Opinion ID: 772936
Heading Depth: 1
Heading Rank: 2

Heading: Liability for Affiliated Corporations Under the WARN Act

Text: 26 In the wake of numerous plant closings and mergers in the 1970s and 1980s, Congress passed the WARN Act. See Hotel Employees & Rest. Employees Int'l Union Local 54 v. Elsinore Shore Assocs., 173 F .3d 175, 182 (3d Cir. 1999). The Act was intended to protect workers by requiring that companies with advance knowledge of an imminent closing provide notice to employees, so as to allow workers and their families some transition time to adjust to the prospective loss of employment, to seek and obtain alternative jobs and, if necessary, to enter skill training or retraining that will allow these workers to successfully compete in the job market. 20 C.F.R.S 639.1(a). Thus, the Act states that: 27 An employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order . . . to each representative of the affected employees as of the time of the notice or, if there is no such representative at that time, to each affected employee. . . . 28 29 U.S.C. S 2102(a)(1). 29 The Act defines an employer as any business enterprise that employs 100 or more employees. Id. S 2101(a). Employers violating the Act are liable for backpay and back benefits. See id. S 2104(a). Thus, the question presented by this litigation is whether, under these facts, GECC was the plaintiffs' employer. In order to make such a showing, the plaintiffs must establish GECC to be a single business enterprise with CompTech such that it is responsible for CompTech's WARN Act obligations. 30 The question when affiliated corporations will be considered a single employer for WARN Act purposes tends to arise in two contexts: (1) when plaintiffs seek to impose liability for violations on affiliates of insolvent corporations, see, e.g., Local 397, Int'l Union of Electronic, Elec. Salaried Mach. & Furniture Workers v. Midwest Fasteners, Inc., 779 F. Supp. 788 (D.N.J. 1992); and (2) when plaintiffs seek to establish that two or more affiliated corporations should be viewed as a single enterprise in order to meet the 100 employee WARN Act threshold, see, e.g., Watts v. Marco Holdings, L.P., No. 3:95CV88-B-A, 1997 WL 578783 (N.D. Miss. Aug. 8, 1997). The WARN Act itself does not address such situations, but the Department of Labor regulations issued under the Act provide that: 31 Under existing legal rules, independent contractors and subsidiaries which are wholly or partially owned by a parent company are treated as separate employers or as a part of the parent or contracting company depending upon the degree of their independence from the parent. Some of the factors to be considered in making this determination are (i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source, and (v) the dependency of operations. 32 20 C.F.R. S 639.3(a)(2). The five factors will hereinafter be referred to as the DOL factors. 33 The Department of Labor's supplementary information regarding its WARN Act regulations explains that: 34 The intent of the regulatory provision relating to independent contractors and subsidiaries is not to create a special definition of these terms for WARN purposes; the definition is intended only to summarize existing law that has developed under State Corporations laws and such statutes as the NLRA, the Fair Labor Standards Act (FLSA) and the Employee Retirement Income Security Act (ERISA). The Department does not believe that there is any reason to attempt to create new law in this area especially for WARN purposes when relevant concepts of State and federal law adequately cover the issue. 35 54 Fed. Reg. 16,045 (Apr. 20, 1989). 36 The intersection of the regulatory factors and the supplementary information has created considerable confusion among courts searching for a single test to determine the status of affiliated corporations. See Cynthia Nance, Affiliated Corporation Liability Under the WARN Act, 52 Rutgers L. Rev. 495, 535-36 (2000) [hereinafter Nance, WARN Act] (describing contradictory holdings). The problem arises because the jurisprudence contains several tests for determining when two corporations compose a single entity depending on whether the cause of action accrues under state or federal law, as well as on the particular type of claim at issue. Further, the DOL factors do not precisely correspond to any of the established tests for such determinations. Courts examining affiliated corporations under the WARN Act have often applied two or more tests, purporting to average the results, usually without any systematic method for doing so. See, e.g., United Paperworkers Int'l Union v. Alden Corrugated Container Corp., 901 F. Supp. 426, 436-39 (D. Mass. 1995) (conducting, inter alia, a state alter ego test, but ultimately jettisoning the results on the ground that federal liability standards should not turn on state protections for corporations). 37 A further complication comes from the fact that we have before us in this case not the traditional parent/subsidiary relationship but a relationship that began as an arrangement between a secured lender and a borrower -- a situation unaddressed by either the Act or the regulations. Thus, we must determine whether the standard WARN Act test -- whatever test that might be -- is even applicable under these circumstances. To that end, we will first briefly sketch some of the methods available for determining intercorporate WARN Act liability, ultimately concluding that rather than simply choosing one of the established tests and importing it to the WARN Act context, the appropriate test is the one specifically delineated in the DOL regulation. We further conclude that the supplementary information provided by the Department of Labor was not intended to encourage courts to choose a different test, but was merely intended to clarify that courts may draw on concepts in existing precedent when interpreting and applying the DOL factors. We will then turn to the question whether the DOL factors should apply to situations involving lenders rather than parents, ultimately concluding that the factors should be the same for both. 38

