How Can Companies Successfully Assert the “Functional Equivalent” Doctrine?

March 27, 2019

Starting in 1994, most courts have recognized an enormously important privilege doctrine – treating as if they were full-time corporate employees independent contractors who are the “functional equivalent” of such employees.  As companies’ outsourcing has dramatically increased since then, this “functional equivalent” doctrine has become a key weapon in corporations’ privilege arsenal.  What must companies prove to successfully rely on this doctrine? 

In In re Sampedro, the court held that third-party consulting firm G3M’s employees were the “functional equivalent” of respondent Codere’s employees.  Case No. 3:18 MC 47 (JBA), 2019 U.S. Dist. LEXIS 4973, at *12 (D. Conn. Jan. 10, 2019).  The court relied on affidavits establishing that one G3M employee became Codere’s CEO, and that “other G3M employees served as the ‘primary liaison with external counsel'” on key matters.  Id. at *12-13 (internal citation omitted).  As the court put it, “[t]his evidence shows that G3M employees were integrated into the corporate structure of Codere rendering them de facto employees of the company.”  Id. at *13.  A couple weeks later, in Dialysis Clinic, Inc. v. Medley, No. M2017-01352-SC-R11-CV, 2019 Tenn. LEXIS 17, at *23 (Tenn. Jan. 25, 2019), the Tennessee Supreme Court similarly held that plaintiff’s outside property management company’s employees satisfied the “functional equivalent” standard.  The court explained that:  (1) plaintiff “hired XMi as its agent because of XMi’s experience in property management, which [plaintiff] did not have in-house”; (2) “XMi had primary responsibility for the day-to-day management of [plaintiff’s] properties” (id. at *22); (3) XMi employees established a “close working relationship” with plaintiff; and (4) XMi “was the entity that interacted directly with the tenants.”  Id. at *23.

Courts analyzing this often privilege-dispositive “functional equivalent” doctrine also examine whether the independent contractors:  exercised decision-making authority for the company; possessed information no one at the company had; interacted with third-parties on the company’s behalf; maintained an office or other substantial physical presence at the company; or obtained legal advice from the company’s lawyers.