Heyl Royster


Heyl Royster


Seventh Circuit Clarifies Appropriate Test for Joint Employer Liability Under Title VII


By: Keith Hill

A recent decision by the Seventh Circuit Court of Appeals clarified the appropriate test for joint employer liability under Title VII. The court held that the plaintiff, a hotel staff member, was employed both by the entity that ran the daily operations of the hotel and the entity that owned the hotel for purposes of her claims under Title VII. This case, Frey v. Hotel Coleman, 903 F.3d 671 (7th Cir. 2018), presented issues regarding the employer/employee relationship that arise in the not-so-uncommon scenario where one employer hires another entity to manage the day-to-day operations of an enterprise. In such a case, one entity provides the paycheck, but another entity does all of the other tasks one ordinarily associates with an employer – hiring, firing, training, supervising, evaluating, and assigning.

In this case, Hotel Coleman, Inc., owned a Holiday Inn Express franchise in Algonquin, Illinois. Hotel Coleman hired Vaughn Hospitality, Inc. to run the daily operations of the hotel. Although staff members were on Hotel Coleman’s payroll and the management agreement stated that all staff were employed by Hotel Coleman, Vaughn Hospitality was responsible for hiring, supervising, directing, and discharging employees, and determining the compensation, benefits, and terms and conditions of their employment.

Michael Vaughn, president and co-owner of Vaughn Hospitality, hired the plaintiff, Bogustawa Frey, to work in the hotel’s guest services department. Frey alleged that, shortly after Vaughn hired her, he began to subject her to unwelcome and inappropriate sexual comments and advances. Frey complained to the housekeeping manager, but when that manager informed Vaughn, he laughed off the complaints and the behavior went unchecked. After Frey informed Vaughn that she was pregnant, Vaughn reduced her hours, rescinded a promise to promote her, assigned her to work the night shift without the customary additional pay, failed to consider her for a higher paying front desk position, asked her to perform duties that were difficult due to her pregnancy, and made inappropriate sexual comments related to her pregnancy. During Frey’s maternity leave, she filed a charge with the Equal Employment Opportunity Commission (EEOC) and the Illinois Department of Human Rights (IDHR). One week after she returned to work, she was discharged. Frey added a claim of retaliatory discharge with the EEOC and the IHDR.

Frey filed suit in state court, alleging sexual harassment, hostile work environment, pregnancy discrimination, and retaliatory discharge under Title VII and the Illinois Human Rights Act (IHRA) against Hotel Coleman and Vaughn Hospitality. After the case was successfully removed to federal district court, Frey moved for summary judgment against Hotel Coleman as to all counts, which was granted. Vaughn Hospitality moved for summary judgment asserting that it was not an employer as defined under Title VI and the IHRA. The court granted Vaughn Hospitality summary judgment with respect to Frey’s claims under Title VII, and Frey appealed.

On appeal, the Seventh Circuit held that the trial court erred in applying the test set forth in Smith v. Castaways Family Diner, 453 F.3d 971 (7th Cir. 2006). In Smith, the court’s task was to decide whether two individuals (diner managers) should be counted as employees or as employers for purposes of determining if the employer had met the 15 employee threshold for liability under Title VII. The Frey court determined that the Smith test was not applicable in this case. The court explained that a corporation cannot be counted toward the fifteen employee minimum because it is not an employee at all.

The court held that the applicable test is the multi-factor “economic realities test," as set forth in Knight v. United Farm Bureau Mutual Ins. Co., 950 F.2d 377, 378-79 (7th Cir. 1991), under which five factors are considered: (1) the extent of the employer's control and supervision over the worker; (2) the kind of occupation and nature of skill required; (3) responsibility for the costs of the operation; (4) method and form of payment and benefits; and (5) length of job commitment or expectations. Of these factors, the employer's control over the worker is the most important, and courts give it the most weight. The court held that this test should be used to determine which entities are employees for purposes of Title VII and the IHRA.

The court vacated the trial court’s ruling that Vaughn Hospitality was not a joint employer of Frey and remanded the case to the trial court with instructions to apply Knight’s “economic realities” test. Despite leaving it to the trial court to apply the test, the court noted that from its “appellate perch,” it seemed likely that Vaughn Hospitality was indeed Frey’s employer.

In addition to clarifying the applicable test to determine whether an entity is an employer under Title VII and the IHRA, the Frey case serves as a warning to employers to be mindful of potential liability under anti-discrimination statutes when considering and implementing subcontracting relationships, joint ventures, independent contractor agreements, or hiring temporary employees.