39 The corporate form was created to allow shareholders to invest without incurring personal liability for the acts of the corporation. These principles are equally applicable when the shareholder is, in fact, another corporation, and hence, mere ownership of a subsidiary does not justify the imposition of liability on the parent. See United States v. Bestfoods, 524 U.S. 51, 69 (1998); American Bell Inc. v. Federation of Tel. Workers of Pa., 736 F.2d 879, 887 (3d Cir. 1984). Nor will liability be imposed on the parent corporation merely because directors of the parent corporation also serve as directors of the subsidiary. See Bestfoods, 524 U.S. at 69. However, under both state and federal common law, abuse of the corporate for m will allow courts to employ the tool of equity known as veil-piercing, i.e., disregard of the corporate entity to impose liability on the corporation's shareholders. Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979). Courts have held veil-piercing to be appropriate when the court must prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from liability for a crime, Zubik v. Zubik, 384 F.2d 267, 272 (3d Cir. 1967), or when the parent so dominated the subsidiary that it had no separate existence, New Jersey Dep't of Envtl. Prot. v. Ventron Corp., 468 A.2d 150, 164 (N.J. 1983). 40 The Third Circuit alter ego test is fairly typical of the genre. 2 It requires that the court look to the following factors: gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate records, and whether the corporation is merely a facade for the operations of the dominant stockholder. See American Bell, 736 F.2d at 886. Other (similar) formulations are set forth in the margin. 3 41 The test, whether or not a particular version requires an element of fraudulent intent, see supra note 2, is demonstrably an inquiry into whether the debtor corporation is little more than a legal fiction. Such a burden is notoriously difficult for plaintiffs to meet. For instance, courts have refused to pierce the veil even when subsidiary corporations use the trade name of the parent, accept administrative support from the parent, and have a significant economic relationship with the parent. See, e.g., Jackson v. General Elec. Co., 514 P.2d 1170 (Alaska 1973). Thus, in order to succeed on an alter ego theory of liability, plaintiffs must essentially demonstrate that in all aspects of the business, the two corporations actually functioned as a single entity and should be treated as such. See RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 545 (9th Cir. 1985) (veil-piercing is appropriate when the personalities of the corporation and individual are no longer separate); Akzona Inc. v. E.I. DuPont De Nemours & Co., 607 F. Supp. 227, 237 (D. Del. 1984) (a subsidiary is an alter ego or instrumentality of the parent when the separate corporate identities . . . are a fiction and . . . the subsidiary is, in fact, being operated as a department of the parent).
42 Veil-piercing doctrine has been criticized for employing the same formulations of the test across the different contexts in which plaintiffs seek to impose liability. See Phillip I. Blumberg, The Law of Corporate Groups: Substantive Law S 6.01, at 107-08 (1987); cf. William H. Lawrence, Lender Control Liability: An Analytical Model Illustrated with Applications to the Relational Theory of Secured Financing, 62 S. Cal. L. Rev. 1387, 1388 (1989) [hereinafter Lawrence, Lender Control Liability] (criticizing the use of similar indicia of control for lender liability cases regardless of context). It is often argued that because public policy varies from contract to tort to property, for example, veil-piercing standards should vary as well. See, e.g., Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036 (1991). These concerns have been partially addressed through the integrated enterprise test for the presence of a single employer, a sort of labor-specific veil-piercing test, first developed by the National Labor Relations Board. 43 Because the Board was concerned only with labor law and policy, it developed a test for corporate sameness that, likewise, concerned itself only with those aspects of corporations having a direct relevance to labor relations. So, for example, the integrated enterprise test is not concerned with such traditional alter ego hallmarks as nonpayment of dividends, because such aspects of a corporation's finances are not as directly related to management's labor policy as are other aspects of corporate functioning. See Nance, WARN Act , supra, at 533. Rather, the test looks to four labor-related characteristics of affiliated corporations: interrelation of operations; common management; centralized control of labor relations; and common ownership or financial control. See, e.g., Radio & Television Broad. Techs. Local Union 1264 v. Broadcast Serv. of Mobile, 380 U.S. 255, 256 (1965) (per curiam). No single factor is dispositive; rather, single employer status under this test ultimately depends on all the circumstances of the case. NLRB v. Browning-Ferris Indus. of Pa., Inc., 691 F.2d 1117, 1122 (3d Cir . 