Opinion ID: 3011706
Heading Depth: 1
Heading Rank: 2

Heading: Liability for Affiliated Corporations Under

Text: the WARN Act
In the wake of numerous plant closings and mer gers in the 1970s and 1980s, Congress passed the W ARN 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 r equiring that companies with advance knowledge of an imminent closing provide notice to employees, so as to allowworkers 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: 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 or der . . . to _________________________________________________________________ 1. Summary judgment is proper if ther e is no genuine issue of material fact and if, viewing the facts in the light most favorable to the nonmoving party, the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). At the summary judgment stage, the judge's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). 11 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. . . . 29 U.S.C. S 2102(a)(1). 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 singlebusiness enterprise with CompTech such that it is r esponsible for CompTech's WARN Act obligations. 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 r egulations issued under the Act provide that: 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 consider ed 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. 20 C.F.R. S 639.3(a)(2). The five factors will hereinafter be referred to as the DOL factors. 12 The Department of Labor's supplementary infor mation regarding its WARN Act regulations explains that: The intent of the regulatory provision r elating to independent contractors and subsidiaries is not to create a special definition of these ter ms 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 r eason 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. 54 Fed. Reg. 16,045 (Apr. 20, 1989). 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) [her einafter 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 pr otections for corporations). A further complication comes from the fact that we have before us in this case not the traditional par ent/subsidiary 13 relationship but a relationship that began as an arrangement between a secured lender and a borr ower -- 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 deter mining 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. W e will then turn to the question whether the DOL factors should apply to situations involving lenders rather than par ents, ultimately concluding that the factors should be the same for both.

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 par ent 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. 14 Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979). Courts have held veil-piercing to be appr opriate 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. Pr ot. v. Ventron Corp., 468 A.2d 150, 164 (N.J. 1983). 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 recor ds, 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 _________________________________________________________________ 2. Although the tests employed to determine when circumstances justifying veil-piercing exist are variously referred to as the alter ego, instrumentality, or identity doctrines, the formulations are generally similar, and courts rarely distinguish them. See Phillip I. Blumberg, The Law of Corporate Groups: Substantive Law S 6.01, at 111 (1987). The most important differences across jurisdictions seem to reside largely in two aspects of these different for mulations: first, whether an element of fraudulent intent, inequitable conduct, or injustice is explicitly required, see id. S 6.02, at 115, and second, a general sense that federal courts are more likely to pierce the veil in order to effectuate federal policy, lest state corporate laws be permitted to frustrate federal objectives, see Anderson v. Abbott, 321 U.S. 349, 365 (1944); United Elec., Radio & Mach. Workers of Am. v. 163 Pleasant St. Corp., 960 F.2d 1080, 1092 (1st Cir. 1992). 3. For comparison, the Massachusetts version r equires consideration of common ownership, pervasive control, inter mingling of activity and assets, undercapitalization, lack of corporate formalities, absence of records, nonpayment of dividends, insolvency at the time of the relevant transaction, siphoning of corporate assets by shar eholders, nonfunctioning officers and directors, use of the corporation for the transactions of dominant shareholders, and use of the corporation for fraud. See Evans v. Multicon Constr. Corp., 574 N.E.2d 395, 398 (Mass. App. Ct. 1991). The Illinois version considers the failure to maintain records and formalities, commingling of funds, undercapitalization, and one corporation treating the assets of the other as its own. See Van Dorn Co. v. Future Chem. & Oil Corp., 753 F .2d 565, 570 (7th Cir. 1985). 15 The test, whether or not a particular version r equires 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 plaintif fs 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 par ent, 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 whenthe personalities of the corporation and individual are no longer separate); Akzona Inc. v. E.I. Du Pont 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).
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 Contr ol 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 pr esence of a single 16 employer, a sort of labor-specific veil-piercing test, first developed by the National Labor Relations Boar d. 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 dir ectly 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 r elations; 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. Br owning-Ferris Indus. of Pa., Inc., 691 F.2d 1117, 1122 (3d Cir . 1982). As originally designed, the integrated enterprise test was used by the National Labor Relations Board to determine whether two firms were sufficiently r elated 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 imper missibly double-breasted operations so as to avoid the obligations of a collective bargaining agreement. See id. at 75-76.4 Since its initial formulation, the test has been applied by courts in other employment contexts, including the Labor _________________________________________________________________ 4. In a double-breasted operation, a company divides its business into union and nonunion shops. See Limbach Co. v. Sheet Metal Workers Int'l Ass'n, 949 F.2d 1241, 1245 (3d Cir . 1991). 17 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 r egulations have also adopted the integrated enterprise test for the Family Medical Leave Act. See 29 C.F .R. 825.104(c)(2). The integrated enterprise test, with its focus only on labor relations and its emphasis on economic r ealities 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 pier cing. 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).
