Supreme Court Landmark Cases on Federal Successorship Law

A new company may be considered the successor of a prior company for the purpose of compelling legal obligations to the predecessor's employees, including the duty to recognize and bargain with the union representing the employees of the former company, the duty to remedy unfair labor practices, or the duty to arbitrate. (Howard Johnson Co. v. Hotel Employees (1974) 417 U.S. 249, 264 (Howard Johnson).) "The term 'successor' is not very meaningful in the abstract; every new employer is a successor in the sense that it succeeded to the operation of a business entity formerly operated by another employer. The National Labor Relations Act (NLRA) does not define successorship or address the labor law obligations of a new employer to the employees of its predecessor. Rather, the federal common law of successorship has developed primarily through Supreme Court decisions." (United Steelworkers v. St. Gabriel's Hosp., supra, 871 F.Supp. at p. 338.) The determination of whether a new company is a successor focuses on whether there is "substantial continuity" between the enterprises. (Fall River Dyeing & Finishing Corp. v. NLRB (1987) 482 U.S. 27, 43 96 L. Ed. 2d 22, 107 S. Ct. 2225 (Fall River).) The evaluation "is primarily factual in nature and is based upon the totality of the circumstances of a given situation, requiring the NLRB to focus on whether the new company has 'acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessor's business operations.' " (Ibid.) "Under this approach, the NLRB examines a number of factors: whether the business of both employers is essentially the same; whether the employees of the new company are doing the same jobs in the same working conditions under the same supervisors; and whether the new entity has the same production process, produces the same products, and basically has the same body of customers. " (Ibid.) "Where a new employer operates essentially the same business without substantial change and hires a majority of its employees from the predecessor, it is generally deemed a successor under federal labor law. " (United Steelworkers v. St. Gabriel's Hosp., supra, 871 F.Supp. at p. 338.) The United States Supreme Court has relied on basic principles of federal labor law in deciding successorship cases, requiring the court to balance the right of employers to rearrange their businesses and make independent hiring decisions, so long as they do not discriminate in hiring or retention on the basis of union membership or activity, with avoidance of industrial strife and protection for employees from sudden changes in the terms and conditions of their employment in the transition from one employer to another. (John Wiley & Sons v. Livingston (1964) 376 U.S. 543, 548-550 11 L. Ed. 2d 898, 84 S. Ct. 909 (Wiley); Howard Johnson, supra, 417 U.S. at pp. 261-264.) The United States Supreme Court first addressed the issue of successorship in Wiley, holding that a union representing the employees of a predecessor could compel the successor employer to arbitrate under section 301 of the Labor-Management Relations Act, 1947 (29 U.S.C. 185) under the circumstances of that case. (Howard Johnson, supra, 417 U.S. at p. 254.) The predecessor corporate employer had merged with another corporation. (Wiley, supra, 376 U.S. pp. 544-545.) The surviving corporation "hired all of the merged corporation's employees and continued to operate the enterprise in a substantially identical form." (Howard Johnson, supra, at pp. 253-254.) The employees "'continued to perform the same work on the same products under the same management at the same work place as before the merger.'" (Id. at p. 258.) The general rule under state law was that in a merger, the surviving corporation was liable for the obligations of the disappearing corporation. (Id. at p. 257.) Under these circumstances, the Wiley court held that the successor employer had a duty to arbitrate with the union representing the employees of the predecessor corporation under the collective bargaining agreement between the union and the predecessor corporation. (Wiley, supra, at p. 551.) The Wiley court emphasized that "the objectives of national labor policy, reflected in established principles of federal law, require that the rightful prerogative of owners independently to rearrange their businesses and even eliminate themselves as employers be balanced by some protection to the employees from a sudden change in the employment relationship. The transition from one corporate organization to another will in most cases be eased and industrial strife avoided if employees' claims continue to be resolved by arbitration rather than by 'the relative strength ... of the contending forces,' ." (Wiley, supra, 376 U.S. at p. 549.) However, in NLRB v. Burns Security Services, Inc. (1972) 406 U.S. 272 (Burns), the Supreme Court concluded that while the successor employer had a duty to bargain with the union representing the employees of the predecessor corporation, the successor was not bound to observe the terms of a collective bargaining contract negotiated with the predecessor employer. A company named Wackenhut provided security services for a Lockheed Aircraft Service Co. plant and its employees were represented by a union certified by the NLRB as the exclusive bargaining unit for these employees. (Id. at pp. 274-275.) Burns successfully bid on the contract. (Ibid.) Burns did not purchase any of Wackenhut's assets or become liable for any of Wackenhut's financial obligations, but 27 of the 42 guards that Burns hired to provide security at the site were Wackenhut employees. (Id. at pp. 284-286.) The NLRB found Burns was required to bargain with the Wackenhut employees' union and honor the substantive provisions of the collective bargaining agreement between the union and Wackenhut. (Id. at p. 274.) The Burns court explained that the NLRA imposes a duty on employers to bargain with the representatives selected by a majority of the employees in an appropriate unit. (Burns, supra, 406 U.S. at p. 277.) Under section 8 of the NLRA, it is an unfair labor practice for an employer "to refuse to bargain collectively with the representatives of his employees, subject to the provisions of section 159(a) of this title." (29 U.S.C. 158(a)(5).) "Representatives designated or selected for the purposes of collective bargaining by the majority of the employees in a unit appropriate for such purposes, shall be the exclusive representatives of all the employees in such unit for the