1982). 44 As originally designed, the integrated enterprise test was used by the National Labor Relations Board to determine whether two firms were sufficiently related to meet its jurisdictional minimum amount of business volume. See Stephen F. Befort, Labor Law and the Double-Breasted Employer: A Critique of the Single Employer and Alter Ego Doctrines and a Proposed Reformulation, 1987 Wis. L. Rev. 67, 75. Later, the Board came to use the same test to determine whether nominally separate fir ms constituted neutral entities in the context of secondary boycotts, and to determine whether an employer had impermissibly double-breasted operations so as to avoid the obligations of a collective bargaining agreement. See id. at 75-76. 4 45 Since its initial formulation, the test has been applied by courts in other employment contexts, including the Labor Management Relations Act, see International Bhd. of Teamsters Local 952 v. American Delivery Serv. Co., Inc., 50 F.3d 770 (9th Cir. 1995); Title VII and the Age Discrimination in Employment Act, see Frank v. U.S. West, Inc., 3 F.3d 1357 (10th Cir. 1993); the Americans with Disabilities Act, see EEOC v. Chemtech Int'l Corp., 890 F. Supp. 623 (S.D. Tex. 1995); and the Fair Labor Standards Act, see Takacs v. Hahn Auto. Corp., No. C-3-95-404, 1999 WL 33117265 (S.D. Ohio Jan. 4, 1999). But see Papa v. Katy Indus., Inc., 166 F.3d 937, 940-43 (7th Cir. 1999) (rejecting the integrated enterprise test in the context of antidiscrimination law). Department of Labor regulations have also adopted the integrated enterprise test for the Family Medical Leave Act. See 29 C.F .R. 825.104(c)(2). 46 The integrated enterprise test, with its focus only on labor relations and its emphasis on economic realities as opposed to corporate formalities, see Phillip I. Blumberg, The Law of Corporate Groups: Problems of Parent and Subsidiary Corporations Under Statutory Law of General Application S 13.03, at 398 (1989), is demonstrably easier on plaintiffs than traditional veil piercing. Ultimately, the policy underlying the single employer doctrine is the fairness of imposing liability for labor infractions where two nominally independent entities do not act under an arm's length relationship. Murray v. Miner , 74 F.3d 402, 405 (2d Cir. 1996).
47 Although not often employed to hold parent corporations liable for the acts of subsidiaries in the absence of other hallmarks of overall integration of the two operations, it has long been acknowledged that parents may be directly liable for their subsidiaries' actions when the alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management, and the parent has interfered with the subsidiary's operations in a way that surpasses the control exercised by a parent as an incident of ownership. United States v. Bestfoods, 524 U.S. 51, 64 (1998) (quoting William O. Douglas & Carrol M. Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193, 207 (1929)). In such situations, the parent has not acted on its own (in which case there would be no need even to consider the subsidiary's actions), nor has it acted in its capacity as owner of the subsidiary; rather, it has forced the subsidiary to take the complained-of action, in disregard of the subsidiary's distinct legal personality. See Esmark, Inc. v. NLRB, 887 F.2d 739, 756-57 (7th Cir. 1989). Thus, in the labor context, direct liability may attach if the parent has overridden the subsidiary's ordinary decision-making process and ordered it to institute an unfair labor practice, or to create discriminatory hiring policies. See id. at 757. In this way, direct liability functions essentially as a kind of transaction-specific alter ego theory. Id. at 756. 48 Although direct liability is rarely used independently to hold parents liable for their subsidiary's actions, it has often been used in conjunction with the integrated enterprise test for liability, particularly to satisfy the control of labor prong. For instance, the Ninth Circuit in UA Local 343 of the United Ass'n of Journeymen & Apprentices of the Plumbing & Pipefitting Industry of the United States & Canada v. Nor-Cal Plumbing, Inc., 48 F.3d 1465 (9th Cir. 1995), held that the control of labor prong of the integrated enterprise test may be established either by a showing of day-to-day control of labor, or by a showing that the parent was specifically responsible for the labor practice at issue in the litigation. See id. at 1471. Other courts have explained that all four factors of the integrated enterprise test are to be employed solely with an eye to discerning which entity -- the parent or the subsidiary -- was the final decisionmaker for the challenged practice. See, e.g., Hukill v. Auto Care, Inc., 192 F.3d 437, 444 (4th Cir. 1999); Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 777 (5th Cir. 1997). Thus, the directness of a parent's involvement in the employment decision under dispute may be conceived as a sliding scale; if the parent has sufficiently overwhelmed its subsidiary in taking the challenged action, such a showing is sufficient to create liability; if the parent was involved to a lesser degree, there must be some demonstration of the presence of the other aspects of the integrated enterprise test.
