Papa v. Katy Industries, Inc.

• Decision Date: 18 March 1999
• Docket Number: Nos. 98-2009,98-2185,s. 98-2009
• Citation: 166 F.3d 937
• Parties: 78 Fair Empl.Prac.Cas. (BNA) 1665, 74 Empl. Prac. Dec. P 45,716, 14 NDLR P 138 James PAPA, Plaintiff-Appellant, v. KATY INDUSTRIES, INC. and Walsh Press Company, Inc., Defendants-Appellees. Equal Employment Opportunity Commission, Plaintiff-Appellant, v. GJHSRT, Inc., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 937

166 F.3d 937

78 Fair Empl.Prac.Cas. (BNA) 1665,

74 Empl. Prac. Dec. P 45,716, 14 NDLR P 138

James PAPA, Plaintiff-Appellant, v. KATY INDUSTRIES, INC. and Walsh Press Company, Inc.,

Defendants-Appellees.

Equal Employment Opportunity Commission, Plaintiff-Appellant, v. GJHSRT, Inc., et al., Defendants-Appellees.

Nos. 98-2009, 98-2185.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 4, 1998.

Decided Feb. 8, 1999.

Rehearing and Suggestion for Rehearing En Banc Denied March

18, 1999.

Margaret A. Angelucci (argued), Joel A. D'alba, Asher, Gittler, Greenfield, Cohen & D'alba, Chicago, IL for Plaintiff-Appellant in docket No. 98-2009.

David I. Herbst, Judith M. Hudson (argued), Holleb & Coff, Chicago, IL, for Defendants-Appellees in docket No. 98-2009.

Gail S. Coleman (argued), Equal Employment Opportunity Commission, Office of

General Counsel, Washington, DC, for Plaintiff-Appellant in docket No. 98-2185.

William R. Sullivan, Jr. (argued), Franczek Sullivan, Chicago, IL, for Defendants-Appellees in docket No. 98-2185.

Before POSNER, Chief Judge, and BAUER and EVANS, Circuit Judges.

POSNER, Chief Judge.

We have consolidated for decision two appeals that raise the same issue. That issue is what test to use to determine whether an employer that has fewer than 15 or 20 employees, and thus falls below the threshold for coverage by the major federal antidiscrimination laws, 42 U.S.C. § 2000e(b) (Title VII of Civil Rights Act of 1964) (15 employees); 42 U.S.C. § 12111(5)(A) (Americans with Disabilities Act) (15 after 1994); 29 U.S.C. § 630(b) (Age Discrimination in Employment Act) (20), should be deemed covered because it is part of an affiliated group of corporations that has in the aggregate the minimum number of employees. The parties treat the issue, as have previous cases to address it, as one of federal common law.

In the first case that we review today, James Papa brought suit under the age-discrimination and disabilities laws against Katy Industries, Inc. and its wholly owned subsidiary Walsh Press Company, Inc. Papa was employed by Walsh, which had too few employees to be covered by the laws under which Papa is suing. Katy, however, the parent, has numerous subsidiaries, employing in the aggregate more than a thousand employees. Katy ordered Walsh's president to discontinue one of its production lines. To comply with this directive, the president had to lay off some of Walsh's employees. One of the ones he laid off was Papa. The question is whether Papa's "real" employer was Katy, or (it makes no difference in this case) the entire consolidated group, rather than Walsh.

Walsh complies with all the formalities required of a subsidiary that wants to have a corporate identity different from that of its parent. Yet there is--unsurprisingly, considering how small Walsh is--a degree of integration between it and Katy. It is illustrated by the latter's command to Walsh to abandon a part of Walsh's business, requiring layoffs. And there is more. The salaries of Walsh's employees are fixed by Katy, and the employees participate in Katy's pension plan; Katy funds Walsh; their computer operations are integrated; Walsh had the use of certain subaccounts in Katy's checking account rather than having its own bank account; and Walsh needs Katy's approval to write checks of more than $5,000. The district court held, nevertheless, that Katy was not Papa's employer and hence that the court lacked jurisdiction over Papa's suit.

The facts in the second case are quite similar. The plaintiff--the EEOC suing on behalf of Richard Mueser, a former regional manager of defendant GJHSRT--charged that the company had violated the antiretaliation provision of Title VII by firing Mueser. GJHSRT didn't have 15 employees but is a part of an affiliated group known as the "Frederick Group of Companies," which like Katy has many more employees than is necessary to trigger the coverage of the antidiscrimination laws. Each of the Frederick companies is engaged in a different phase of the trucking business and at a different location, but as with Katy there is a degree of integration. Payroll and benefits are centralized, as are computer operations; the membership of the boards of directors of the two companies overlaps; and employees are moved back and forth among affiliates. The district court, nevertheless, granted summary judgment for the defendants, holding that only GJHSRT was Mueser's employer.

