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Company hired to manage hotel may be Title VII employer of hotel employees

By Harold S. Berman J.D.

A Holiday Inn employee who was fired after she filed an EEOC charge for sexual harassment and discrimination by the CEO of the company hired to operate the hotel likely can sue that company as her employer, the Seventh Circuit ruled. The court vacated and remanded the dismissal of her Title VII claims against the company on the basis that it was not her employer. The company hired and fired the employee, and had full control over her compensation and work conditions. The appeals court gave the district court discretion to determine whether the company was the employee’s employer, but detailed specific standards under which it could make that determination, and opined that it likely was her employer under those standards (Frey v. Hotel Coleman, September 11, 2018, Rovner, I.).

Outside company operates hotel. A company that owned a Holiday Inn franchise hired another company to run the hotel’s day-to-day operations. That company was given full responsibility for all employee operations, including hiring, supervising, and firing, as well as determining salaries, benefits, and terms of employment. Although the employee and her coworkers were subject to the supervision and direction of the outside company, they were on the payroll of the franchisee.

Sexual harassment. The outside company hired the employee in 2008 to work in the hotel’s guest services department. She alleged that shortly after, its CEO subjected her to unwelcome sexual comments and advances. The CEO made comments about the employee having sex with her husband and about her physique. He invited her to join him in a hotel room, asked if he could touch her stomach, and told her he wanted to have phone sex with her. The employee complained to the housekeeping manager, but the CEO laughed off her complaints.

Changes following pregnancy. After the employee told the CEO in June 2009 that she was pregnant, he reduced her hours, rescinded a promised promotion, assigned her to the night shift without the customary extra pay, refused to consider her for a higher-paying position, and required her to perform tasks she claimed were made difficult by her pregnancy. He also made sexually offensive comments related to her pregnancy.

EEOC complaint and termination. During her maternity leave, the employee filed EEOC and Illinois Department of Human Rights charges based on the CEO’s conduct. One week after she returned, the CEO fired her, allegedly for stealing another employee’s cell phone.

District court decision. The employee sued under Title VII and the Illinois Human Rights Act, alleging sexual harassment, hostile work environment, pregnancy discrimination, and retaliatory discharge against the hotel, the outside company, and Holiday Inn Express.

The federal district court granted the employee’s summary judgment motion against the hotel. However, it also granted the outside company’s summary judgment motion, dismissing all federal claims against it on the basis that it was not the employee’s employer. The state retaliation claim, which did not require an employer/employee relationship, remained. At trial on the state retaliation claim, the jury found for the employee, who was awarded compensatory damages, back pay, and pre-judgment interest. The court also entered judgment against the hotel.

The employee appealed the district court’s ruling that the outside company was not her employer, and the amount of back pay and pre-judgment interest the court awarded on the retaliation claim.

Outside company as employer. The appeals court vacated the district court’s ruling that the outside company was not a joint employer of the employee. The district court mistakenly applied the standards of Smith v. Castaways Family Diner, which concerned whether a manager could be considered an employer for purposes of determining whether the company had 15 or more employees. The district court equated the outside company with the managers in Smith, concluding that the outside company was a “hired manager” and so was part of the hotel staff rather than an employer.

The district court should not have used the Smith standards, because it was not considering whether a particular individual was an employee or employer, or whether a company had a certain number of employees. Rather, because the court was considering whether one or both of two unrelated corporate entities were the employee’s employer, an “economic realities” test, which measured whether the putative employer exercised sufficient control, was the appropriate standard.

Additionally, under Title VII, because the outside company was a corporation and not an individual, it could not be considered an “employee.” The appeals court outlined the relevant economic realities test articulated in Knight v. United Farm Bureau Mut. Ins. Co., which it ordered the district court to use on remand.

Although the court left to the district court on remand to determine whether the outside company was the employee’s joint employer, it noted that the district court likely would draw that conclusion by applying the Knight factors. The outside company had control over every aspect of the employee’s work environment, hired and fired her, determined her compensation, supervised, scheduled, and trained her. The hotel had agreed in writing not to interfere with the outside company’s employment decisions and to refrain from giving any instructions to employees that were contrary to the company’s instructions. The employee also was required to comply with policies contained in a training manual provided by the outside company.

Back pay. The employee claimed that the back pay due her on the retaliation claim was approximately 10 times the amount the district court awarded. The appeals court ruled that, to the extent the district court awarded the lower amount because it found the employee was bound by that amount which she had stated in a pre-trial memorandum, the district court erred. Because it was unclear whether the district court made its backpay decision on that basis, the court remanded the back pay award for reconsideration.