49 Given these variations in the methods by which courts determine when corporations shall be liable for the acts of their affiliates, it is not surprising that there has been a good deal of inconsistency among the courts attempting to apply existing law in the context of the WARN Act. 5 In the first reported case on the subject, Local 397, International Union of Electronic, Electrical Salaried Machine & Furniture Workers v. Midwest Fasteners, Inc., 779 F . Supp. 788 (D.N.J. 1992), the court employed three different tests -- Third Circuit federal veil-piercing, the integrated enterprise test, and the DOL factors -- to determine whether parent and grandparent corporations could be held liable for the debts of a subsidiary. The court concluded that the corporations were separate under an alter ego analysis, but identical under integrated enterprise analysis and the DOL factors. In reconciling these different outcomes, the court ultimately explained that the WARN Act was enacted to protect workers, and that the wrongdoer should not escape liability merely because corporate formalities were observed -- a principle that the court noted had been established in federal labor statutes generally. Id. at 800. Thus, the court held that the outcomes of the integrated enterprise and DOL factors would control the analysis, rendering its entire discussion of alter ego not only superfluous, but also inapposite. 50 Other courts have followed the multi-part Midwest Fasteners approach, although the application of its principles varies widely. For instance, in Watts v. Marco Holdings, L.P., No. 3:95CV88-B-A, 1997 WL 578783 (N.D. Miss. Aug. 8, 1997), the court chose to apply state, rather than federal, veil-piercing analysis, all the while acknowledging that, as Midwest Fasteners had stated, for the purpose of determining whether two nominally separate companies constituted a single employer, state law veil- piercing was probably inappropriate. See id. at ; see also United Paperworkers Int'l Union v. Alden Corrugated Container Corp., 901 F. Supp. 426, 436-39 (D. Mass. 1995) (applying state corporate law, integrated enterprise, and the DOL factors and concluding that because WARN is a federal labor statute, the outcomes of the federal tests, rather than the state alter ego test, should control). 51 On the opposite end of the spectrum, the court in Wholesale & Retail Food Distribution Local 63 v. Santa Fe Terminal Services, 826 F. Supp. 326 (C.D. Cal. 1993), also applying state alter ego principles, rejected the plaintiffs' assertions that state veil-piercing was less important under WARN than the DOL factors, and chose not to employ the integrated enterprise test at all. See id. at 334-35. In United Mine Workers of America, District 2 v. Florence Mining Co., 855 F. Supp. 1466 (W.D. Pa. 1994), the court, although purporting to follow Midwest Fasteners, actually appeared to apply only the DOL factors in concluding that two corporations did not constitute a single employer for WARN Act purposes. See id. at 1480. Finally, in International Brotherhood of Teamsters Local 952 v. American Delivery Service, 50 F.3d 770 (9th Cir. 1995), the Ninth Circuit expressed doubts about the need to apply several different tests for liability, yet still chose to apply both the integrated enterprise test and the DOL factors, albeit concurrently due to the tests' similarity. See id. at 776. 6 52 The current trend toward applying more than one test for affiliated corporate liability is manifestly unworkable. Not only does this approach generate considerable uncertainty for parties affected by the WARN Act (the briefs presented to us are exemplars; they spend an inordinate amount of time simply running through different possible tests for liability), but it also obfuscates the purposes of the inquiry itself, i.e., whether the affiliated corporation should be legally responsible for issuing WARN notice. Further, although the importation of state law standards into federal law is permissible when state law is deemed to effectuate federal policy, see Textile Workers Union of Am. v. Lincoln Mills of Ala., 353 U.S. 448, 457 (1957), state veil-piercing standards hardly seem likely to do so when such standards may generate inconsistency in an area of law that has always been characterized by insistence on uniformity. Cf. Antol v. Esposto, 100 F.3d 1111, 1115 (3d Cir. 1996) (discussing the need for uniformity in the interpretation of collective bargaining agreements). The use of state law standards also has the potential to permit [t]he policy underlying a federal statute to be defeated by . . . an assertion of state power. Anderson v. Abbott, 321 U.S. 349, 365 (1944). Finally, the multi-test approach is both unduly complicated, American Delivery Serv., 50 F.3d at 776, and ultimately yields no definitive answer to the question of liability: When liability is uncertain enough to result in different outcomes for each of the different tests, there is no method of reconciling the results, much in the same way that a man with one watch always knows what time it is, but a man with two watches is never sure. Cf. Papa v. Katy Indus., Inc., 166 F.3d 937, 940 (7th Cir . 1999) (criticizing the integrated enterprise test on the ground that there is no way to reconcile the results of the prongs). 53 Given these variations in the methods by which courts determine when corporations shall be liable for the acts of their affiliates, we decline to interpret the Department of Labor's statement that it does not intend to create new law for WARN Act liability as a direction to courts to employ multiple tests within a single case. Rather, we conclude that the most prudent course is to employ the factors listed in the Department of Labor regulations themselves. This approach not only has the virtue of simplicity (if anything in this area of law can be described as simple), but also allows for the creation of a uniform standard of liability for the enforcement of a federal statute. Cf. United States v. Pisani, 646 F.2d 83, 87-88 (3d Cir . 1981) (holding that federal veil-piercing standards are appropriate in Medicare disputes due to the need for a uniform federal approach). Finally, and most importantly, the DOL factors are the best method for determining WARN Act liability because they were created with WARN Act policies in mind and, unlike traditional veil-piercing and some of the other theories, focus particularly on circumstances relevant to labor relations. 