Local_Driver
Pyle People deliver
- Credits
- 13
Background
When Sun Cap acquired Jevic in a leveraged buyout in 2006, Jevic and Sun Cap entered into a management services agreement pursuant to which Sun Cap agreed to provide Jevic with consulting services for a fee. At the end of 2007, the value of Jevic’s assets had fallen below that required by certain of the financial covenants in Jevic’s financing agreements. In March 2008 Sun Cap determined not to invest additional money in Jevic. Jevic then commenced an active sale process. On May 16, 2008, having failed to reach agreement with any potential buyers, Jevic’s board voted to authorize the filing of a voluntary petition for relief for Jevic under chapter 11 of the Bankruptcy Code. Jevic sent termination notices to its employees pursuant to the WARN Act, which the employees received on May 19, 2008. The following day, on May 20, 2008, Jevic filed its petition for relief with the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The next day, May 21, 2008, the Jevic Employees filed a complaint against Jevic and Sun Cap alleging violations of the WARN Act and a similar New Jersey statute for failure to provide the Jevic Employees with the requisite 60-day notice before a plant closing or mass layoff.
In 2012, Sun Cap and the Jevic Employees each filed with the Bankruptcy Court motions for summary judgment on the issue of whether Sun Cap could be held liable for violations by Jevic of the WARN Act as a “single employer.” The Bankruptcy Court granted Sun Cap’s motion and denied the motion of the Jevic Employees. The Jevic Employees appealed to the District Court.
“Single Employer” Analysis
The WARN Act provides that an employer must provide employees with 60-days notice prior to closing a plant or making mass layoffs. Courts have held that a parent corporation may be liable for damages arising from WARN Act violations by a subsidiary if the subsidiary corporation and the parent corporation constitute a “single employer.” A standard adopted by the Third Circuit to determine whether a parent entity may be held liable for WARN Act violations of its subsidiary under the “single employer” doctrine is whether the two companies have become “so entangled with [one another’s] affairs” that they “are not what they appear to be, [and] in truth they are but divisions or departments of a single enterprise.”[SUP]1[/SUP] In this regard, the Department of Labor has set forth five factors courts should consider when determining whether a parent company is liable for WARN Act violations of a subsidiary:
Turning to the third factor, de facto exercise of control, the District Court, citing Third Circuit case law, stated that this factor turns on whether the parent has specifically directed the allegedly illegal employment practice that forms the basis for the litigation and not just on the “parent’s exercise of control pursuant to the ordinary incidents of stock ownership”.[SUP]4[/SUP] The Jevic Employees argued that Sun Cap maintained ultimate control of Jevic, as evidenced by the presence of two of Sun Cap’s employees on Jevic’s board of directors. The Jevic Employees further argued that even though Sun Cap did not direct the plant closure, Sun Cap’s decision to cut off funding was a de facto exercise of control over Jevic’s decision to close its doors. However, the District Court noted that Third Circuit precedent cautions against using this type of “natural and probable consequences” reasoning, and instead directs courts to focus on which entity retains ultimate responsibility for keeping the company alive. Through this lens, the District Court considered the fact that Jevic and not Sun Cap was responsible for signing the WARN Act notice and terminating its employees, and that Jevic made the decision to shut down the company. Based on these facts, the District Court found that Jevic had ultimate responsibility for keeping its company alive and that Sun Cap did not exercise de facto control over Jevic for purposes of WARN Act liability.
Analyzing the fourth factor, which is whether there was unity of personnel policies between Jevic and Sun Cap, the District Court looked at whether the two companies functioned as a single unit when relating to employees, including whether there was centralized hiring and firing, payment of wages, and recordkeeping with respect to personnel and benefits. The Jevic Employees argued that such unity did exist because Sun Cap and Jevic shared a healthcare initiative, business insurance and incentive programs for management. The District Court rejected these arguments and found that the Jevic Employees failed to produce evidence that Sun Cap directly hired or fired Jevic employees, paid the salaries of employees or shared a personnel or benefits recordkeeping system with Jevic.
