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Finding deep pockets gets easier as courts stretch the law to find entities liable for unlawful employment practices as joint employers, agents, or others

April 15th, 2014  |  Lorene Park

By Lorene D. Park, J.D.

Courts have flexed a bit of statutory muscle lately, finding that threshold definitions of “employer” and “agent” stretched just enough to extend potential liability to entities that were not direct employers in the traditional sense, including franchise operations, purchasers of assets, building managers, insurers that administered benefits, and more. From a plaintiff’s point of view, this makes the search for deep pockets to pay a potential judgment much easier. But from a company’s vantage point, there is a greater possibility for liability that it didn’t see coming. Consider these examples:

Successor in interest. Companies that purchase the assets of an employer and hire its employees may find they have taken on unexpected liabilities as well. The key considerations for liability as a successor employer often include the pre-purchase relationship of the entities and whether the transition involved no real change in operations. The Third Circuit Court of Appeals applied federal common law and ruled that a mortgage company could be liable under the FLSA for overtime violations as a successor in interest. Vacating the dismissal of an underwriter’s claims, the appeals court found that it was enough that she alleged that all facets of the business, such as operations, staffing, office space, email addresses, and employment conditions, remained the same after the transition; that the successor had pre-transfer notice of the overtime obligations (the same managers controlled payroll and scheduling); and that the predecessor was now “defunct,” indicating it could not pay a potential award. The employee’s direct liability and joint employer liability theories were also revived, as were her claims against individual managers (Thompson v Real Estate Mortgage Network).

Similarly, the operator of a bar and restaurant that took over the business assets of a sports bar that went out of business was a successor employer, the Oregon Supreme Court found, requiring it to reimburse a state agency for wages paid from the state’s Wage Security Fund on behalf of four claimants previously employed by the sports bar. Since the defendant conducted essentially the same business, it was liable as a successor (Blachana, LLC dba Penner’s Portsmouth Club v Bureau of Labor and Industries).

Agent of “future” employer. One of the more unusual cases of recent note was a ruling that a company was liable under the ADA as a matter of law for unlawful pre-offer medical exams as an agent of a “future employer,” even though the employer was not operational at the time of the alleged ADA violations (and thus not an “employer” as defined by the Act). The federal court from the Western District of Pennsylvania noted that the company (“agent”) itself had enough employees to satisfy the ADA’s numerosity requirement and it was undisputed that it controlled applicants’ access to employment with the future employer. The EEOC was thus granted partial summary judgment in that regard. The court denied the EEOC’s motion as to the future employer because the company had no employees during the relevant time. Though the future employer might be liable under a “joint employer” theory, further factual development was needed to make that determination (EEOC v Grane Healthcare Co).

Franchise. There have also been several recent cases concerning whether franchise operations might be liable for FLSA violations as a joint enterprise with a franchisee. A federal court in the Northern District of Georgia explained that, while franchise operations generally do not meet the requirements for inclusion, the FLSA does not categorically exclude franchise relationships from joint enterprise coverage. Department of Labor regulations “make it clear that an ordinary franchise arrangement does not create an enterprise,” but that “some franchise . . . arrangements have the effect of creating a larger enterprise and whether they do or do not depends on the facts.” The key inquiry is whether plaintiffs show: (1) related activities; (2) unified operation or common control; and (3) a common business purpose.

Applying this test in a suit brought by drivers for a restaurant food delivery service, the court granted conditional certification of an FLSA collective action over minimum wage violations because the drivers adequately alleged that a franchise operation formed a joint enterprise under the Act. The defense argued that the employer had not generated sufficient revenue to be governed by the FLSA, but the court found that the proposed amendment to the complaint (alleging that the relation between GoWaiter Franchise Holding and its related company, GoWaiter Business, constituted a joint enterprise) was not futile (Wilson v GoWaiter Franchise Holdings, LLC).

Managing entity. Other entities that are sufficiently related to, or involved in, an employer’s operations also risk litigation. For example, a hospital clerk who alleged that she was disciplined and fired because she had to take FMLA leave for post-traumatic stress disorder after sexual harassment and an assault by a medical director survived dismissal of her FMLA “discrimination” claims against the hospital and the corporate entities that managed and operated it. Though she failed to name the managing entities in her administrative complaint, a federal district court in Iowa noted that a complainant should not be expected to know the intricacies of complex corporate relationships, and the clerk plausibly alleged that the entities were “substantially identical” and had notice of her complaints. She also alleged that the related entities “managed” and were “doing business as” Franklin General Hospital and that certain supervisors were their “agents” (Whitney v Franklin General Hospital).

Insurers. In addition, insurers that administer leave and other benefits could find themselves on the hook as an “employer.” In one case, a federal court in Maine refused to dismiss a Bank of America (BOA) employee’s disability discrimination claims against Aetna, the insurer that administered BOA’s disability and leave claims, concluding that she sufficiently alleged Aetna was an employer under the ADA and state law. After discussing the tests for finding “constructive ‘employer’ status,” the court noted that Aetna allegedly did more than administer benefits; it controlled whether leave would be granted as an ADA accommodation of the employee’s post-traumatic stress disorder after a sexual assault by a coworker. According to the complaint, BOA authorized Aetna to handle disability and FMLA claims; the bank had her provide information to Aetna to justify leave; Aetna interacted with her and directed the information she was to produce; and Aetna informed BOA she was “being placed on ‘LOA-closed’ status” and directed BOA to take action within three days. While this did not show Aetna controlled the bulk of the indicia of employment, “it may well be that Aetna was ‘intertwined’ with BOA” as to her employee benefits, the court wrote.

