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double breasted

NLRB Slaps New Jersey Contractor for Illegal Double Breasted Operation

A recent NLRB decision underscores the dangers of improperly operating a double breasted construction firm.  In Rdm Concrete & Masonry, LLC, Collective Concrete, Inc., & Remco Concrete, LLC, Alter Egos & A Single Employer & New Jersey Bldg. Laborers Dist. Council, 366 NLRB No. 34 (Mar. 13, 2018), the Board held that the three respondents, RDM, Collective, and Remco were alter egos of each other and were collectively bound by the terms of the collective bargaining agreement with the Laborers Union.

A. Background

The three charged entities were all owned by members of the same family.  Collective Concrete was owned by Ryan Ciullo.  In 1999, Ryan started Collective.  Collective listed his parents residence as it official place of business.  Ryan’s father Mark owned a separate company, D&M Mansonry.  When Ryan started Collective, Mark was winding down D&M and would assist Ryan with operating collective.  In 2001, Collective signed a Section 8(f) agreement with the Laborers Union.  Thereafter, Collective signed three successor 8(f) agreements with the Laborers.  As suspected, the agreement covered the terms and conditions of Collective employees performing Laborers Union claimed work.

While covered by those agreements, the Laborers Union filed grievances against Collective.  Mark, Ryan’s father, represented Collective at those grievance hearings.  In one matter, an action was initiated in federal court to overturn an arbitration award and Mark signed an affidavit in that case.

In 2007, Mark formed RDM a concrete and masonry firm with no union affiliation.  When he formed RDM, Mark stopped working for Collective.  However, RDM performed the same type of work as Collective and Collective transferred some equipment to RDM.  Ryan does not hold an ownership interest in RDM but was employed by RDM.  Moreover, RDM and Collective shared back office employees, who happened to be Ryan’s wife and mother.  At a certain point, Collective and RDM shared office space.  When Collective ran into financial trouble, RDM transferred $1.6 million dollars to it.

Then in 2014, RDM signed an agreement with the Union.  Circumstances arose that led to a consent judgment being entered in favor of the Union and against RDM and Collective, jointly and severally.

Soon, RDM’s work slowed down.  And, in 2015 Ryan started a new company called Remco, which also performed masonry and concrete work.  Ryan testified that he formed Remco to obtain non-union work.  In 2016, the Union demanded that Remco recognize it as the bargaining agent for its employees under the collective bargaining agreements with RDM and Collective.

B.  The Outcome and Damages.

As expected, the Board found that Collective and RDM were a single employer and Remco was an alter-ego or “disguised continuance” of RDM.  The Board applied its long standing rule that the collective-bargaining agreement of an employer applies to its alter ego, as of the date of the alter ego’s first use of bargaining unit employees. E. G. Sprinkler Corp., 268 NLRB 1241, 1241 fn. 1 (1984).  The Board further ordered that the entities make the employees whole for any loss of earnings or benefits, plus interest compounded daily. That means that Collective, RDM, and Remco could owe huge sums of money.

C.  The Take Aways

  1. Forming a double breasted operation carries huge risks for those that are not prepared to properly organize and operate the two firms.
  2. Forming a non-union entity for the purpose of avoiding bargaining obligations will almost always fail.
  3. Improperly forming a double breasted entities carries with it the potential for huge penalties.
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Construction Company Executives Indicted for Running Double Breasted Operation

The United States Attorney for the District of Massachusetts announced that it indicted two construction company executives for running what the Department of Justice calls  “a fraudulent “double breasted shop” scheme.”   The DOJ charged Christopher Thompson and Kimberly Thompson on 18 counts of mail fraud, one count of benefit fund embezzlement, and 18 counts of filing false documents with an ERISA fund.  A copy of the indictment can be found here.

The facts set forth in the indictment are not ground breaking.  One company, Air Quality Experts, Inc., was an asbestos abatement contractor established in 1987.  Air Quality was not a signatory to any collective bargaining agreement.  In 2005, the owners of Air Quality set up the creatively named AQE, Inc., which signed a collective bargaining agreement with the Massachusetts Laborers District Council.  According to the indictment, AQE operated out of the same office, used the same equipment, operated under the same management, and, critically, used the same employees, as Air Quality.  However, AQE did not submit fringe benefits for the members of the Laborers Union for the work they performed for the non-signatory entity, Air Quality.

