Earlier this year in Sheet Metal Workers’ Int’l Ass’n Local 19 v. Main Line Mech. Inc., the Eastern District of Pennsylvania decided a case that is important to members of the construction industry who own multiple companies. In the aforementioned case, two HVAC firms shared common ownership and a union that had a contract with one of the HVAC firms was trying to piece the corporate veil of the other HVAC firm based upon the common ownership. The court ruled against the union, holding that although the HVAC firms shared common ownership, the corporate veil of the HVAC firm that never entered into a contract with the union could not be pierced because the companies did not share employees and the companies targeted different types of HVAC work. The facts of the case, which I discuss in greater detail below, are quite interesting.
- HVAC Company No. 1 Enters Into Collective Bargaining Agreement With Union
Main Line Mech. Inc. was a Pennsylvania based HVAC firm. Several years after its incorporation, Main Line entered into a collective bargaining agreement with Sheet Metal Contractors Association, which contract contained a number of provisions that required Main Line to perform sheet metal work using only union-represented workers. The contract also forbid Main Line from setting up another business to evade contract obligations. Leonard Santos served as the president of Main Line and was a minority shareholder in the firm while the majority of the stock was owned by his wife.
- HVAC Company No. 2 Does Business Outside of the Union’s Jurisdiction
Santos and his wife also owned another HVAC firm referred to as “Sands.” Sands and Main Line maintained an office at the same location. Santos formed Sands to seek business in Northern New Jersey outside the union’s jurisdiction. Santos and his wife performed work at Sands that was similar to their activities at Main Line, but the court said other than the couple, no one worked for both companies at the same time.
- Separation of the HVAC Businesses
Despite the common ownership, Sand and Main Line kept separate unconnected offices and equipment, along with separate finances and corporate records. Sands competed for public projects in New Jersey requiring payment of prevailing wages, and the court found that the nonunion firm never undertook any contracts within the union’s jurisdiction while Main Line was an active HVAC installation business.
- The Nature of HVAC Company No. 1 Changes
Unfortunately, Main Line lost a job in Pennsylvania and was sued for poor performance. Subsequently, the company gave up HVAC work and limited itself to buying and reselling equipment.
- Union officials spot HVAC Company No. 1’s equipment being used by HVAC Company No. 2
Thereafter, Sands was awarded a contract to do HVAC work in New Jersey where union officials spotted the company using several gang boxes and ladders that were labeled Main Line property. The union filed a grievance against Main Line alleging the company used Sands to perform bargaining unit work, bypassing the union’s contract. The union-management adjustment board sustained the grievance and assessed more than $202,000 against the firm. Thereafter, the union filed a lawsuit under Section 301 of the Labor-Management Relations Act seeking confirmation of the arbitration award. The district judge confirmed the award against Main Line, but rejected the union’s request to hold Sands jointly and several liable as the alter ego of Main Line.
- The Legal Analysis
In rejecting the request to hold HVAC Company No 2 liable for HVAC Company No. 1, the court examined whether the two organizations had substantially identical supervision, business purpose, operations, equipment or customers.
Although Santos ran both companies, the daily operations were handled by supervisors who differed from one company to the other. Moreover, Main Line installed large rooftop heating and cooling units on top of hotels, schools, and other large buildings while Sands installed small HVAC units in multifamily residential complexes. Significantly, apart from Mr. and Mrs. Santos, the companies at no time shared the same employees.
Lessons Learned: Members of the construction industry who operate multiple construction related businesses need to be vigilant in their efforts to separate the entities. Here, it was the presence of the Main Line equipment spotted on a Sands job that raised suspicions. Fortunately, there was evidence that Main Line had formally sold at least some of the equipment to Sands, but it would have been best for Sands to have removed Main Line’s name from the equipment before using it.
This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice. Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.
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