery into two stages, with discovery on employee numbers coming first. Then, the Mom-and-Pop business could move for summary judgment on the employee-minimum issue if discovery was favorable. I think many courts would grant just such a request. And, like a motion for summary judgment, this request, if granted, would get Mom and Pop out of court, pronto, as Congress likely intended.

Why This Case, and This Issue, Matter

Why does this case matter? There are several reasons.

First, though this is a Title VII case, the ruling will affect plaintiffs suing under other federal antidiscrimination laws as well: the Americans with Disabilities Act, the Age Discrimination in Employment Act, and the Family and Medical Leave Act. All of these apply only to employers with a certain number of employees.

Second, this case may give us more insight into the decisionmaking of the court's new Chief Justice, John Roberts. Some have speculated that his past work in private practice on business-related matters will give him greater empathy for the interests of small businesses than for those of civil rights plaintiffs. Will this turn out to be true, even in a case like this - where, as I have argued, the plaintiff has much the better argument? It's possible, but I doubt it.

And even if the Chief Justice sides with Y&H, it seems likely that Arbaugh's position will command a majority. A prediction as to outcome: the better money here is on the plaintiff.

Joanna Grossman, a FindLaw columnist, is a professor of law at Hofstra University. Her columns on family law, trusts and estates, and discrimination, including sex discrimination and sexual harassment, may be found in the archive of her columns on this site.

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