In EEOC v. Northern Star Hospitality, Inc., No. 14-1660, 2015 WL 353997 (7th Cir. Jan. 29, 2015), the U.S. Court of Appeals for the Seventh Circuit held that companies under common ownership can be liable as successor entities to companies that are incapable of paying judgments in federal employment actions if there is continuity between the operations and workforce of the entity that is incapable of paying the judgment and another of the employer’s businesses. Employers need to be aware that the EEOC and the plaintiff’s bar can use this theory to try to reach other corporations that the employers own, even if the EEOC and these plaintiffs cannot pierce the corporate veil to reach those corporations.

Case Background

Dion Miller, an African-American, was a cook for Northern Star Hospitality, Inc. d/b/a Sparx Restaurant (“Sparx” or “Hospitality”). On October 1, 2010, when Miller arrived at Sparx to begin his shift, a co-worker told him to look in the kitchen cooler. In the cooler was a one-dollar bill with a noose drawn around President Washington’s neck and a sketch of a hooded Klansman on horseback with “KKK” written on the hood. Also in the cooler was a picture of the late Gary Coleman.

Miller had a co-worker take a photograph of the display in the cooler and lodged a complaint with the restaurant’s general manager. The general manager learned that two of Miller’s superiors – the kitchen manager and kitchen supervisor – admitted that they were responsible for the display. As a result of the complaint, the kitchen supervisor was given a warning, with the kitchen manager receiving no discipline at all.

After Miller’s complaint, the kitchen manager and supervisor began to criticize Miller’s performance. Miller was then terminated less than one month after the display was put up.

On March 27, 2012, the EEOC filed suit against Hospitality on Miller’s behalf, claiming that he was the victim of racial harassment and that he was wrongfully terminated for opposing that harassment. On September 7, 2012, the EEOC amended its complaint to add Northern Star Properties, LLC (“Properties”) and North Broadway Holdings, Inc. (“Holdings”) and claimed that they also were liable for this conduct. By this time, Sparx had closed and Hospitality had dissolved. Sparx was replaced by a Denny’s Restaurant franchise owned by Holdings, while Properties owned the building where Sparx and the Denny’s Restaurant were located. Hospitality, Properties, and Holdings were all owned by the same individual.

After trial, the jury awarded Miller $15,000 in compensatory damages for wrongful termination while denying him punitive damages. The EEOC petitioned the district court to award Miller front and back pay, as well as a tax award to off-set income tax liability on the back pay award.  The district court granted the EEOC’s request for back pay and awarded Miller an additional $43,300.50, plus $6,495 to off-set his resulting tax liability. Because Hospitality no longer existed and thus could not pay these damages, the EEOC sought to have Properties and Holdings pay these damages either on a successor liability theory or via a pierce of Hospitality’s corporate veil. The district court granted the EEOC’s request under both theories. The defendants appealed.

The Seventh Circuit’s Ruling

The Seventh Circuit began its analysis by noting that “successor liability is ‘the default rule . . . to enforce federal labor or employment laws.’” Northern Star Hospitality, 2015 WL 363997 at *3 (quoting Teed v. Thomas & Betts Power Solutions, LLC, 711 F.3d 763, 769 (7th Cir. 2013)). This is because “[w]ithout [successor liability], ‘the victim of the illegal employment practice is helpless to protect his rights against an employer’s change in the business.’” Northern Star Hospitality, 2015 WL 363997 at *3 (quoting Musikiwamba v. ESSI, Inc., 760 F.2d 740, 746 (7th Cir. 1985)).

The Seventh Circuit laid out “a five-factor test for successor liability in the federal employment-law context: (1) whether the successor had notice of the pending lawsuit; (2) whether the predecessor could have provided the relief sought before the sale or dissolution; (3) whether the predecessor could have provided relief after the sale or dissolution; (4) whether the successor can provide the relief sought; and (5) whether there is continuity between the operations and work force of the predecessor and successor.” Northern Star Hospitality, 2015 WL 363997 at *3.

The Seventh Circuit found that the first factor was satisfied, reasoning that Holdings had notice of the lawsuit because both Holdings and Hospitality were owned by the same individual. Id. With respect to the second factor, the Seventh Circuit determined that, because Hospitality paid a number of its bills before its dissolution, as well as several bills that would benefit Holdings, it could have paid the judgment prior to its dissolution. Id. at *4. It held that, since Hospitality no longer existed, Hospitality could no longer pay the judgment, thus satisfying the third factor. Id. It found that the fourth factor was satisfied since Holdings was a going concern and thus could pay the judgment entered in favor of Miller. Id.

With respect to the fifth factor, the Seventh Circuit ruled that there was a continuity between the operations and workforce of Hospitality and Holdings because “[Holdings] moved into a building prepared for it by Hospitality to the specifications of the Denny’s Corporation, hired more than half of the employees previously employed by Hospitality, hired Hospitality’s management team, the members of which had been trained by Denny’s at Hospitality’s expense, and used the same work rules for the employees that Hospitality had used at Sparx. In other words, Holdings carried on the restaurant business at 1827 North Broadway, albeit with a different name and theme.” Id. Having concluded that all the factors were satisfied, the Seventh Circuit held that Holdings was liable as a successor to Hospitality. Id. It held this even though Holdings did not exist at the time of the alleged wrongful conduct. Id.

Having decided that Holdings was liable as a successor to Hospitality, the Seventh Circuit declined to review whether the district court was correct when it decided to pierce the corporate veil of Hospitality to reach Properties and Holdings. Id. at *5. It further declined to consider whether Properties was also a successor entity of Hospitality. Id. at *4.

Implications For Employers

Employers need to be aware that, under the holding of EEOC v. Northern Star Hospitality, liability under federal employment laws can follow them even if the company that purportedly violated those laws no longer exists or has assets. This is true even without a piercing of the corporate veil.

Employers who are concerned about federal discrimination or wage and hour liability in a dissolving or otherwise expiring company should take steps to make sure that they establish that there is no continuity between the operations and workforce of the dissolving entity and any of the employer’s other businesses. Employers should make sure that the dissolving entity does not pay for anything that will be used by a successor entity or the employer’s other businesses. Employers should further establish new work rules for successor entities. Finally, employers should also consider not hiring the employees of the dissolving entity to work for the successor entity or the employers’ other businesses. Whether one or some combination of these proposed steps would, as a matter of law, prevent successor liability will need to be determined in future litigation.