Employment Law Daily Substantial evidence that unionized manufacturer created non-union shop to evade union obligations sustains alter ego status (1)
News
Tuesday, June 19, 2018

Substantial evidence that unionized manufacturer created non-union shop to evade union obligations sustains alter ego status

By Ronald Miller, J.D.

Substantial evidence supported the NLRB’s findings that a unionized manufacturer and a non-union shop that it created were alter egos, ruled a divided D.C. Circuit. The 2-1 appeals court looked to the Board’s findings on three critical factors—identity of business purpose, operations, and equipment; substantial control; and anti-union motive. Island created Verde to mass-produce a partition that Island had been exclusively producing for an architectural firm; Island maintained substantial control over Verde; and Island created Verde for the purpose of evading its bargaining obligations. Moreover, Island required its union to renounce any claim to represent Verde’s employees as a condition for renewal of a CBA. Judge Kavanaugh filed a separate dissenting opinion (Island Architectural Woodwork, Inc. v. NLRB, June 15, 2018, Pillard, C.).

Creation of non-union shop. Island Architectural, a unionized manufacturer of office interiors, created a non-union shop, Verde, to specialize in one of its products, a moveable office divider. The non-union company set up shop in the employer’s back building under the leadership of the daughter of Island’s CEO. Island conferred substantial, uncompensated economic benefits on the non-union shop through a set of informal agreements, which were not memorialized in writing for over a year until the union brought unfair labor practice charges.

From its start, Verde’s employees largely did the same work, on the same equipment, in the same building as Island’s unionized employees had done. Island’s management insisted that “no union members were allowed to enter the back building again.” Island also conditioned its renewal of its collective bargaining agreement on the union signing a waiver of any claim to represent Verde’s employees. The union filed unfair labor practice charges with the Board.

Collective bargaining status. The Board held that the Island and Verde violated Section 8(a)(5) and (1) of the NLRA when they refused to recognize the union that represented Island’s collective bargaining unit as representative of Verde’s workers and when they failed to apply the terms of the Island’s CBA to Verde. Based on evidence showing multiple indicia of a lack of arms-length dealings between Island and Verde, the Board determined that Verde was not a separate and independent employer but merely Island’s alter ego. Te Board also held that Island’s insistence that the union renounce any claim to represent Verde’s employees violated the Act. On the other hand, the employers claimed that Verde was a separate business outside of Island’s bargaining unit and challenged the Board’s contrary determination.

Island gets almost all of its business through a large architecture firm, which designs products and hires Island to manufacture them. The moveable partition that Island arranged for Verde to build was designed by the firm and licensed to Island to mass produce. Island did not believe it could cost-effectively produce the partition; ultimately, Island created Verde to produce the partition.

For the production, Verde hired two former Island employees, among other production workers. An engineer who had designed partitions for Island also joined Verde, as did a foreman from Island. In addition to providing the building, Island provided manufacturing equipment and expertise to Verde. Island also assisted with management, operations, sales training, back office functions, drafting and engineering, and trucking.

Alter ego doctrine. The Board’s alter ego doctrine holds an employer responsible for the contractual or statutory obligations of a nominally separate employer where the circumstances show the latter is not actually distinct but operates as the “alter ego” of the first in a “disguised continuance of the predecessor’s operations.” The appeals court concluded here that the Board’s findings on three critical factors—identity of business purpose, operations, and equipment; substantial control; and anti-union motive—were supported by substantial evidence and comported with the alter ego doctrine.

Business purpose. The Board first found that Island and Verde had substantially identical business purpose and operations. Island created Verde to mass produce a partition that Island had been exclusively producing for the firm. The employers failed to identify evidence that contravened the substantial record evidence supporting the Board’s findings, and the Board permissibly rejected the employers’ contention that their close ties were those typical of a vendor-vendee relationship.

Control. The Board next found that Island maintained substantial control over Verde. For example, Island created formal documentation of its putative sale of part of its business only after the companies faced unfair labor practice charges. Verde operated in Island’s back lot, used Island’s equipment, and received significant operational assistance from Island—without Island documenting or demanding payments for those valuable contributions. The third factor supporting the Board’s alter ego holding was its finding that Island created Verde for the purpose of evading its bargaining obligations under the Act. Island’s CEO repeatedly misled the union about Island’s relationship with Verde, and his evasiveness and conflicting accounts to the union supported the Board’s finding of his anti-union purpose in creating Verde.

Bargaining duty. Finally, the appeals court rejected the employer’s contention that the Board lacked substantial evidence for its holding that Island violated the NLRA by insisting, as a condition of reaching a new CBA, that the union renounce any claim to represent Verde’s employees. A party violates its obligation to bargain in good faith if it conditions agreement regarding mandatory subjects on acceptance of a particular position on a permissive subject. Here, the parties do not dispute that negotiations for the successor CBA involved mandatory subjects of bargaining, and that a memorandum of agreement contained permissive subjects. The employers failed to offer evidence that would require a finding contrary to the determination of the Board.

Dissent. Judge Kavanaugh dissented from the majority’s finding upholding the Board’s treatment of Island and Verde as a single employer under an alter ego theory. The dissent pointed out that Island and Verde did not have common ownership, did not have common management, did not share employees, and did not mingle funds. Further, he noted that each company supervised, hired, fired, and paid the salaries of its own employees. The dissent also noted that an NLRB ALJ had concluded, based on the factual record, that Island and Verde were not alter egos. In Kavanaugh’s view, the ALJ conclusion was the only reasonable conclusion to reach on this factual record.

Interested in submitting an article?

Submit your information to us today!

Learn More