54 The DOL factors are quite similar to the integrated enterprise test, which is understandable because the integrated enterprise test was also specifically intended to deal with labor relations. However, in addition to those factors that are analogous to the integrated enterprise factors, the Department of Labor's version has included a fifth, catch-all factor -- that of de facto exercise of control -- that has the potential to tip the balance in an otherwise close case. This factor is arguably problematic, because read in isolation, it might well encourage the imposition of liability merely as a result of the control ordinarily exercised by a parent corporation over a subsidiary by virtue of its ownership. Such a result would cause a type of liability that is not only at odds with the purpose of limited liability in general, but also would be inconsistent with the existing legal rules regarding parental liability that the Department of Labor would have courts apply. See Bestfoods, 524 U.S. at 61-62 (describing as hornbook law that a parent's exercise of control through ownership of stock is not grounds for holding the parent liable for the subsidiary's actions). 55 In reconciling this apparent tension, we observe that the DOL factors are, by their wording, more focused than their integrated enterprise test counterparts. For instance, rather than looking to centralized control of labor relations -- the factor that, in the integrated enterprise context, could be satisfied either upon a showing that the parent and subsidiary functioned as a single entity, or , alternatively, upon a showing that the parent directed the subsidiary to institute the policy at issue -- the DOL formulation is unity of personnel policies, a rendering that appears to be more targeted toward discerning whether the nominally separate corporations actually functioned as a single entity with respect to such policies on a regular , day-to-day basis. Similarly, the common management prong of the integrated enterprise test, which allowed courts to focus not only on employees holding formal officer positions or directorships but also on employees occupying supervisory positions, see, e.g., Hukill v. Auto Care, Inc., 192 F.3d 437, 443 (4th Cir. 1999); Penntech Papers, Inc. v. NLRB, 706 F.2d 18, 25-26 (1st Cir. 1983), has been changed to common officers and/or directors, a facially more specific requirement. 56 In light of these changes, and in light of the instruction that the test should draw upon existing legal rules, we read the de facto exercise of control factor as an endorsement of the sort of hybrid direct liability analysis heretofore employed in the context of the integrated enterprise test -- allowing consideration not only of whether the two corporations shared the same labor policies, as the DOL's unity factor would suggest, but also of whether the parent company directly exercised control over the particular policy at issue. We further conclude that the regulation's specific instruction that the factors are a nonexhaustive list is meant only as a reminder that the inquiry is a balancing test, and that, as with most balancing tests, a number of circumstances may be relevant. Just as the integrated enterprise test is often described as ultimately an inquiry into whether the two companies operated at arm's length, see NLRB v. Browning-Ferris Indus. of Pa., Inc., 691 F.2d 1117, 1122 (3d Cir. 1982), we believe that the Department of Labor's instructions are intended to allow the consideration of evidence that might otherwise fall outside of the listed factors in order to conduct such an inquiry.
57 In the long history of the corporate form and limited liability, both the common law and various pieces of legislation have developed numerous methods for determining when affiliated corporations should be treated as unified or as distinct entities. These methods are often quite different from each other, and vary across contexts. In light of this history, if we were to interpret the DOL's instruction that courts apply existing law to determine WARN Act liability for affiliated corporations as a literal direction to employ the various tests that have been developed over the years, we would find ourselves ensnared in a web of complicated -- and conflicting -- lines of jurisprudence. We cannot believe that the Department intended such a result. 58 Rather, in our view, the Department intended for courts to test for affiliated corporate liability under WARN along the dimensions specifically enumerated in its regulation. These dimensions, in turn, were adapted from other tests developed for intercorporate liability, most notably labor law's integrated enterprise test. In light of the similar considerations inherent in the DOL factors and in other such veil-piercing tests, we believe that the DOL's instruction that courts apply existing law is intended only to encourage courts to make use of established precedent in interpreting and applying its factors. Further, via its statement that the factors are meant as a nonexhaustive list, the DOL has made room for the exercise of the flexibility that this area of law requires. Accordingly, in determining whether two or more corporations constitute a single employer, the factfinder may consider not only the aspects of corporate organization specifically listed in the regulation, but also may consider the other indicia of corporate sameness that have characterized this area of the law, such as nonfunctioning of officers and directors, gross undercapitalization, and other circumstances that demonstrate a lack of an arm's-length relationship between the companies. 59 We also interpret the DOL's inclusion of the de facto exercise of control factor to be an endorsement of the hybrid direct liability analysis heretofore employed in the context of the integrated enterprise test. Thus, the de facto exercise of control prong allows the factfinder to consider whether the parent has specifically directed the allegedly illegal employment practice that forms the basis for the litigation.