While the facts of this indictment are not groundbreaking, the fact that the Department of Justice indicted the owners of the improperly established and maintained double breasted operation is tremendous.  Normally, an improperly established and maintained double breasted operation would result in a civil lawsuit by a union seeking to recover fringe benefits owed for work performed by the non-union entity.  While the civil liability in those cases can be significant, it never meant jail time for the owners of the double breasted firms.  Therefore, this case significantly ups the ante for firms that have double breasted operations, but who fail to properly maintain them.

There is nothing wrong or illegal about a double breasted operation per se.  In fact, both firms can even have common ownership.  However, they never can have common employees, common equipment, and common management.  That is what apparently did in the owners of AQE and Air Quality.

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Good News For Double Breasted Construction Companies

In a recent NLRB Advice Memorandum, the Board’s Division of Advice dismissed an unfair labor practice complaint and held that before a union can request information from a non-union affiliated entity it must “present objective facts that support their belief that a [union and non-union entity] constitute a single employer.”   Importantly, the Board held that a mere suspicion of a alter ego or single employer relationship is not enough to justify requiring the union employer to provide the union with information regarding its non-union affiliate.

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Double Breasted Firms Sometimes Pay a Huge Price

An article on the website Real Estate Weekly entitled “Construction unions going after alter-ego contractors as profits shrink” recently grabbed my attention.  The article recounts the  familiar tale of a union shop contractor that was forced to pay $6 million for violating its collective bargaining agreement with a Carpenters Local.

The Carpenters accused a New York firm, River Avenue Contracting of creating alter ego companies and using them to hire non-union workers.  River Avenue created RNC Industries and Extreme Concrete Corp., but allegedly kept the same employees and address.  

Therein lies the problem.

As we have written about before, double breasted operations, even if they share a common owner, are completely legal.  The issue that contractors, like River Avenue Contracting, run into in establishing a non-union entity is not common ownership, its common everything else.  Common ownership is but one factor in a series of factors the Court will use to determine whether the non-union entity is an “alter ego” of the union firm.  But, it is hardly dispositive.  More important factors are common employees, common management, common office space, and common equipment.

Unfortunately, for River Avenue Contracting, and many firms like it, they fail to keep the two enterprises truly separate, which is frankly not that difficult.  If River Avenue Contracting’s owners, established a new non-union firm, that had a different management team, different non-union member employees, a different location, and bid different types of work (say residential instead of commercial), then the union would have had an uphill battle with its case and it is unlikely River Avenue would have agreed to pay the $6 million amount.

 

 

 

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FAQ’s Regarding “Double Breasted” Construction Companies

The terms “double breasted” or “dual shop” contractor refers two construction firms often sharing common ownership one of which is a signatory to a collective bargain agreement (the union firm) and the other that is not (the open shop firm).  Here are some frequently asked questions I have received in counseling clients who either already operate or are contemplating establishing a double breasted operation.

1.  Are Double Breasted Operations Legal?  

Yes.  The National Labor Relations Act (“NLRA”) does not prohibit double breasted operations outright.  However, the NLRA does prohibit an employer from interfering with employees’ collective bargaining rights and refusing to collectively bargain with the union representing the employees. Therefore, if the double breasted operation is not properly established, the National Labor Relations Board (“NLRB”) will treat the two entities as the same and, accordingly, the NLRB will impose liability on the union entity for violating the NLRA’s prohibitions on interfering with collective bargaining rights.

2.  Can Both the Union and Non-Union Entity Share Common Ownership?

Yes.  A common misconception is that common ownership invalidates a double breasted operation.  Accordingly, contractors will go to great length to conceal the common ownership of the union and non-union entities.  But, they do not have to.  While common ownership is certainly a factor in determining whether the union and non-union firm should be treated as one in the same under the NLRA (or a collective bargaining agreement), it is not conclusive.  In other words, courts do not simply look to common ownership in determining whether a legitimate operation exists.  In fact, both the NLRB and the courts have repeatedly held that common ownership alone is not dispositive of whether a single employer exists. 