purposes of collective bargaining in respect to rates of pay, wages, hours of employment, or other conditions of employment ... ." (29 U.S.C. 159(a).) The Burns court accepted the NLRB's conclusion that Burns had an obligation to bargain with the union over terms and conditions of employment as a result of its hiring of the former contractor's employees and the recent election and NLRB certification of the union. (Burns, supra, 406 U.S. at pp. 278-279.) However, the Burns court stated that the case would be different "if Burns had not hired employees already represented by a union certified as a bargaining agent." (Id. at pp. 280-281.) "The NLRB has never held that the NLRA itself requires that an employer who submits the winning bid for a service contract or who purchases the assets of a business be obligated to hire all of the employees of the predecessor though it is possible that such an obligation might be assumed by the employer. However, an employer who declines to hire employees solely because they are members of a union commits a section 8(a)(3) unfair labor practice. " (Burns, supra, 406 U.S. at pp. 280-281, fn. 5.) The Burns court rejected the NLRB's conclusion that Burns was required to adhere to the terms of the collective bargaining agreement negotiated with the predecessor which Burns had not expressly nor impliedly assumed. (Burns, supra, 406 U.S. at pp. 281-282.) "Preventing industrial strife is an important aim of federal labor legislation, but Congress has not chosen to make the bargaining freedom of employers and unions totally subordinate to this goal." (Id. at p. 287.) "The source of Burns's duty to bargain with the union is not the collective-bargaining contract but the fact that it voluntarily took over a bargaining unit that was largely intact and that had been certified within the past year. Nothing in its actions, however, indicated that Burns was assuming the obligations of the contract, and 'allowing the NLRB to compel agreement when the parties themselves are unable to agree would violate the fundamental premise on which the NLRA is based--private bargaining under governmental supervision of the procedure alone, without any official compulsion over the actual terms of the contract.' " (Ibid.) "Burns also stressed that holding a new employer bound by the substantive terms of the pre-existing collective-bargaining agreement might inhibit the free transfer of capital, and that new employers must be free to make substantial changes in the operation of the enterprise. " (Howard Johnson, supra, 417 U.S. at p. 255.) "A potential employer may be willing to take over a moribund business only if he can make changes in corporate structure, composition of the labor force, work location, task assignment, and nature of supervision. Saddling such an employer with the terms and conditions of employment contained in the old collective-bargaining contract may make these changes impossible and may discourage and inhibit the transfer of capital. On the other hand, a union may have made concessions to a small or failing employer that it would be unwilling to make to a large or economically successful firm. The congressional policy manifest in the NLRA is to enable the parties to negotiate for any protection either deems appropriate, but to allow the balance of bargaining advantage to be set by economic power realities." (Burns, supra, 406 U.S. at pp. 287-288.) The Burns court noted that "in a variety of circumstances involving a merger, stock acquisition, reorganization, or assets purchase, the NLRB might properly find as a matter of fact that the successor had assumed the obligations under the old contract. " (Burns, supra, 406 U.S. at p. 291.) The Supreme Court held in Howard Johnson, supra, 417 U.S. at pages 264-265, that there was no substantial continuity between businesses when the new employer purchased the assets of a franchisee, yet hired only a small fraction of the franchisee's employees. Howard Johnson had purchased the personal property and leased the real property necessary to operate a restaurant and motor lodge from its franchisee. (Id. at p. 251.) Although the franchisee had employed 53 employees, Howard Johnson commenced operations with 45 employees, including 9 employees who had worked for the franchisee. (Id. at p. 252.) The union that represented the franchisee's employees sought to compel Howard Johnson to arbitrate the union's claim that Howard Johnson was required to hire all of the franchisee's employees under the collective bargaining agreement with the franchisee. (Id. at pp. 250, 260.) The Howard Johnson court rejected the union's argument based on the principles of federal labor law articulated in Burns, namely, that federal law did not obligate the purchaser of business assets to hire all of the predecessor's employees, and a potential employer might not take over a failing business unless it could make changes to the corporate structure, the workforce, and the nature of supervision. (Howard Johnson, supra, 417 U.S. at p. 261.) The court concluded that Howard Johnson had the right not to hire any of its predecessor's employees. (Id. at pp. 261-262.) The Howard Johnson court concluded that substantial continuity between the businesses included substantial continuity in the identity of the workforce across the change in ownership. (Howard Johnson, supra, 417 U.S. at pp. 263-264.) "This holding is compelled, in our view, if the protection afforded employee interests in a change of ownership by Wiley is to be reconciled with the new employer's right to operate the enterprise with his own independent labor force." (Id. at p. 264.) Finding no substantial continuity of identity in the workforce hired by Howard Johnson and no assumption of the franchisee's agreement to arbitrate, either express or implied, the court held that Howard Johnson was not required to arbitrate the extent of its obligations to the franchisee's employees. (Id. at pp. 264-265.) The court noted that an "alter ego" case, in which the successor corporation is "merely a disguised continuance" of the predecessor corporation, involves "a mere technical change in the structure or identity of the employing entity, frequently to avoid the effect of the labor laws, without any substantial change in its ownership or management. In these circumstances, the courts have had little difficulty holding that the successor is in reality the same employer and is subject to all the legal and contractual obligations of the predecessor. " (Howard Johnson, supra, 417 U.S. at p. 259, fn. 5.)