60 The preceding discussion focused on the standards to be employed for parent/subsidiary liability (or between sister corporations). But at the time their venture began, GECC was a major secured lender of CompTech, and not a parent. Neither the WARN Act itself, nor the regulations, explicitly discuss the statute's applicability to lenders, but we agree with both the Eighth and the Ninth Circuits that, under some circumstances, a lender can become so entangled with its borrower's affairs so as to engender WARN Act liability. See Adams v. Erwin Weller Co. , 87 F.3d 269, 271 (8th Cir. 1996); Chauffeurs, Sales Drivers, Warehousemen & Helpers Union Local 572 v. Weslock Corp., 66 F.3d 241, 244 (9th Cir. 1995). Thus, the question becomes what circumstances must exist before such liability can attach. 61 Courts have grappled with the question of lender liability in a wide variety of situations, such that the catch-phrase lender liability has now taken on a broad meaning to refer to any kind of liability that can grow out of the lender/borrower relationship. See, e.g., Lawrence, Lender Control Liability, supra (describing various theories under which lenders can be held liable either to their borrowers or to third parties). For our purposes, the most relevant lines of precedent are those where third parties seek to impose liability on major lenders on the theory that the lenders have so controlled the borrowing corporation that the corporation was functionally being run by the lenders, or solely for the lenders' benefit, to the detriment of other creditors. See, e.g., Krivo Indus. Supply Co. v. National Distillers & Chem. Corp., 483 F.2d 1098 (5th Cir. 1973). Often, these claims arise in the context of a bankruptcy proceeding, whereby the creditors or the trustee seek equitable subordination of the major lender's claims. See, e.g., In re W.T. GrantCo., 699 F.2d 599 (2d Cir. 1983). In other situations, creditors simply sue the major lender on the theory that the lender's control over the borrower rendered the lender the real party in interest for the incurred debt. See, e.g., Combustion Sys. Servs., Inc. v. Schuylkill Energy Res., Inc., Civ.A. 92-4228, 1993 WL 514496 (E.D. Pa. Dec. 1, 1993). 62 In these situations, the test usually applied is some version of traditional veil-piercing, be it alter ego, instrumentality, or some other formulation. See, e.g., In re Clark Pipe & Supply Co., Inc., 893 F.2d 693, 699 (5th Cir. 1990) (explaining that, in the absence of fraud, a lender must have used its debtor as an instrumentality to justify equitable subordination); Great West Cas. Co. v. Travelers Indem. Co., 925 F. Supp. 1455, 1462-63 (D.S.D. 1996) (utilizing state veil-piercing standards to determine whether a lender would be liable to a third party for the debtor's debts). This is precisely the test that was employed by the District Court when it concluded that because GECC was a lender and not a parent, the integrated enterprise test was inapplicable. See Pearson v. Component Tech. Corp., 80 F. Supp. 2d 510, 520 (W.D. Pa. 1999). We believe, however, that traditional lender/borrower veil-piercing jurisprudence is inappropriate in the WARN Act context for many of the same reasons that we rejected such jurisprudence in the context of parent/subsidiary liability. 63 To begin with, the precedent on this point does not draw as sharp a distinction between lenders and parents as the District Court perceived. Although Krivo and its progeny employed strict veil piercing standards to suits against lenders, they did so in situations where even parents would have been examined under such standards. The only differences between parents and lenders came in the test's application, both via the court's awareness of the changed context, see Krivo, 483 F.2d at 1110 (observing that the lender's control was limited to its financial interest as a major creditor), and the court's statement that the lack of stock ownership is a factor to be considered in assessing the relationship between two companies, see id. at 1109; see also Riquelme Valdes v. Leisure Res. Group, Inc., 810 F.2d 1345, 1353 (5th Cir. 1987) (explaining that complete ownership is a symptom but not the sine qua non of alter ego status). It follows that when the appropriate test for parental liability is something other than the strict alter ego test, there should be a parallel change in the test for liability for lenders. 64 Further, traditional veil-piercing jurisprudence tends to sweep quite broadly, allowing liability to attach only when there is complete unity of identity in all aspects of corporate functioning. See, e.g., Krivo, 483 F .2d at 1105 (liability attaches to lenders only when there has been total control over the debtor). Although such an inquiry may be appropriate for many types of claims, the mere existence of the integrated enterprise test demonstrates that in the labor context, a more targeted inquiry is appropriate. We acknowledge that the DOL factors are explicitly made applicable in the WARN Act regulation only to subsidiaries and not to borrowers, but do not read that reference as precluding the application of the factors to lenders; rather, we believe that by directing courts to examine these particular factors, the Department of Labor was highlighting those aspects of corporate functioning that are most closely tied to the particular problems the WARN Act was intended to address. 