Ernst & Young case, a case that was heard in the District Court for the Southern District of Ohio. This case clearly demonstrates the presents of ultimate legal concepts and is viable in illustrating the challenges our courts face in clarifying a workable guidelines for the definition Of an employee. The case will touch base with the multiple methods of defining an employee, the influence case law has on the issue, and high light the long standing risk of miss defining an individual as an employee or employer.
For one to be successful in understanding the legal concepts and the controversial challenges the judicial system encountered during this case one must have knowledge of the baseline undisputed facts involved in the profile of the case. This case involved the plaintive Peyote Simpson, born September 27th 1943, a managing partner at the Arthur Young accounting Firm in Cincinnati. In 1989 the Arthur Young accounting firm ad the Ernst & Whiney accounting firm decided to merge. Both firms held the public image of caring for their employees and primarily allowing their employees to easily climb the corporate latter of the company.
The two firms guaranteed that partners of Arthur Young would receive equal if not better rights after the merger. They also emphasized the merger would not result in the discharge of partners. After the merger the new accounting firm of Ernst & Young consisted of two separate entities, the Ernst & Young firm and the Ernst & Young U. S firm. In the Ernst & Young firm members who were Certified Public Accountants (CPA) were required to sign an agreement under the title of management. This meant that Simpson, being a CPA, signed under this entity of the firm as a partner. However under the Ernst & Young U.
S agreement he was demoted to being labeled as being a “party’ not a “partner”. He was considered to be apart of the “Capital Account Part)/’ this was any members of the firm who ere CPA The Management Committee and the Advisory Council primarily controlled the Ernst & Young U. S firm. These were the key players in deciding to discharge Simpson. The reasons that led to the discharge of Simpson after the merger, despite the earlier confirmation by the firm that no partners would be discharged, was the fact that after the merger it was clear that the merged firm’s retirement benefits plan held obligations Of above it’s available funds.
The firm will later confirm on the record that they did not consider a freeze on the admission of new partners or a reduction of earnings for current partners as an alternative solution to this funding problem. This is apparently because they wanted to be able to continue to attract “young accountants” to the new firm with the high salary and benefits partners received. During the following time period from October of 1 989 to March of 1991 the merged firm had discharged a total 127 partners while hiring 122 new accountants. Despite parceling his six months written notice of termination Simpson was discharged in the year 1990 at age 46.
This was when Simpson brought suit under IDEA and ARISE against the firm for what e claimed was definite age discrimination. Dissecting the facts of this case is a necessary step in comprehending the choice of legal tactics taken by both Ernst & Young and Simpson. First one can look at the Simpson role in the firm regarding his rights and earnings after the merger. As a partner of the Arthur Young firm he had the right to an unbilled time and uncollected fees payment referred to as a LIB, which he would be paid for over 8 years after discharge or retirement. However the merged firm did not make this JIBE payment.
Simpson had very limited rights n the merged firm. He had no right to examine the books, records, or accounts. He had no right of access to legal opinions from the firms general counsel. Simpson also had no right to the firm audit, accept new clients, and lost his title of partner to Director of Entrepreneurial Service. However he was stated to be jointly and individually liable for the losses of the firm. In addition to the limited rights Simpson held one must also look at how Simpson was paid and compensated by the merged firm. Simpson received an annual salary that was determined by the management committee.
In financial reports of the firm’s entity Ernst & Young U. S Simpson salary was put as a business expense of an employee salary, this was supposedly for tax purposes. However on the Schedule k-l for the entity Ernst & Young his salary was indeed identified as a distribution of partnership earnings. His salary as a partner was supposedly determined by the management committee and allocated by profits and losses of the firm. This detail in his salary was never actually executed seeing how Simpson never received any compensation or loose any money as a result of the firm’s rate of success or failure.
In fact it was clear that the salary was allocated based on factors of his employment, such as, years of service, performance review, and level of responsibility. As mentioned before there is a clear absence of statutory clarity in the definition of an employee. This lack in criteria for who qualifies as an employee is found through out Title VII and the related acts of EPA and IDEA The profile of an employee is different depending on what legal approach or test one refers to. We must look at the different options a court has in determining the outline for defining who qualifies as an employee.
The court can use Case Law history and refer to the definition of The Per Se Rule, or the Common Law test using the traditional agency law principles, The pure Economic Realities Test, and The Hybrid Test. By understanding the specifics of these tests and rules one can easily see how and why each side of the case attempted to persuade the court to use certain definitions that would benefit them in the debate of if Simpson qualified as an employee or not. Referring to Case Law history the case of Burk v. Friedman set up the per say rule.
Without indulging in the specific circumstances of this case one imply must understand that it was this case that established the per say rule in its verdict when the courts explained “we do not see how partners can be regarded as employees rather than as employers who own and manager the operation of the business”. It is this definition that will be referred for precedence in many following cases regarding who can be protected as an employee. This rule established the standard that the roles of a partner and employee are mutually exclusive.
An alternative source for defining who is an employee is the common law test. This test is used to determine when a independent contractor or partner an qualify as an employee, receiving the rights and protection from Title VII. This test uses the tradition agency law principles. The common law test has created a criteria of factors that will indicate an individual as being an employee or not. The test is used in a case by case bases. The factors assist in building an entire profile of the individual and their role.
The common law test is as follows: 1) ” the hiring party’s right to control the manner and means by which the product is accomplished” 2) ‘The skill required” 3) ‘The source of the instrumentalities and tools” ) “The location of work” 5) ‘The duration of the relationship between the parties” 6) ‘Whether the hiring party has the right to assign additional projects” 7) “The extent of the hired party:s discretion over when and how long to work” 8) “The method Of payment” 9) ‘The hired party’s role in hiring and paying assistants” 10) “Whether the work is part of the regular business of the hiring party” 1 1) “Whether the hiring party is in business” 12) ‘The provision of employee benefits” 13) “The tax treatment of the hired party’ Another, far more liberal test, is the Pure Economic Realities Test. This test was established by the Fair Labor Standards act.
