Fancy title aside, this apparent promotion was a bad deal because it ultimately cost the newly-fledged “partners” money. There was no upside in terms of ownership. It also may have run afoul of California job misclassification rules and complicated state and federal tax questions.
Congratulations, great job! Now you owe us money
Before her association with Duane Morris, Ms. Garland, a Black woman, had owned and managed her own law firm with a sizeable book of business. In 2018, after she had been in practice for a dozen years, Duane Morris hired her as “Special Counsel.” She was classified as an at-will employee. Her annual salary was subject to all federal and state tax withholdings. In addition, she was entitled to consideration for discretionary bonuses and employee benefits, including:
- medical insurance;
- participation in the firm’s 401k plan;
- vacation; and
- a parking subsidy.
In 2021, she was offered a “non-equity” or “salaried” partnership. Although her title changed, her job duties did not, and she still had no ownership share in the firm.
But her net pay did change -- it got smaller. She lost money in the deal.
Duane Morris stopped withholding employment taxes from her salary, shifting responsibility to her. The firm also began to assess Ms. Garland for a share of Duane Morris’s state tax liability.
Partner, shmartner – what’s the difference?
Plenty. An equity partner is an owner who must contribute capital to the firm (often via bank loan guaranteed by the firm). With that money, the equity partner buys a share in the firm’s success or failure. If a partnership wishes to shed an equity partner, it often must buy him (usually him) out at an agreed-upon price.
A “salaried partner” or “non-equity partner” is just an employee with a nice salary. A salaried partner owns nothing. Absent contract provisions to the contrary, he or she can be fired for good, bad or no reason – just like any at-will employee. A “salaried partner” is not a partner in any meaningful way.
Another legal difference has to do with how different categories of workers are protected by law. Independent contractors are protected by the terms of their contracts. If, as a hypothetical, Ms. Garland’s law firm had been retained by Duane Morris to work on a particular matter, the firm would have been protected by the terms of a negotiated contract. To be clear, these facts are not alleged in the Complaint.
The rights of employees, on the other hand, are generally protected by state and federal law. The statutes at issue here are federal and state tax laws and the California Equal Pay Act, other provisions of the California Labor Code, the California Business and Professions Code and California common law principles concerning fraud, misrepresentation, concealment and breach of contract.
Equity partners, by contrast, are largely protected by the terms of a partnership agreement – a contract somewhat like the kinds of contracts that protect independent contractors.
Claims and counterclaims
Ms. Garland contends that Duane Morris denied non-equity partners the federal and California legal protections to which employees are entitled. She claims the firm also restructured compensation for non-equity partners to push expenses onto its employees. She also alleges that the firm engaged in “massive tax fraud.” Duane Morris claims that the lawsuit mischaracterizes her role at the firm.
But does it add up to discrimination?
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The Eighteenth Cause of Action in the Complaint is lightly pleaded, essentially following the language of the statute. It accuses the firm of discriminating against female and non-White lawyers by paying them for substantially similar work at lower wage rates than are paid to male and White attorneys. It depends heavily on allegations of employee misclassification.
In a lawsuit, the Complaint need not set out the specific evidence to be used at trial. However, it must provide enough detail to show that there is a plausible legal claim. This is likely to be Duane Morris’s first line of attack.