Over the past few months, the United States Fifth Circuit Court of Appeals, which reviews appeals of federal district court cases in Louisiana, Texas and Mississippi, addressed a seminal issue which crops up repeatedly in lawsuits - when is a parent corporation deemed to be the employer of the subsidiary's employees for purposes of a discrimination suit. In Tipton v. Northrup Grumman Corp., 2007 WL 2188190 (5th Cir. 2007), the Court was faced with a discrimination suit brought by current and former employees of Northrup Grumman Ship Services, Inc.; the plaintiffs' current and former employer was a subsidiary of the defendant who had been sued by the plaintiffs. In this lawsuit, plaintiffs alleged that the parent had discriminated against them under various federal statutes. The corporate entity sued, Tipton v. Northrup Grumman Corp., ("NGC") moved to dismiss on the basis that it was not the plaintiffs' employer and was, therefore, not the proper party defendant. NGC also moved for dismissal based on a host of other grounds as well. The district court granted NGC's motion for summary judgment, on the basis that NGC was not a proper party defendant, since it was not a plaintiffs' employer.
In the course of its opinion, the Fifth Circuit reiterated the long-standing rule that the doctrine of limited liability creates a strong presumption that a parent corporation is not the employer of its subsidiary's employees. However, the Court noted that in a civil rights action such as a discrimination lawsuit, superficially distinct enterprises may be exposed to liability upon a finding that they represent a single integrated enterprise - a single employer. To determine whether a parent corporation and its subsidiary may be regarded as a "single employer" in the context of a civil rights case, the Court reiterated the four part test which reviews the following factors:
1) interrelation of operations,
2) centralized control of labor relations,
3) common management, and
4) common ownership or financial control.
The Court noted that the second factor concerning centralized control of labor is deemed most important, with courts refining their analysis to the distinct question of what entity made the final decision regarding the challenged employment action. In other words, was the parent corporation ultimately the final decision maker in connection with the employment issues underlying the litigation?
In the case involving NGC, the Court noted that it was persuaded by NGC's evidence indicating that there was no interrelation of operations, no centralized control of labor, no common management, and no common ownership or financial control between NGSS; the plaintiff's actual employer and NGC, the corporate entity sued. Although plaintiffs contended that they had been lead to believe that their employment extended through to the parent, the Court stated that such conclusory allegations could in no way refute the sworn evidence submitted by the parent which indicated to the contrary.
Employers who assess their business operations should be very mindful that while it may convenient to consolidate certain business functions such as operations, labor relations management and financial control, these factors can be used to impute liability to a parent corporation based on the acts of a subsidiary if the four part test is satisfied by plaintiffs in civil rights litigation.