Under the single employer test, NLRB uses four criteria in determining whether the entities are legitimately separate or whether they are actually a “single employer:” (a) interrelation of operations; (b) centralized control of labor relations; (c) common management; and (d) common ownership of financial control.  No one of these factors has been held to be controlling.  In fact,  the Board has stressed the first three factors, which go to show ‘operational integration,’ particularly centralized control of labor relations, are the most important. Therefore, even if both entities of the double breasted operation are commonly owned, an operation may not violate the single employer test if operations, labor relations, and management are kept separate.  

3.  My Collective Bargaining Agreement Prohibits Me from Going Double Breasted.  Can I still establish a non-union construction firm?

Yes,  but it will depend on the language in your CBA.  So called, anti-dual shop clauses appear in many collective bargaining agreements and aim to prevent a contractor from “double breasting” even when it would be permitted under case law.  Anti dual shop clauses are valid if they are lawful “work preservation” clauses. The lawfulness of a work preservation clause hinges on the amount of control the union contractor has over the non-union contractor’s employees. 

Courts apply a two pronged test to determine whether an anti-dual shop clause is valid. First, the agreement must seek to preserve work traditionally performed by employees represented by the union. Second, the contracting employer must have the power to give the employees the work in question, which is known as the “right of control” test.  As with the single employer test, control of labor is a key.  If the union entity has no control over the labor of the non-union entity, the anti dual shop clause is invalid on its face against the non-union entity.  Furthermore, because the contracting employer must be able to control the employees in question for an anti-dual shop clause to apply, any operation that passes muster under the single employer test would in theory not be subject to the anti-dual shop clause.

4.  Is there a downside to establishing a double breasted operation?

Yes.  Contractors that do not properly establish and maintain a double breasted operation face significant liability most notably in terms of ERISA contributions.  If the non-union entity is not properly separated, the firm could own union health and welfare funds benefits for employees whether those employees are union members or not.  This is due to the union security clause in the CBA that the union firm signed and because the CBA also will contain a provision that all employees become members of the union after a certain period of time.  This potential liability should not be taken lightly because the potential ERISA liability could easily reach in the several hundreds of thousands of dollars or more.

The takeaway – there is a tremendous opportunity for construction firms wishing to open a firm that is not bound by the labor rates contained in a collective bargaining agreement.  But that opportunity does not come without risks if the proper steps are not taken.

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Can a Non-Union Company Be Compelled to Arbitrate?

Some of the most viewed topics on this blog are those concerning double breasted company.  That is a two separate firms, commonly owned, one that is a signatory to a union and the other that is merit shop.

An issue frequently encountered with double breasted construction companies is an union arbitrator’s jurisdiction over the non-signatory firm.  The issue usually goes something like this.  A signatory employer’s collective bargaining agreement contains language prohibiting double breasting (which could be invalid).  The collective bargaining agreement also contains an arbitration provision requiring all disputes concerning a breach of the agreement (a grievance) be decided by an arbitrator in private arbitration.  The union files a demand for arbitration claiming that the union signatory has breached the collective bargaining agreement’s anti-dual shop provision.  The union names the non-union firm as a party to the arbitration based on its status as an alleged “single employer.”

What should the non-union firm do?  It should ignore the arbitration demand or file an action in federal court to obtain a court order prohibiting the arbitrator from taking any action against it.  The law in most – if not all – jurisdictions is that an arbitrator has no jurisdiction over a non-signatory firm.  If the union obtains an arbitration award against the non-union firm, the District Court will vacate that award if the non-union firm requests relief.  The general rule is that only a court can determine whether a non-signatory is bound by a collective bargaining agreement.  Moreover, some courts have held that a court must determine that the union and non-union entities are a single employer before that will happen.  Because a single employer finding is fact sensitive, that cannot be done without discovery.

The take away.  If you own a dual shop firm and receive a demand from the union to arbitrate, you need to review your collective bargaining agreement, be prepared to fight the union, and win.