The briefs in these two cases examine four factors, treating none as entitled to more weight than any of the others, to determine whether the nominal employer is part of an "integrated enterprise" and in consequence not allowed to invoke the few-employees exemption. These factors are interrelation of operations, common management, common ownership, and centralized control of labor relations and personnel. We cannot blame the lawyers for structuring their analysis this way, because we and other courts of appeals have often done likewise, Sharpe v. Jefferson Distributing Co., 148 F.3d 676, 678 (7th Cir.1998); Rogers v. Sugar Tree Products, Inc., 7 F.3d 577, 582 (7th Cir.1994); Lockard v. Pizza Hut, Inc., 162 F.3d 1062, 1069-70 (10th Cir.1998); Artis v. Francis Howell North Band Booster Ass'n, Inc., 161 F.3d 1178, 1184 (8th Cir.1998); Swallows v. Barnes & Noble Book Stores, Inc., 128 F.3d 990, 993-94 (6th Cir.1997); Cook v. Arrowsmith Shelburne, Inc., 69 F.3d 1235, 1240-41 (2d Cir.1995); Herman v. United Brotherhood of Carpenters & Joiners, 60 F.3d 1375, 1383 (9th Cir.1995)--though not always. In EEOC v. Illinois, 69 F.3d 167, 171-72 (7th Cir.1995); Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 777 (5th Cir.1997); Schweitzer v. Advanced Telemarketing Corp., 104 F.3d 761, 765 (5th Cir.1997), and Johnson v. Flowers Industries, Inc., 814 F.2d 978, 981 n. * (4th Cir.1987), although the four-factor test is cited or recited, the focus of the opinions is on whether the parent corporation made the personnel decision--committed the discriminatory act--of which the plaintiff was complaining. There is no necessary incompatibility between the two lines of case. The opinion in Lusk explains that the four factors "are examined only as they bear on this precise issue," 129 F.3d at 777, that is, the issue of whether the parent was the real decision maker. In a number of other cases, such as our Sharpe decision, the four-factor test is applied because the parties agreed that it is the right test, but is not endorsed by the court.

There is enough uncertainty about the standard to warrant a fresh look. This is especially appropriate because of the vagueness of three of the four factors (all but "common ownership" and it, as we shall see, is useless); because, being unweighted, the four factors do not yield a decision when, as in the two cases before us, they point in opposite directions; and because the test was not custom-designed for answering exemption questions under the antidiscrimination laws, but instead was copied verbatim from the test used by the National Labor Relations Board to resolve issues of affiliate liability under the laws administered by the Board. Rogers v. Sugar Tree Products, Inc., supra, 7 F.3d at 582; Armbruster v. Quinn, 711 F.2d 1332, 1336-38 (6th Cir.1983); Baker v. Stuart Broadcasting Co., 560 F.2d 389, 392 (8th Cir.1977).

The place to start in rethinking the proper standard is with the purpose, so far as it can be discerned, of exempting tiny employers from the antidiscrimination laws. The purpose is not to encourage or condone discrimination; and Congress must realize that the cumulative effect of discrimination by many small firms could be substantial. The purpose is to spare very small firms from the potentially crushing expense of mastering the intricacies of the antidiscrimination laws, establishing procedures to assure compliance, and defending against suits when efforts at compliance fail. See Tomka v. Seiler Corp., 66 F.3d 1295, 1314 (2d Cir.1995) (reviewing legislative history); Miller v. Maxwell's International Inc., 991 F.2d 583, 587 (9th Cir.1993). This purpose or policy is unaffected by whether the tiny firm is owned by a rich person or a poor one, or by individuals or another corporation. If a firm is too small to be able economically to cope with the antidiscrimination laws, the owner will not keep it afloat merely because he is rich; rich people aren't famous for wanting to throw good money after bad. So an approach actually hinted at in the EEOC's brief of treating any affiliated group of corporations as a single employer of all the employees of all the corporations in the group would lead as rapidly to the destruction of tiny firms as the approach obviously rejected by Congress of applying the antidiscrimination laws to every employer, no matter how few employees he has.

There are three situations in which the policy behind the exemption of the tiny employer is vitiated by the presence of an affiliated corporation; the exemption should be construed to exclude them. The first situation is where, the traditional conditions being present for "piercing the veil" to allow a creditor, voluntary or involuntary, of one corporation to sue a parent or other affiliate, e.g., United States v. Bestfoods, 524 U.S. 51, 118 S.Ct. 1876, 1885, 141 L.Ed.2d 43 (1998); Anderson v. Abbott, 321 U.S. 349, 362-63, 64 S.Ct. 531, 88 L.Ed. 793 (1944); Secon Service System, Inc. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 413-16 (7th Cir.1988); In re Kaiser, 791 F.2d 73, 75-77 (7th Cir.1986); Fletcher v. Atex, Inc., 68 F.3d 1451, 1458-61 (2d Cir.1995), the parent or affiliates of the plaintiff's employer would be liable for the employer's debts. If because of neglect of corporate formalities, or a holding out of the parent as the real party with whom a creditor nominally of a subsidiary is dealing, a parent (or other affiliate) would be liable for the torts or breaches of contract of its subsidiary, it ought...