The question of whether a parent corporation and its subsidiaries are "integrated" for purposes of federal labor and employment laws isn’t new. Courts have traditionally answered the question with a tried and true four part test – i.e., do the parent and subsidiary have (1) interrelated operations; (2) common ownership; (3) common management; and/or (4) centralized personnel and labor relations? South Prairie Construction Co. v. Operating Engineers Local 627, 425 U.S. 800, 802 n. 3 (1976). Surprisingly, the Seventh Circuit Court of Appeals has scrapped the tried and true test. Papa v. Katy Industries, Inc., 166 F.3d 937 (7th Cir. 1999).
Citing "enough uncertainty about the standard to warrant a fresh look," the 7th Circuit created a new framework; a judicial "do-over." Papa, 166 F.3d at 939. Specifically, Papa dealt with the minimum number of employees a firm must employ for laws like the ADEA, ADA and Title VII to apply. Under Papa, the number of parent and subsidiary employees can be aggregated only if one of the following three exceptions apply:
- Cases in which the parent corporation "might have directed the discriminatory act, practice, or policy";
- Cases in which the company has splintered itself into several subsidiaries -- each employing less than the minimum number of employees -- "for the express purpose of avoiding liability under the discrimination laws"; or
- Cases where the parent and subsidiary have "neglected corporate formalities" such that the parent could be sued by the subsidiary’s creditors (e.g., a subsidiary fails to comply with the statutory requirements for independent corporate status).
Papa, 166 F.3d at 940-941.
The consolidated cases in Papa revealed a high degree of integration between the parent and subsidiary. In the first case, the parent ordered the subsidiary to discontinue a product line (which resulted in the complained of RIF); the parent fixed the subsidiary employees’ salaries; the subsidiary employees’ participated in the parent’s pension plan; the parent funded the subsidiary’s operations; the computer systems of the parent and subsidiary were integrated; and the subsidiary had access to the parent’s checking accounts. Papa, 166 F.3d at 937. In the second case, the subsidiary’s payroll and benefits were centralized with the parent; the membership of the parent’s and subsidiary’s board of directors overlapped; and employees often "moved back and forth among affiliates." Papa, 166 F.3d at 937-38.
While the employing subsidiaries were heavily integrated with their parents in the consolidated cases, the 7th Circuit held that none of the three exceptions applied. Papa represents a shift from emphasis on integration to a "more precise issue" – i.e., "whether the parent was the real decision-maker." Papa, 166 F.3d at 937. Accordingly, parent involvement in or control over complained of employment decisions will emerge as a critical issue. Here, the 7th Circuit stressed the absence of the following facts:
There is no suggestion that the parent, or any other affiliate, or the enterprise as a whole formulated or administered the specific personnel policies, or directed, commanded, or undertook the specific personnel actions, of which plaintiff’s are complaining.
It is true that [the parent] in a sense ‘caused’ the firing of [the plaintiff] by ordering [the subsidiary] to curtail its operations…but there is no suggestion that [the parent or any of its affiliates] was responsible for his being selected for layoff, let alone for [the subsidiary’s] having picked on him for a forbidden reason.
Papa, 166 F.3d at 941 (emphasis added). Ultimately, the question isn’t how much control does the parent have over the subsidiary’s operations – it’s how much control the parent has over the subsidiary’s employment decision at issue in each case.
It remains to be seen whether Papa’s new standard will extend to questions of liability (i.e., whether the parent can be liable for a subsidiary’s decision, whether a parent is properly joined as a party in a case, etc.) or whether it can be successfully sold in other circuits. Both are results to be devoutly wished for. Papa is significant in reinforcing the concept of the "employing unit." That, of course, is relevant to limiting discovery, limiting the size-driven damage caps in Title VII and the ADA, and to arguing over who is are and are not "similarly situated" comparable employees. Here, small is far more often beautiful.
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