7 65 Additionally, the problem with creating such a sharp distinction in liability rules under the WARN Act for lenders and for parents is that it will not always be clear when a party should be characterized as a lender, when a party should be characterized as a parent or owner, and when a party occupies both roles. In the case before us, GECC began its relationship with CompTech as a lender, but subsequently foreclosed on the stock and, rather than merely holding the stock for only a few days before the plant closure (as was the case in Weslock), transferred it (for no consideration) to CompTech's Chief Executive Officer (then under contract to GECC), yet retained a considerable amount of control over the stock for the next several years as part of its plan to hold CompTech until the company could be restored to profitability. Given the ease with which Thomas Gaffney parted with the stock upon being asked by GECC to relinquish his position with CompTech, it is certainly not clear that GECC should not be viewed as having owned CompTech's stock from the date of foreclosure until the date that the company was finally liquidated. 66 Lenders may also occasionally be difficult to distinguish from parents because, although generally the difference between a parent and a lender is the existence of an equity, rather than a debt, interest in the company, lenders often structure their interests in hybrid ways. In this case, in addition to traditional loans, GECC chose to structure part of the debt by having CompTech modify its articles of incorporation so as to create a class of mandatorily redeemable preferred stock tailored to GECC's interest. Such redeemable preferred stock is currently listed as neither equity nor liability according to U.S. generally accepted accounting principles. See Inter national Accounting Standards, SEC Release Nos. 33-7801 & 34-42430, 65 Fed. Reg. 8,896, 8,911 (Feb. 23, 2000). However, it is sometimes classified as equity in SEC opinions, see, e.g., The Southern Company, SEC Release Nos. 35-27323 & 70-8277, 2000 SEC LEXIS 2860 (Dec. 27, 2000), although international accounting standards list such stock as a liability, see International Accounting Standards, supra, and federal regulations forbid such stock from being listed as stockholders' equity, see 17 C.F.R.S 210.5-02. See generally Anthony P. Polito, Useful Fictions: Debt and Equity Classification in Corporate Tax Law, 30 Ariz. St. L.J. 761 (1998) (explaining the fluidity of the concepts of debt and equity). 67 Several federal statutes have defined the term parent in such a way as to include GECC's interest. For instance, the Internal Revenue Code at 26 U.S.C. S 1563 defines as parents in a controlled group those companies that own eighty percent of the of the stock of other corporations in the group, and 26 U.S.C. S 1202 requires only fifty percent ownership. Ownership, in turn, is defined throughout the Code to include stock options. See, e.g., 26 U.S.C. SS 318, 544, 554, 1563. Under these definitions, GECC was a parent of CompTech after the transfer to Charles Villa, because GECC retained options on all of CompTech's stock. The Code of Federal Regulations also contains definitions of parent and subsidiary that would include GECC's relationship to CompTech as a result of its power to vote the stock in the wake of CompTech's default. See 17 C.F.R. S 210.1-02. And Pennsylvania law defines the term subsidiaries for registered corporations as including those corporations for which another corporation has obtained options on fifty percent of the voting stock, see 15 Pa. Cons. Stat. S 2542, a definition that would also apply to GECC due to its calls obtained during the stock transfer to Villa. That the Supreme Court of Delaware described the right to vote a majority of the board in the event of default as a creditor's remedy in In re Bicoastal Corp., 600 A.2d 343, 350 (Del. 1991), merely serves to highlight the hybrid nature of such rights. Obviously, however, the regulatory purposes of these statutes (and the WARN Act itself) vary considerably. 68 Finally, we note that the commonly understood difference between a parent and a lender-- i.e., the existence of an equity interest -- is largely accounted for in the DOL factors themselves, via the common ownership prong. Although this factor is typically referred to as the least important of the factors, International Bhd. of Teamsters Local 952 v. American Delivery Serv., 50 F .3d 770, 775 (9th Cir. 1995), these statements mean only that, by itself, ownership -- and even ownership coupled with common management -- is not a sufficient basis for liability, see Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 778 (5th Cir. 1997). Although financial control will suffice to satisfy the common ownership prong of the integrated enterprise test, see, e.g., Frank v. U.S. West, Inc., 3 F.3d 1357, 1362 (10th Cir. 1993), and it is likely that the DOL factors should be interpreted similarly, there is nothing to prevent courts from requiring a higher showing of control in the absence of true ownership, just as they have done in traditional veil- piercing lender cases. See, e.g., Riquelme Valdes, 810 F.2d at 1354.
