In a September 11, 2018 opinion, the U.S. Court of Appeals for the Seventh Circuit reversed a lower court decision and in doing so clarified the applicable test for determining joint employment for Title VII liability. The court held that the plaintiff, a hotel staff member, was employed both by the entity that managed the day-to-day operations of the hotel and the entity that owned the hotel for purposes of her claims under Title VII and the Illinois Human Rights Act.

In this case, Frey v. Hotel Coleman, et al., Hotel Coleman, Inc. owned a Holiday Inn Express franchise in Algonquin, Ill. Hotel Coleman hired Vaughn Hospitality, Inc. to run the daily operations of the hotel. While 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 the employees

Michael Vaughn, president and co-owner of Vaughn Hospitality, hired Bogustawa Frey (the plaintiff ) to work in the guest services department. Frey alleged that, shortly after her hire, Vaughn began to subject her to unwelcome and inappropriate sexual comments and advances. After Frey informed Vaughn that she was pregnant, Vaughn reduced her hours, rescinded a promise to promote her, assigned her to work the night shift without the customary additional pay, asked her to perform duties that were difficult due to her pregnancy, and made inappropriate sexual comments related to her pregnancy. While on maternity leave, Frey filed a charge of discrimination with the Equal Employment Opportunity Commission and the Illinois Department of Human Rights based on Vaughn’s conduct. Within a week of returning from maternity leave, Frey was discharged. As a result, Frey added a claim of retaliatory discharge with the EEOC and IDHR.

Subsequently, Frey filed a complaint in the Northern District of Illinois alleging violations of Title VII, the IHRA, sexual harassment, hostile work environment, pregnancy discrimination, and retaliatory discharge, naming both Hotel Coleman and Vaughn Hospitality as defendants. Frey moved for summary judgment against Hotel Coleman as to all counts, which was granted. Vaughn Hospitality, on the other hand, moved for summary judgment in its favor, asserting that it was not an employer under Title VII 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 lower court had erred in applying the “employee” test set forth in Smith v. Castaways Family Diner, 453 F.3d 971 (7th Cir. 2006). The court determined that the Smith test, while useful for determining whether an individual is an employer or employee (for such purposes as seeing if an employer meets the 15 employee threshold for liability under Title VII), was not appropriate for determining whether a joint employment relationship existed among entities. The court held that the applicable test, as set forth in Knight v. United Farm Bureau Mutual Ins. Co., 950 F.2d 377, 378-79 (7th Cir. 1991), is the multi-factor “economic realities test" in which no single factor is dispositive, but the broad focus is on whether the putative employer exercised sufficient control over the employee. This test, more familiarly used to distinguish between employees and independent contractors, should also be used to determine which entities are employers for purposes of Title VII, as well as the IHRA.

As a result, the Seventh Circuit vacated the district court’s ruling that Vaughn Hospitality was not a joint employer of Frey and remanded the case back to the district court with instructions to apply the Knight test in order to determine whether Vaughn Hospitality was an employer under Title VII and the IHRA. Despite leaving it to the lower court to apply Knight, the Seventh Circuit walked through the application of the Knight factors, postulating that applying the Knight factors would lead to a determination that Vaughn Hospitality was, in fact, Frey’s employer because Frey was hired as a permanent long-term employee and Vaughn Hospitality exercised control of Frey’s employment and its conditions, provided all of the training to the staff, and provided each employee with a handbook.

In addition to providing clarity on the applicable test to determine whether an entity is an employer under Title VII, the Frey case serves as a warning to employers to be aware of potential exposure to liability under anti-discrimination statutes in their capacity as joint employers. That encompasses situations where, as with Vaughn Hospitality, an entity does not consider itself to be an employer but might exercise sufficient control over putative employees to be considered as such under the economic realities test.