Shareholder Agreement.jpgA recent Michigan Court of Appeals Opinion has significant impact on small businesses, employment discrimination claims, and arbitration agreements. This decision is likely to especially impact professional businesses such as law firms and doctors groups.

Specifically, in Hall v Stark Reagan, P.C., two former law partners were forced out of their professional corporation after contesting the involuntary redemption of their shares. The plaintiffs claimed this decision was based on unlawful age discrimination and sued under Michigan’s Elliot-Larsen Civil Rights Act (ELCRA), MCL 37.2101 et seq.

Employment Discrimination Claims – Who is an Employee

The defendants argued that the plaintiff shareholders lacked standing to sue under the Michigan Civil Rights Act because only “employees” may sue under the Michigan Civil Rights Act and as shareholders of the firm, the plaintiffs instead qualified as employers. 

The Court rejected this argument and reasoned that to merit protection under the CRA, a plaintiff must show some form of nexus or connection between the employer and the status of the nonemployee. The key to liability under the ELCRA is not simply the status of an individual as an “employee.” Rather, liability is contingent upon the employer’s affecting or controlling that individual’s work status.

Accordingly, an employer can be held liable under Michigan Civil Rights Act for discriminatory acts against a nonemployee if the nonemployee can demonstrate that the employer affected or controlled a term, condition, or privilege of the nonemployee’s employment.

Limiting Application of Arbitration Provision  

The defendants also argued that the claims were should be submitted to arbitration pursuant to the partnership agreement. The Court disagreed noting that even in contracts containing broad arbitration provisions, the determination of whether a particular claim must be submitted to arbitration necessarily depends on the existence of some nexus between the dispute and the contract containing the arbitration clause.

The test for determining arbitrability of a particular claim under a broad arbitration provision is whether a significant relationship exists between the claim and the agreement containing the arbitration clause, regardless of the legal label attached to the dispute.  

The Take Away

A person’s status as a partner will not preclude that partner from asserting a discrimination claim under ELCRA. 

The Court’s conclusion regarding the arbitration provision also signals that courts will more carefully scrutinize arbitration provisions to determine if issues are properly subject to arbitration. For this reason, it is important to assess existing arbitration agreements to ensure they stand up to this increased scrutiny.