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Union Contractors Need to Read This

Earlier this year, I wrote about the indictment of the owners of a union construction company that was improperly operating a double breasted (a union firm and a related non-union firm) operation.  That indictment alleged that the owners of the union firm failed to pay union members fringe benefits and wages when the union employees worked for the non-union firm.  As I said in that post, it should be concerning that these allegations led to a criminal indictment because usually these types of allegations were dealt with in civil suits brought by the union.

This past week the U.S. Attorneys Office in Chicago announced the indictment of executives of a construction company for, among other things, failing to pay fringe benefits owed to union health, welfare, and pensions funds. This type of wrongdoing was also usually dealt with a civil lawsuit brought by the union health and welfare funds against the contractor that owed the money to the funds.

Union contractors with obligations to health and welfare funds need now need to worry that failing to pay the union funds could result in more than a simple collection action in federal court.  These two cases signal it could mean jail time.

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NLRB Denies Union’s Alter Ego Claim

In a rare blow to Big Labor, on August 17, 2015, the NLRB affirmed an ALJ’s denial of a claim that a non-union electrical contractor was the alter ego of a closed union firm.

In Deer Creek Electric, Inc. and Black Hills Electric, Inc., an IBEW local brought a claim against a non-union firm claiming that the firm was an “alter ego” of a defunct signatory electrical firm.  The ALJ’s decision in that case provides excellent guidance on how to properly establish a double breasted or dual shop firm and, alternatively, how to defeat a union’s claim that a non-union firm is the alter ego of signatory firm.

From 2004 to 2012, Deer Creek was a signatory to the IBEW’s collective bargaining agreement.  Deer Creek was owned by Richard and Sandra Moloney.  In 2012, Deer Creek was forced to close because of lack of business.   After the Deer Creek closed, Richard Moloney began discussions with his sister – in – law about assisting her in opening up an electrical contracting business.  Those discussion lead to the establishment of Black Hills Electric, which was 100% owned by Cheri Jackson, Moloney’s sister-in-law, and which was not a signatory to IBEW’s CBA.  Deer Creek then employed Moloney, who surprised its projects,  purchased certain equipment from Deer Creek, and completed a handful of projects that Deer Creek was unable to complete.

The Judge reviewed the well established test for determining alter ego (and its cousin single employer) status: common ownership, management, business purpose, customers, employees, and equipment. As the Judge explained, no single factor is conclusive.   (Many incorrectly believe that common ownership is the conclusive factor.) While lack of common ownership is usually fatal to a claim of alter ego, it nonetheless can still be found if both companies are owned by close family members or where the old company retains substantial financial control over the new entity.  Another important overarching factor is whether the non-union company was established to circumvent the union firm’s collective bargaining obligations.

The Judge analysed Black Hills’ relationship with Deer Creek using these factors.  First, the Judge found that Moloney familial relationship with Jackson did not warrant a common ownership inference because Moloney exercised no financial control over Black Hills.  Second, the Judge ruled that Black Hills was not established to circumvent Deer Creek’s collective bargaining obligations.

The Judge then addressed whether the firms had common management, supervision, and business purposes. Importantly, the Judge found that they did share those common elements.  Finally, the Judge determined that the two firms did not share common equipment and customers, even though there was some overlap.

Balancing all of the factors the Judge found that “too many of the critical factors” needed to support an alter ego finding were not found.

The Take Away

1.  When establishing a non-union affiliate you need to be cognizant to the factors the Court and the NLRB will employ to determine if you non-union affiliate can operate without violating the NLRA.  The non-union affiliate should be established with the factors in mind with an eye on how you can present evidence favorable to your position in an adversary proceeding challenging the non-union entity.

2.  If you are a non-union company purchase equipment and hiring former employees of a union firm, you should also be aware of the ramifications of that decision and make sure that the purchase of equipment and employment of former employees and principals is structured with the alter ego test in mind.

3.  Union bully tactics can be defeated with facts and evidence.  A union / non-union firm relationship does not have to defeat all of the factors of the alter ego test to be viable if sufficient evidence can be produced to show most of the factors can not present.

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