The court also found that the allegations placed Aetna outside of the safe harbor provisions of 42 U.S.C. Sec. 12201(c) and Maine law for insurers that “administered the terms of a bona fide benefit plan” because the employee was not claiming Aetna violated those Acts as a plan administrator, but rather as an employer. She alleged BOA delegated to Aetna certain personnel functions normally handled by an employer, such as whether an employee’s disability justified leave and whether BOA should accommodate the claimed disability. Aetna’s motion to dismiss was denied on the disability discrimination claims. It was also denied as to the claim that it violated a state personnel records law by refusing to produce all of the employee’s medical and other records (Brown v Bank of America, NA).

Building and land owners. In another case, a federal court in New York found that a company that owned and managed a building where a security company’s employee was assigned could be liable, as joint employer, for Title VII, FMLA, and other statutory claims he asserted against both companies. The employee was interviewed by the owner before being assigned there, and one of the owner’s employees granted him days off. The employee alleged that he was harassed based on his race, national origin and sexual orientation by a security company employee, who he claimed acted as an agent of the building owner (Daniel v T&M Protection Resources, Inc). As indicated by this case, the right to control the workplace as well as the terms and conditions of employment are key issues. In contrast, for example, an employee of a contractor that provided cleaning services to a Missouri plant had his tort claims against the plant owner for severe personal injuries dismissed on summary judgment after the Eighth Circuit concluded that the company did not retain sufficient control over the jobsite or the contractor’s employees (Spaulding v Conopco, Inc).

Other contractor cases. Several of the foregoing examples involved instances where companies contracted with other companies and, based on the circumstances, were potentially liable. Factors considered by courts vary depending on the theory of liability (e.g., as a “constructive” employer, joint employer, or otherwise), though there is some overlap. In one recent case, an employee threw it all on the table and the resulting unpublished Third Circuit opinion set forth a concise summary of the Darden “right to control” factors in determining whether an entity is an “employer” under Title VII, as well as the tests for joint employer and integrated enterprise liability. Because the employee in Plaso was unable to show that the hospital where she worked as a consultant (under contract with a consulting business) was her “employer,” her Title VII and state law claims, alleging that her boss at the consulting firm sexually harassed her, failed. The Third Circuit found no support for her claims under joint employer, integrated enterprise, or independent contractor theories of liability (Plaso v IJKG, LLC).

Key considerations

While there are too many examples of the potential for liability on the part of non-traditional “employers” to include them all here, suffice it to say that courts are willing to let claims proceed against non-traditional employers based on jurisprudence concerning joint employer status, integrated or common enterprise, agent status, successor in interest, and more. Generally speaking, courts look to the totality of circumstances. Although the precise test varies by statute and between federal circuits, key considerations for liability often include:

  • “Constructive” employer (direct liability): the “right to control” test, often focusing on who paid the plaintiff; who hired and fired the plaintiff; and who had control over the plaintiff’s daily employment activities.
  • “Agent” of employer: according to the court in EEOC v Grane Healthcare Co, an agent that independently satisfies the numerosity requirement can be sued under employment laws for its own discriminatory conduct perpetrated against a plaintiff employed by a distinct entity when it exercised control over employment opportunities. (Note that this is a distinct analysis from the more typical case where the question is whether an employer is liable for the unlawful acts of its employees/agents.)
  • Joint employer: whether the entities exercise significant control over the same workers, considering the authority to hire and fire, promulgate work rules and assignments, and set conditions of employment; the day-to-day supervision of employees, including discipline; and the control of employee records, including payroll, insurance, and taxes.
  • Integrated or common enterprise: the relationship between the companies, including: related activities; unified ownership, management, operations; a common business purpose; whether the entities present themselves as a single entity to third parties; whether one indemnifies the expenses or losses of the other; and whether one entity does business exclusively with the other.
  • Successor employer: the pre-purchase relationship between the entities (factors similar to integrated enterprise liability); whether the transition involved no real change (e.g., changes in operations, staff, office space, addresses, working conditions); the successor’s pre-transfer notice of potential liability; and the predecessor’s ability to pay a potential award.

Under the premise that forewarned is forearmed, companies that do not fit within the traditional role of employer should be cognizant that they may nonetheless find themselves liable for unlawful employment practices under circumstances such as those outlined above. Any company that outsources to another company, perhaps to avoid liability under labor and employment laws, may nonetheless find itself liable to the other company’s employees. And a company that purchases the assets of another company should take a hard look at the potential for liability under employment laws (with respect to the other company’s employees) and factor that in to the negotiations for a purchase price. At the very least, keep in mind that if a company controls an important aspect of an individual’s employment relationship with a separate entity (e.g., hiring, hours, benefits, etc.), the company should assess its potential for liability under labor and employment laws.