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Fifth Circuit Affirms NLRB Expansion of Employer Liability in Parent-Subsidiary-Affiliate Relationships

October 18, 2011

Fifth Circuit Affirms NLRB Expansion of Employer Liability in Parent-Subsidiary-Affiliate Relationships

October 18, 2011

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The Fifth Circuit's decision has significant implications for: (1) parent companies having operating subsidiaries with employees of their own; and (2) investment companies, such as hedge funds or private equity firms, that exert control over companies in which they invest.

Last year, the National Labor Relations Board (NLRB) greatly expanded employer liability in labor law cases involving parent-subsidiary-affiliate relationships. See Oaktree Capital Mgmt., L.L.C., 355 N.L.R.B. 147 (2010). The U.S. Court of Appeals for the Fifth Circuit just affirmed the NLRB’s decision over a strong dissent. See Oaktree Capital Management, L.P. v. National Labor Relations Board, No. 10-60749, (5th Cir. Sept. 26, 2011).

In a 2-1 decision, the Fifth Circuit affirmed the NLRB's finding that California-based investment firm Oaktree Capital Management, L.P. (Oaktree) and TBR Property, L.L.C. d/b/a Turtle Bay Resorts (TBR), a related company that controls a Hawaiian resort, constitute a "single employer" for labor law purposes. Per the doctrine of "single employer" liability, the Fifth Circuit held Oaktree itself jointly and severally liable for unfair labor practices allegedly committed by managers at the resort.

The Decision

The question for the court was whether Oaktree, a limited partnership, was "sufficiently connected to TBR so that Oaktree is jointly and severally liable with TBR, as a single employer, for remedying unfair labor practices" that took place at the resort. The court analyzed the following four factors regarding the integration of Oaktree and TBR: (1) common ownership or financial control, (2) common management, (3) centralized control of labor relations and (4) interrelation of operations. With respect to each factor, the majority found that the relationship between Oaktree and TBR cut in favor of single employer status. For example, the majority decided that:

  • Oaktree invested $50 million in the resort, and "created or purchased various other entities and placed them in the ownership chain between itself and the Resort."
  • Oaktree and TBR shared common management, and TBR had no other "officers, managers, or principals" than those of Oaktree.
  • Oaktree "participated in labor negotiations with the Union" when its "principal" authored two pieces of correspondence regarding the status of collective bargaining.
  • Oaktree calls itself an "asset and investment manager," and the resort itself was an asset and an investment of Oaktree.
  • Oaktree was "the effective owner of the resort" and Oaktree "must be consulted . . . before any significant decisions are made by or at [the Resort], including decisions on labor matters."

The dissent contended that the "NLRB cites no authority that applies the 'single employer' theory to an investment adviser/manager." The dissent stated that "[n]o obvious labor law policy is being served by holding Oaktree liable in addition" to TBR, which the dissent noted was a "fully accountable, solvent and responsible" party. The dissent further noted that the corporate structure involved was "complex, albeit hardly extraordinary" and that "Oaktree created or used TBR as a self-sufficient corporate vehicle for an individual investment opportunity."

What This Means for Employers

The Fifth Circuit's decision has significant implications for: (1) parent companies having operating subsidiaries with employees of their own; and (2) investment companies, such as hedge funds or private equity firms, that exert control over companies in which they invest. The dissent expressed concern that the "NLRB test would impose responsibility on virtually any corporate parent for subsidiary or affiliate actions, because the subsidiary is ultimately accountable to its parent company and because they often share common employees or officers."

This decision also has potential ramifications beyond the area of traditional labor law because courts often rely on labor relations law precedent to decide whether two or more employers constitute a "single employer" for employment law claims, such as employment discrimination and retaliation claims; wage-and-hour claims; and other similar employment law claims.

For a parent company to potentially avoid a "single employer" finding, it may consider: (1) looking to the subsidiary for only "bottom line" financial results; (2) vesting the management of the subsidiary with authority to manage the subsidiary on a day-to-day basis; and (3) in particular, having the management of the subsidiary have, and exercise, exclusive responsibility for making decisions regarding labor relations and employment matters.

For Further Information

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.