From the May 1997 issue of Entrepreneur

Title VII of the Civil Rights Act of 1964, which forbids discrimination in hiring on the basis of race, sex, religion and nationality, applies only to businesses with 15 employees or more. The same goes for the Americans With Disabilities Act (ADA). Do these laws apply to your business?

That might depend on how you count employees. If you have, say, three employees or 30, the answer is clear. But what if the number hovers right around 15, depending on how you count job-sharing teams, part-timers and employees on leave?

The answer could be crucial if you're sued by a former employee, because the coverage threshold is often the first line of defense for a company facing a Title VII or ADA lawsuit. If you can persuade a judge the law doesn't apply to your business, you can have the lawsuit dismissed.

Stricter Definition

Under Title VII, a company is covered if it "has 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year." That definition is ambiguous; does it mean 15 or more employees actually in the office and working or simply 15 or more employees on the payroll? In January, the U.S. Supreme Court issued a ruling that clarifies the issue.

The case involved Chicago's Metropolitan Educational Enterprises Inc., a retail distributor of educational materials. In 1990, Metropolitan declined to promote employee Darlene Walters to credit manager. Walters filed a charge with the Equal Employment Opportunity Commission (EEOC), claiming sex discrimination. Soon after, she was dismissed.

Three years later, Walters sued Metropolitan and its owner, Leonard Bieber, charging illegal retaliation. Metropolitan asked a district court judge to dismiss the suit, claiming it did not have 15 employees and thus was not covered by Title VII. When the district court agreed and dismissed the suit, Walters appealed.

The Court of Appeals affirmed the district court's decision, relying on an earlier case in which employees were counted toward the 15-employee threshold only on days when they actually worked or were paid despite being absent. When Walters appealed again, the U.S. Supreme Court agreed to decide the matter once and for all.

The court considered the implications if it endorsed the counting method Metropolitan advocated: including employees based on how many people were actually working or compensated for working that day. At the time, Metropolitan had two part-time hourly employees who normally skipped one workday each week. Only if these two were not counted would the company fall under the 15-employee threshold.

To determine how many employees were working or otherwise compensated each workday of the two-year period, the parties would have to spend 10 months poring over Metropolitan's payroll registers, time cards and other records to determine how many employees were at work, on salary, or on paid holiday, vacation or sick leave each day. The court decided that process was far too complex and endorsed a much simpler method: looking at how many employees were on the payroll each week. By that standard, Metropolitan had 15 employees on the payroll for 20 or more calendar weeks--and thus lost its case.

"This is a pretty narrow, technical ruling," says attorney and professor Wayne Eastman of Rutgers University Graduate School of Management in Newark, New Jersey. The implication, Eastman says, is if you have 15 employees who work every week but only one day a week, your company can be sued under Title VII because you have 15 employees on the payroll per week.

Implications For You

The decision is likely to affect more than Title VII cases. Eric Dreiband, an employment attorney with Mayer, Brown & Platt in Chicago, notes other federal laws have similar wording, including the Age Discrimination in Employment Act of 1967 (which has a threshold of 20 employees) and the Family and Medical Leave Act (which has a threshold of 50).

Dreiband says many states and municipalities have anti-discrimination laws with lower thresholds or none at all; you can be sued under some of these laws with three employees or fewer. However, plaintiffs would generally rather sue in federal court, where they're entitled to a jury trial.

What does the ruling mean for small employers? Patrick Falahee, the Chicago attorney who defended Metropolitan before the Supreme Court, says employers who haven't yet reached the Title VII threshold may want to consider the implications of adding that 15th employee. "The question is whether you want Big Brother looking over your shoulder and second-guessing employment decisions," Falahee says. Not that employers are looking for freedom to discriminate, he explains: "Even if the claim is false and without merit, the cost of defending [yourself] can run to six figures."

In one sense, Falahee adds, the Supreme Court's decision may hurt the very people the civil rights laws are designed to help. Suppose you have 13 employees and need to add a receptionist. Should you hire a student who can only work three days a week and a young mother or a senior citizen to work the other two? You'd be better off with one full-time employee because the part-timers would give you 15 or more employees and make your business subject to job bias lawsuits.

What's an employer to do?

Be aware of the thresholds and the way employees are now counted: by the number of employees on the payroll, whether or not they're working full time.

Before taking action against an employee, consult an attorney to make sure you do it without bias.

Look into employment practices liability insurance, a relatively recent form of insurance that for a modest premium covers the cost of defense in discrimination cases, plus compensatory damages if you lose. Most "comprehensive" liability policies for businesses exclude job bias lawsuits. Learn what's covered and what's not, just in case.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.