Does a Small Business Lose Protection under the Iowa Civil Rights Act When It Incorporates?

In a case of first impression, the Iowa Supreme Court recently determined that a corporation cannot qualify for the family-member exemption under the Iowa Civil Rights Act. The Iowa Civil Rights Act prevents discriminatory employment practices and does not apply to “any employer who regularly employs less than four individuals.” Individuals who are members of the employer’s family are not counted as employees under this section.

            In Cote v. Derby Insurance Agency, Inc., the plaintiff filed suit pursuant to the Iowa Civil Rights Act, alleging sexual harassment. The employer, a corporation employed less than four employees, excluding family members, during the relevant time. In December 2015, the employer filed a motion for summary judgment, alleging that the Iowa Civil Rights Act did not apply because the employer regularly employed fewer than four individuals, not counting family members. The district court denied this motion, and the case was appealed. The Iowa Court of Appeals determined that “employer” in the statute is limited to “individuals”, and that the district court correctly denied the employer’s motion for summary judgment.

            After further appeal, the Iowa Supreme Court noted that the Iowa Civil Rights Act defines “employer” to include “every other person employing employees within the state”. “Person” can be defined as a corporation, unless the context otherwise requires. The court stated that the legislature, broadly intending to protect family-owned small businesses, may have intended to exclude from the Iowa Civil Rights Act all businesses, incorporated or not, with fewer than four nonfamily-member employees. However, in analyzing the ordinary meaning of the statutory language, the court concluded that a corporate employer has no family members as employees. Thus, a corporate employer cannot qualify for the family-member exemption under the Iowa Civil Rights Act and may be held liable for discriminatory employment practices if it otherwise meets the statutory requirements.

            This opinion affects many family-owned businesses. Although the Iowa legislature may choose to change the language in the Iowa Civil Rights Act to clearly include corporations in the exemption, small businesses should consider the protections it may be losing by operating as a corporation.