Finally, the District Court considered the Jevic Employees’ argument that Sun Cap’s role in implementing Jevic’s restructuring plan exceeded the ordinary powers of ownership and rose to the level of satisfying the “dependency of operations” factor. The Jevic Employees argued that Sun Cap’s representatives worked with an independent contractor to implement the restructuring plan in which they instituted accounts and managed costs, and also that Sun Cap immersed itself in the details of Jevic’s management by putting into place a management services agreement between Sun Cap and Jevic. Sun Cap argued that the restructuring plan was the product of an agreement between Jevic and the independent consulting firm, that such agreement provided that all decision-making authority shall remain with Jevic, and that the management services agreement provided that the activities of Jevic shall at all times be subject to the control of Jevic’s officers and directors. The District Court rejected the Jevic Employees’ position and noted that the separateness from Sun Cap of Jevic’s books and records, bank accounts, financial statements, administrative services, facilities and equipment weighed against a finding of “dependency of operations.” In light of such separateness, and its finding that Sun Cap acted as an independent contractor providing Jevic with management consulting services for compensation under the management services agreement, the District Court concluded “there is insufficient evidence that [Sun Cap] yielded the type of control and day-to-day involvement sufficient to show a ‘dependency of operations’ giving rise to liability.”[SUP]5[/SUP]
Having found that three of the five factors weighed against a finding of liability, the District Court concluded that Sun Cap and Jevic could not be considered a “single employer” for purposes of WARN Act liability and affirmed the Bankruptcy Court’s ruling.
Conclusion
The District Court’s decision is an important reminder to private equity firms that in order to minimize the risk of single employer liability under the WARN Act, it is crucial to keep in mind the five factors set out by the Department of Labor. While not all factors are of equal weight and it may not be necessary to maintain completely separate boards, the acquiring company should strive to implement procedures and policies, in form and in substance, that will maintain the separateness and individual decision-making capacity of the acquired entity.
When Sun Cap acquired Jevic in a leveraged buyout in 2006, Jevic and Sun Cap entered into a management services agreement pursuant to which Sun Cap agreed to provide Jevic with consulting services for a fee. At the end of 2007, the value of Jevic’s assets had fallen below that required by certain of the financial covenants in Jevic’s financing agreements. In March 2008 Sun Cap determined not to invest additional money in Jevic. Jevic then commenced an active sale process. On May 16, 2008, having failed to reach agreement with any potential buyers, Jevic’s board voted to authorize the filing of a voluntary petition for relief for Jevic under chapter 11 of the Bankruptcy Code. Jevic sent termination notices to its employees pursuant to the WARN Act, which the employees received on May 19, 2008. The following day, on May 20, 2008, Jevic filed its petition for relief with the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The next day, May 21, 2008, the Jevic Employees filed a complaint against Jevic and Sun Cap alleging violations of the WARN Act and a similar New Jersey statute for failure to provide the Jevic Employees with the requisite 60-day notice before a plant closing or mass layoff.
In 2012, Sun Cap and the Jevic Employees each filed with the Bankruptcy Court motions for summary judgment on the issue of whether Sun Cap could be held liable for violations by Jevic of the WARN Act as a “single employer.” The Bankruptcy Court granted Sun Cap’s motion and denied the motion of the Jevic Employees. The Jevic Employees appealed to the District Court.