69 All things considered, including the absence of a satisfactory alternative, we are satisfied that the DOL factors are an appropriate method of deter mining lender liability as well as parental liability, and therefore hold that, regardless of whether GECC took on the status of parent in addition to its status of lender when it foreclosed on the stock, its involvement with CompTech will be tested by reference to those factors. We emphasize, however, that just as Krivo and similar cases took special note of the unique relationship between a lender and a borrower, so should courts do the same when utilizing the DOL factors. Thus, courts should place special weight on a lender's lack of stock ownership, and the mere fact that a lender has loaned money to the borrower -- thus making the borrower, in some sense, financially beholden to the lender-- will not establish liability, or even dependency of operations as that phrase is used in the DOL test, just as a parent's ownership of stock will not suffice to create liability for the parent. 70 Our application of the DOL factors will not, however, be dominated by an assessment of whether the defendant's behavior was typical of a secured lender, as other courts (including the District Court in this case) have done. See Pearson, 80 F. Supp. 2d at 525; see also Adams, 87 F.3d at 272 (refusing to hold a lender liable for WARN Act violations because the lender's control was not unusual for a lender loaning over eighteen million dollars); Weslock, 66 F.3d at 245 (refusing to hold lender liable because the control exercised was consistent with the type of control a secured creditor legitimately may exercise over a defaulting debtor (quotations omitted)). Typical lender behavior is a mutable concept, and it will respond to the liability rules we put into place. See Robert E. Scott, A Relational Theory of Secured Financing, 86 Colum. L. Rev. 901, 934 (1986) (explaining that, if not for the liability rules currently in place, creditors would exercise more control over debtors than is now customary). Further, even total control of a delinquent borrower's business might well be justified as an effort to protect collateral. See id. Thus, although courts should attend to the customary relationship between lender and borrower (just as they have attended to customary relationships between parents and subsidiaries in determining liability), they should also make a functional assessment of the amount of control involved.
71 Affiliated corporate liability under the WARN Act is ultimately an inquiry into whether the two nominally separate entities operated at arm's length. Cf. NLRB v. Browning-Ferris Indus. of Pa., Inc., 691 F.2d 1117, 1122 (3d Cir. 1982). To that end, the Department of Labor has specifically mandated consideration of: (1) common ownership, (2) common directors and/or officers, (3) de facto exercise of control, (4) unity of personnel policies emanating from a common source, and (5) the dependency of operations. We acknowledge that although these factors do not correspond precisely to established tests for liability, reliance on analogous precedent may often be useful in the interpretation and application of those factors. 72 We believe that the DOL's caveat that the factors are a nonexhaustive list is intended to allow the factfinder to consider other evidence, if any, of a functional integration between the two nominally separate entities -- with, as always, an eye to the sorts of circumstances that courts have considered relevant to veil-piercing inquiries in the past. So, although ordinarily such hallmarks of integration as nonfunctioning of officers and directors and nonpayment of dividends are not of great importance in the labor context, certainly the factfinder would be permitted to take such arrangements into account when determining WARN Act liability, as well as any other arrangements that bear on the question whether the two companies failed to maintain an arm's-length relationship. 73 Further, the de facto exercise of control factor allows the factfinder to consider, as has been done in the integrated enterprise context, whether a parent corporation was the final decision maker for the challenged practice. If the evidence of the parent's control with respect to the practice is particularly egregious -- for instance, if the parent corporation has disregard[ed] the separate legal personality of its subsidiary in directing the subsidiary to act, Esmark, Inc. v. NLRB, 887 F.2d 739, 757 (7th Cir. 1989) -- such evidence alone might be strong enough to warrant liability. 74 Finally, we conclude that these factors, with their labor-specific focus, are more appropriate than traditional veil-piercing jurisprudence for gauging WARN Act liability with respect to lenders. As has always been the case, when a plaintiff seeks to hold one corporation liable for the debts of another, particular attention must be paid to any lack of an ownership interest between the two corporations, and such a lack must be weighed heavily against a finding of liability for the affiliated corporation. Further, just as a parent will not be held liable solely because of its ownership of the subsidiary, so too a lender will not be liable solely because of the financial dependence that necessitated the loan in the first place. 75 However, notwithstanding the importance of a lack of ownership interest between two corporations, we believe that in the application of the DOL factors, the ultimate inquiry should not depend entirely on an assessment of whether the lender has behaved in a typical fashion. Typical lender behavior is a mutable concept, and it will respond to the liability rules we put into place. Thus, although the customary relationship between lender and borrower is a relevant consideration (just as customary relationships between parents and subsidiaries have always been relevant to the determination of liability), there must also be a functional assessment of the amount of control exercised by the lender.