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 bedirectly liable for their subsidiaries' actions when thealleged wrong can seemingly be traced to the parent thr ough the conduit of its own personnel and management, and the par ent has interfered with the subsidiary's operations in a way that surpasses the control exercised by a par ent as an incident of ownership. United States v. Bestfoods, 524 U.S. 51, 64 (1998) (quoting William O. Douglas & Carr ol M. Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193, 207 (1929)). In such situations, the parent 18 has not acted on its own (in which case ther e 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 or dered it to institute an unfair labor practice, or to cr eate 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. 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 Jour neymen & 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 contr ol 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 dir ectness 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. 19
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 ther e has been a good deal of inconsistency among the courts attempting to apply existing law in the context of the W ARN 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 dif ferent 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 _________________________________________________________________ 5. In addition to the tests for liability listed above, there are numerous others that are employed less frequently, or only in specific contexts. Sometimes courts will impose liability on a par ent for a subsidiary's acts based on a theory of agency, i.e., that the subsidiary organization, although (unlike an alter ego) possessed of a distinct legal personality from the parent, has acted as the par ent's agent in a series of transactions and therefore has the power to bind the parent. See, e.g., A.T. Massey Coal Co., Inc. v. International Union, United Mine Workers of Am., 799 F.2d 142, 147 (4th Cir. 1986); Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1070 (3d Cir. 1979); A. Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W .2d 285 (Minn. 1981). Moreover, specific statutes have their own tests. For instance, the Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. S 1381 et seq., treats as a single employer all businesses under common control, borrowing its definition ofcommon control from the Internal Revenue Code. That definition, in turn, looks purely to stock ownership to define a controlled group, and ownership in this context includes stock options. See IUE AFL-CIO Pension Fund v. Barker & Williamson, Inc., 788 F.2d 118, 123 (3d Cir. 1986). Cases construing the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. S 9601 et seq., have also set forth standards for determining when parent corporations will be responsible for the waste management responsibilities of subsidiaries. See United States v. Bestfoods, 524 U.S. 51 (1998). And cases under the Securities Act of 1933, 15 U.S.C. S 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. S 78a et seq., have fashioned distinct standards of liability for entities that control businesses found to be in violation of the securities laws. See Lawrence, Lender Control Liability, supra, at 1393. 20 corporations were separate under an alter ego analysis, but identical under integrated enterprise analysis and the DOL factors. In reconciling these differ ent outcomes, the court ultimately explained that the WARN Act was enacted to protect workers, and that the wr ongdoer 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. Other courts have followed the multi-part Midwest Fasteners approach, although the application of its principles varies widely. For instance, in W atts 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 veilpiercing 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). 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. Flor ence 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 21 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 concurr ently due to the tests' similarity. See id. at 776. 6 The current trend toward applying mor e 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 inor dinate amount of time simply running through differ ent 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 standar ds 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 unifor mity. 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 per mit [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 r esult in different outcomes for each of the dif ferent tests, there is no _________________________________________________________________ 6. Just recently, in Hollowell v. Orleans Regional Hospital LLC, 217 F.3d 379 (5th Cir. 2000), the Fifth Circuit upheld a jury finding that several corporations constituted a single employer for W ARN Act purposes where the jury had been instructed to follow only the DOL factors. However, it is unclear whether the court ultimately held that the DOL factors, and only those factors, were the appropriate method of analysis, for it refused to consider the defendants' arguments that the wrong legal standard had been applied. See id. at 389. 22 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 pr ongs). 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 cr eate 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 ar e appropriate in Medicare disputes due to the need for a uniform federal approach). Finally, and most importantly, the DOL factors ar e 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. 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 pr oblematic, because read in isolation, it might well encourage the imposition of liability merely as a result of the contr ol 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 23 liability in general, but also would be inconsistent with the existing legal rules regarding par ental liability that the Department of Labor would have courts apply. See Bestfoods, 524 U.S. at 61-62 (describing ashornbook law that a parent's exercise of control through ownership of stock is not grounds for holding the par ent liable for the subsidiary's actions). In reconciling this apparent tension, we observe that the DOL factors are, by their wording, mor e 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 par ent 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 for mulation 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 Car e, 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. 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 ar e a nonexhaustive list is meant only as a reminder that the inquiry is a 24 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.
