October 6, 2017

Construction Company Liable for $76 Million for Fraudulently Creating Alter Ego Companies to Avoid Its Collective Bargaining Agreements

BY: Steven D. Atkinson, Thomas Lenz, L. Brent Garrett

A case from New York highlights the distinct labor law challenges for employers trying to do business in both union and non-union markets. In some instances, a company may have decided to set up union and non-union entities to operate independently of each other. In other instances, a unionized employer may have created a non-union entity to try to evade the legal and contractual obligations flowing from a relationship with a union. As demonstrated below, the issues and risks in such situations can be significant.

Navillus Case

On September 20th, after three years of litigation, a Manhattan federal district court ordered defendant Navillus Tile, Inc. to pay union plaintiffs $76 million in back wages and contributions to their benefit plans.

The court determined that Navillus, one of the largest unionized subcontractors in New York, created an alter ego company called Advanced Contracting Solutions, LLC (“ACS”) that used non-union workers in order to subvert “work preservation clauses” in collective bargaining agreements between Navillus and several major New York City construction unions. Among other provisions, the agreements stated that successors to Navillus would be bound by the union contracts signed by Navillus.

The court also found an alter ego relationship with Times Square Construction (“TSC”), a company incorporated in 2006 as an “open-shop” general contractor using both unionized and non-unionized subcontractors. TSC was owned by Donal O’Sullivan, the owner of Navillus Tile, until it was sold to O’Sullivan’s brother shortly after unions alleged the two companies were alter egos.

The Alter Ego Doctrine

Collective bargaining agreements often require employers to hire union members for all specified work in a specified geographic area. Some employers use “double-breasted” operations by creating a separate company with non-union employees. These types of operations are not strictly prohibited under the National Labor Relations Act. However, they may violate certain sections and subsections of the NLRA, other federal laws, and work preservation clauses in collective bargaining agreements. When several commonly controlled companies run parallel operations, a court may determine that the operations are actually one double-breasted one.

Similarly, when a company creates another company that is practically the same as the original one, they may be considered alter egos. Employers may not use alter egos to evade their obligations under the labor laws through a sham transaction or technical change in operations. Under the alter ego doctrine, courts can bind a non-signatory to a collective bargaining agreement.

In considering whether two companies are alter egos of each other, courts ask whether they have substantially identical management, business purposes, operations, equipment, customers, supervision, and ownership. A company’s intent to evade union obligations is also a factor in determining alter ego status. Not all of these factors need be present to establish that two entities are alter egos; no single factor is dispositive.

The Navillus court weighed these factors in its 95-page decision and concluded the nonunion employers were alter egos of Navillus. For instance, the court found that ACS relied upon Navillus’s personnel, equipment and reputation, as well as Navillus owner Donal O’Sullivan’s goodwill, generous financial assistance, and personal connections. ACS also used Navillus’ corporate resources and reputation to secure financing for its projects and visas and insurance for its workers. In addition, the court recognized that Donal O’Sullivan received options from the three owners to purchase their ACS shares at fair market value any time within the next three years.

Comment

As the $76-million-dollar judgment in this case illustrates, employers that attempt unlawful workarounds of their collective bargaining agreements do so at considerable risk.

The Labor Relations Team at AALRR works with employers every day to help them avoid issues like those presented in this case.  When we are approached early on, we can provide advice and coordinate with corporate counsel to structure businesses and activities in a way which achieves employers’ goals while complying with labor law and contract provisions. When issues have arisen under grievance, lawsuit, audit, or NLRB charge, we are experienced in working with clients and opposing parties to resolve disputes effectively and efficiently.

The stakes, when dual shop/alter ego issues arise, can be staggering.  It is important to get the best possible advice up front to avoid the land mines which might undo a business plan.  Commonly owned union and non-union entities can be lawfully established and operated. It is attention to details and the rule of law which will help employers succeed.

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Author(s)

Steven D. Atkinson

Steven D. Atkinson

Partner

(562) 653-3200

satkinson@aalrr.com

Steve Atkinson is a founding partner with a diverse clientele in litigation, labor, and employment law matters. He focuses on representing employers in collective bargaining negotiations, union organizing campaigns, unfair labor practice complaints and other proceedings before the National Labor Relations Board. He also handles arbitrations pursuant to collective bargaining agreements

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Thomas Lenz

Thomas Lenz

Partner

(626) 583-8600

tlenz@aalrr.com

Thomas Lenz is a partner handling all aspects of labor and employment law issues from the firm’s Pasadena and Cerritos offices. He heads the firm’s traditional labor and National Labor Relations Board practices. He works with employers in all major industries across California and the West. Mr. Lenz currently serves on the Executive Committee of the Labor and Employment Section for the State Bar of California. He also serves as a Lecturer in Law, teaching at the USC Gould School of Law.

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L. Brent Garrett

L. Brent Garrett

Partner

(562) 653-3200

bgarrett@aalrr.com

Brent Garrett is a partner in the firm's Cerritos and Irvine offices and is a member of the firm’s Private Labor and Employment Group. He exclusively represents management in labor and employment matters. He is also a frequent contributor to the Firm’s Labor Relations Blog, providing analysis and commentary about new developments in the area of traditional labor law.

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