Fenwick v. Unemployment Compensation Commission

New Jersey Court of Errors and Appeals · Corporations

CorporationsPartnershipEmployee vs. partnerpartnershipco-ownershipprofit sharingemployee compensationcontrol of business

Facts

Fenwick operated a beauty shop and originally employed Chesire as a cashier and reception clerk for $15 per week. After she asked for a raise in late 1938, the parties signed an agreement labeled a partnership effective January 1, 1939, under which Chesire would continue in the same job at $15 per week plus 20% of net profits if the business warranted it. The agreement gave Fenwick exclusive control and management, required no capital contribution from Chesire, made Fenwick alone liable for debts, and gave Fenwick 80% of profits and all capital ownership. After the agreement took effect, Chesire continued doing the same work as before, and when the relationship ended in 1942 she simply stopped working and Fenwick continued the business with another receptionist.

Issue

Whether Chesire was, between January 1, 1939 and January 1, 1942, a legal partner of Fenwick or instead an employee whose compensation was measured in part by profits. The answer determined whether she counted as the eighth employee for unemployment compensation coverage.

Rule

Whether a partnership exists depends on the legal substance of the relationship, not merely the parties' label. In determining partnership, courts consider such elements as the parties' intent, the right to share profits, the obligation to share losses, ownership and control of business property, community of power in administration, the language of the agreement, the parties' conduct toward third persons, and the parties' rights on dissolution; under the Uniform Partnership Act, partnership requires carrying on a business as co-owners for profit, and profit sharing does not support an inference of partnership when the profits are received as wages of an employee.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Cleveland, Owen Mercer owned a neighborhood tailoring shop. After his bookkeeper, Talia Brooks, asked for a raise, they signed a document titled "Partnership Agreement" under which Talia would keep doing the same bookkeeping work for $700 per week plus 15% of annual net profits; Owen retained exclusive management, supplied all capital, remained solely responsible for debts, and kept all business assets if the arrangement ended.

For purposes of a state employment statute, which characterization is most likely correct?

Explanation. The majority treated a similar arrangement as employment, not partnership, where the worker continued in the same role, contributed no capital, had no control, bore no losses, and received profits as compensation. The label "partnership" and profit sharing are evidential but not conclusive; the controlling question is whether the parties carried on the business as co-owners for profit. Here, the substance shows wages measured in part by profits, not co-ownership. (Derived from Fenwick v. Unemployment Compensation Commission (n.d.).)