“Single Employer” Analysis
The WARN Act provides that an employer must provide employees with 60-days notice prior to closing a plant or making mass layoffs. Courts have held that a parent corporation may be liable for damages arising from WARN Act violations by a subsidiary if the subsidiary corporation and the parent corporation constitute a “single employer.” A standard adopted by the Third Circuit to determine whether a parent entity may be held liable for WARN Act violations of its subsidiary under the “single employer” doctrine is whether the two companies have become “so entangled with [one another’s] affairs” that they “are not what they appear to be, [and] in truth they are but divisions or departments of a single enterprise.”[SUP]1[/SUP] In this regard, the Department of Labor has set forth five factors courts should consider when determining whether a parent company is liable for WARN Act violations of a subsidiary:
- common ownership;
- common directors and/or officers;
- de facto exercise of control;
- unity of personnel policies; and
- dependency of operations.[SUP]2[/SUP]
Turning to the third factor, de facto exercise of control, the District Court, citing Third Circuit case law, stated that this factor turns on whether the parent has specifically directed the allegedly illegal employment practice that forms the basis for the litigation and not just on the “parent’s exercise of control pursuant to the ordinary incidents of stock ownership”.[SUP]4[/SUP] The Jevic Employees argued that Sun Cap maintained ultimate control of Jevic, as evidenced by the presence of two of Sun Cap’s employees on Jevic’s board of directors. The Jevic Employees further argued that even though Sun Cap did not direct the plant closure, Sun Cap’s decision to cut off funding was a de facto exercise of control over Jevic’s decision to close its doors. However, the District Court noted that Third Circuit precedent cautions against using this type of “natural and probable consequences” reasoning, and instead directs courts to focus on which entity retains ultimate responsibility for keeping the company alive. Through this lens, the District Court considered the fact that Jevic and not Sun Cap was responsible for signing the WARN Act notice and terminating its employees, and that Jevic made the decision to shut down the company. Based on these facts, the District Court found that Jevic had ultimate responsibility for keeping its company alive and that Sun Cap did not exercise de facto control over Jevic for purposes of WARN Act liability.
Analyzing the fourth factor, which is whether there was unity of personnel policies between Jevic and Sun Cap, the District Court looked at whether the two companies functioned as a single unit when relating to employees, including whether there was centralized hiring and firing, payment of wages, and recordkeeping with respect to personnel and benefits. The Jevic Employees argued that such unity did exist because Sun Cap and Jevic shared a healthcare initiative, business insurance and incentive programs for management. The District Court rejected these arguments and found that the Jevic Employees failed to produce evidence that Sun Cap directly hired or fired Jevic employees, paid the salaries of employees or shared a personnel or benefits recordkeeping system with Jevic.
Finally, the District Court considered the Jevic Employees’ argument that Sun Cap’s role in implementing Jevic’s restructuring plan exceeded the ordinary powers of ownership and rose to the level of satisfying the “dependency of operations” factor. The Jevic Employees argued that Sun Cap’s representatives worked with an independent contractor to implement the restructuring plan in which they instituted accounts and managed costs, and also that Sun Cap immersed itself in the details of Jevic’s management by putting into place a management services agreement between Sun Cap and Jevic. Sun Cap argued that the restructuring plan was the product of an agreement between Jevic and the independent consulting firm, that such agreement provided that all decision-making authority shall remain with Jevic, and that the management services agreement provided that the activities of Jevic shall at all times be subject to the control of Jevic’s officers and directors. The District Court rejected the Jevic Employees’ position and noted that the separateness from Sun Cap of Jevic’s books and records, bank accounts, financial statements, administrative services, facilities and equipment weighed against a finding of “dependency of operations.” In light of such separateness, and its finding that Sun Cap acted as an independent contractor providing Jevic with management consulting services for compensation under the management services agreement, the District Court concluded “there is insufficient evidence that [Sun Cap] yielded the type of control and day-to-day involvement sufficient to show a ‘dependency of operations’ giving rise to liability.”[SUP]5[/SUP]
Having found that three of the five factors weighed against a finding of liability, the District Court concluded that Sun Cap and Jevic could not be considered a “single employer” for purposes of WARN Act liability and affirmed the Bankruptcy Court’s ruling.
Conclusion
The District Court’s decision is an important reminder to private equity firms that in order to minimize the risk of single employer liability under the WARN Act, it is crucial to keep in mind the five factors set out by the Department of Labor. While not all factors are of equal weight and it may not be necessary to maintain completely separate boards, the acquiring company should strive to implement procedures and policies, in form and in substance, that will maintain the separateness and individual decision-making capacity of the acquired entity.
