Can You Break a Big Business Into Smaller Ones to Avoid Employment Laws?

Many federal laws that protect employees have minimum employee requirements. In other words, your company must have over a set amount of employees to have to comply with certain federal employment and civil rights laws—if your company has less than the threshold amount of employees, you do not need to comply with these laws and you can’t be sued for violating them.

How Many Employees?

The amount of employees that you need can vary, and can get pretty complex. Just by way of example, many civil rights laws, including laws that prohibit discrimination based on age, require that a business has at least 20 employees. The Americans With Disabilities Act requires a business to have at least 15 employees.

Breaking Up a Bigger Business

Many businesses have tried to use a technique to circumvent the requirements to comply with these laws, and to minimize their exposure to lawsuits for violating them: take one big company, and break it up into multiple, smaller companies, each with fewer than the threshold amount of employees needed to comply with the law. This way, no one company has over the required amount of employees, and thus, doesn’t have to comply with, or get sued under the federal employment laws.

Will It Work?

Although it may seem like a clever loophole, it’s not something that will work—at least, not as far as we can tell.

That’s because, on the one hand, there are very few cases where this has happened, so we don’t really know how different courts will rule on the issue. But in the cases that have existed, most courts have treated multiple, affiliated smaller companies, as one big one for the purpose of calculating employees, and thus, compliance with federal employment laws.

One Company or Many Separate Ones?

It is somewhat common to have a larger business that is, in fact, made up of smaller companies, under one larger corporate umbrella. Some or all of these smaller companies may legitimately have very few employees.

When a court looks at multiple smaller companies to see if they all should be treated as one for the purpose of employees, courts look to see how closely affiliated they all are.

Of course, dividing a larger company into multiple smaller ones for the purpose of evading creditors, or evading compliance, will be discredited by a court.

A court will also look to see how much control or authority a larger company had over the other smaller, subsidiary companies. In other words, did the larger company (which is subject to federal employment laws) direct or control the actions that the smaller company did that are discriminatory, or which violate employment laws?

Courts will look to formalities as well. Did the smaller companies maintain their own bank accounts, procedure, books and records, etc.? If so, they may be treated as individual businesses, and not as one big company.

Do you have to comply with employment laws? Reach out to the West Palm Beach commercial litigation attorneys at Pike & Lustig for support with your case.

Source:

law.justia.com/cases/federal/appellate-courts/ca7/20-1106/20-1106-2020-10-21.html