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 interpr et 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. Rather, in our view, the Department intended for courts to test for affiliated corporate liability under W ARN along the dimensions specifically enumerated in its r egulation. 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 pr ecedent 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 exer cise of the flexibility that this area of law requir es. Accordingly, in determining whether two or more corporations constitute a 25 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 cir cumstances that demonstrate a lack of an arm's-length r elationship between the companies. 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 heretofor e employed in the context of the integrated enterprise test. Thus, thede facto exercise of control prong allows the factfinder to consider whether the parent has specifically dir ected the allegedly illegal employment practice that forms the basis for the litigation.

The preceding discussion focused on the standar ds 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 r egulations, 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. 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 br oad 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 26 which lenders can be held liable either to their borrowers or to third parties). For our purposes, the most r elevant lines of precedent are those where thir d 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). 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 W est 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 T ech. Corp., 80 F. Supp. 2d 510, 520 (W.D. Pa. 1999). We believe, however, that traditional lender/borrower veil-pier cing 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. To begin with, the precedent on this point does not draw as sharp a distinction between lenders andparents as the District Court perceived. Although Krivo and its progeny 27 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 itsfinancial interest as a major creditor), and the court's statement that the lack of stock ownership is a factor to be consider ed 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 appr opriate 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. 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 beentotal control over the debtor). Although such an inquiry may be appropriate for many types of claims, the mer e 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 _________________________________________________________________ 7. In its own decision granting summary judgment to GECC, the District Court relied on cases involving standar ds for equitable subordination in the bankruptcy law context, such as In re W.T. Grant, 699 F.2d 599 (2d Cir. 1983), and standards regar ding allegations that lenders have breached fiduciary obligations to borrowers, such as in Temp-Way Corp. 28 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 befor e 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 W eslock), 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 CompT ech, 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. 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 _________________________________________________________________ v. Continental Bank, 139 B.R. 299 (E.D. Pa. 1992). See Pearson, 80 F. Supp. 2d at 521. We do not believe that these precedents are particularly instructive. Both sorts of claims set a high bar for plaintiffs because the causes of action rely upon an allegation of wr ongdoing by the lender. WARN Act liability, by contrast, requir es no showing of fraud or even a culpable mental state, although a court may, in its discretion, reduce penalties if the employer proves good faith. See 29 U.S.C. S 2104(a)(1)(B)(4). Therefore, the standards justifying equitable subordination cannot be freely transferred. Cf. Lawrence, Lender Control Liability, supra, at 1388 (criticizing courts' tendencies to apply similar definitions of control for lender liability, no matter what the cause of action). 29 redeemable preferred stock tailor ed 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 & 3442430, 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 fr om 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 ofdebt and equity). Several federal statutes have defined the ter m 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 gr oup those companies that own eighty percent of the of the stock of other corporations in the group, and 26 U.S.C. S 1202 r equires 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 CompT ech'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 Delawar e described the right to vote a majority of the board in the event of default as a creditor's remedy in In r e Bicoastal Corp., 600 A.2d 343, 350 (Del. 1991), merely serves to highlight the hybrid 30 nature of such rights. Obviously, however , the regulatory purposes of these statutes (and the WARN Act itself) vary considerably. Finally, we note that the commonly understood dif ference 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 referr ed 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. W est, 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 contr ol in the absence of true ownership, just as they have done in traditional veilpiercing lender cases. See, e.g., Riquelme Valdes, 810 F.2d at 1354.
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 borr ower, 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 31 that phrase is used in the DOL test, just as a par ent's ownership of stock will not suffice to create liability for the parent. 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 W ARN Act violations because the lender's control was notunusual 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 exer cise 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 mor e 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.
Affiliated corporate liability under the W ARN 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, 32 reliance on analogous precedent may often be useful in the interpretation and application of those factors. 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-pier cing inquiries in the past. So, although ordinarily such hallmarks of integration as nonfunctioning of officers and directors and nonpayment of dividends are not of gr eat 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 r elationship. Further, the de facto exercise of control factor allows the factfinder to consider, as has been done in the integrated enterprise context, whether a par ent corporation was the final decisionmaker for the challenged practice. If the evidence of the parent's contr ol with respect to the practice is particularly egregious -- for instance, if the parent corporation has disregar d[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. Finally, we conclude that these factors, with their laborspecific focus, are more appropriate than traditional veilpiercing 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. 33 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.