It has a far broader definition of an employee IS expanded to mean “to suffer or employ to work”. This broad expansion extends the spectrum of who can be considered an employee. In addition to the previous test mentioned the court could choose to use a hybrid test. This is a combination of the economic reality test and the common law test. The test looks not only at the role and rights Of the employee but takes into account the vast number of economic factors that surround the specific case. The dominant factor in the hybrid test is the incepts of common law, such as, ” the extent of the employer’s rights to control the mean and manner of the workers performance”.
However the court is not blinded by this dominant factor because it will also take a step back and consider other unconventional factors in each case. It is the differences between each of these tests that influenced the approaches taken by both the firm and Simpson. The first aspect to look at when understanding the defense taken by Ernst & Young is that the firm continuously contended that the pure economic reality test was not appropriate when clarifying if Simpson was indeed an employee. They stated the argument that Simpson was a partner and because of this fact the statues of employment did not apply to him and thus he had no legal backings to his claim.
Ernst & Young insisted on referring to the traditional partnership law concepts and that only the “essential” elements of being a partner are what qualify an individual as being a partner. The “essential” elements include the aspect of sharing profits and holding unlimited personal liability. Further more the firm expressed their belief that “non- essential” elements of the tradition partnership law Concept should be dismissed as insignificant factors. The legal approach taken by Simpson was first and for most his legal claim that he was indeed an employee, despite his title, and that as an employee was wrongfully discharged for age discrimination.
He protested that he was rightfully protected by the Employers act (IDEA) and the employee retirement income security act (ARISE). Simpson attempted to claim the court should use the pure economic reality test when looking at the features that would or would not determine him as an employee. He wanted the case to take into account the totality of circumstances that surrounded his role in the firm. His council also highlighted the interesting fact that Ernst & Young threw claiming Simpson was a partner was also making an irrational claim that discrimination and wrongful discharge could be accepted as long as the title of the individual is not that of an employee.
The court considered this argument and decided to use the common law test despite the motion made by Simpson. This use of the common law test did not result in Ernst & Young winning the case, for the court ruled Simpson as an employee. One can clearly see the reasoning behind the courts decision and it is because of these ere reasons that I personally support the courts decision. Simpson was an employee subject to IDEA protections based the fact that Simpson never made a true capital contribution to the firm. When taking a closer look at Simpson supposed “contribution” to the firm it became clear that this was more in the format of a loan that was returned with interest payments.
Interest payments are not the same as a partner generating a share of the profits because this payment was made regardless of the performance of the firm. The paper transaction Of Simpson capital account initially held the appearance of a partner making a financial contribution. However when the court looked closer it became evident that the firm had organized a bank loan that Simpson merely signed, the invested capital had not come from Simpson personal finances. This lead the court to identify another significant factor that made Simpson in no way an established partner and that is he did not share in any profits or losses with the firm at any point in his time working there.
As I mentioned before Simpson received an annual salary, which never was influenced by the success or recession of the firm’s refits. If this had been the case at some point there would have been evidence of Simpson being required to return a portion of his salary during the firm’s decline in profits. In addition the court was able to conclude that the allocation of any additional payments made to Simpson was more comparable to a periodic bonus of an employee not an amount calculated from the net profits or gross receipts. In addition Simpson internship rights are clearly dismissed as pure illusion by the fact that he was not treated like a partner because he never received his CUBE account.
The failure for the urged firm to carry out the BOOT payment demonstrates that Simpson status partnership did not legitimately carry over from his role as a partner at Arthur Young. Simpson limited power within the firm also demonstrates his lack of ownership. One can easily examine the fact that he had no say in the hiring of new partners, the discharge of partners, his inability to determine how firm members were to be compensated, and him having absolutely no authority on who was to become a member of the Management Committee. His own performance was reviewed annually by the Management Committee ND in turn left him under the authority of the committee, not in line with having an equal status to the committee members.
Thus it is clear that in the practical sense Simpson did not hold a fundamental characteristic of being a partner and that is to have Management authority. In addition to his lack of authority he also never was given the right to examine the firm’s books and records. This is clearly stated under the common law test as being a right Of the partner to have access and the ability the inspect the company books. This is a basic right of any bona fide partnership. Last but not least would eke to point out that my support for the courts verdict comes from not only his lack of attributes as a bona fide partner but also the lack of a fiduciary relationship between Simpson and the Ernst & Young firm.
To have a fiduciary relationship is a key quality in the common law test. Had the relationship between Simpson and the firm had indeed been fiduciary this would mean there would have been an established sense of mutual respect and loyalty. However through the multiple actions of the firm, including not allowing Simpson to obtain the firm’s attorneys opinion regarding the case, it s clearly depicted that there was no sense of fidelity, fairness, or loyalty in this relationship. The specifics of this case are not what one should remember but rather the undeniable fact that this is a case that has solidified the new judicial trend of accepting the common law test to assist a court in defining who is an employee.
This case also highlights multiple questions and controversial obstacles that our courts face. Although it would seem that this case provides evidence that the use of the common law test is successful in excluding true bona fide partners from the protection of acts, such as, Title VI’, because the role of a partner is similar to that of a employer; one would be mistaken if they truly believed all controversy surrounding this case was resolved. In fact this case is significant because it presents new questions that had yet to be considered. For example how many characteristics of the common law test should an individual hold to be a partner or employee?