The goal for a double-breasted operation is to have one company, which will perform work under union agreements, also known as Collective Bargaining Agreements (“CBA”), and another company which will operate as an open shop. An open shop is a company that does not require its employees to join or financially support a union.
To legally run a double-breasted operation, the companies must remain separate. If the companies are not sufficiently separate then a court may find the open shop company to be the alter ego of the union company. If a court makes this finding the open shop company may be found to be bound by the CBA and the open shop company will be required to make fringe benefit payments.
But what does separate mean? A court will consider the following factors to determine whether two businesses are alter egos – or not.
FACTOR 1: FINANCIAL VIABILITY
The first factor is determining whether the two companies are financially viable. The companies need to have different owners, managers, business purposes, customers, operations, and equipment. The existing company cannot assist the new company with any of the above without risking alter ego liability. The individual starting the new company needs to determine whether it is financially possible to create an open shop that is separate from the existing union shop.
FACTOR 2: BUSINESS PURPOSE
The next factor is whether the new company’s business purpose is different than the original company. Two entities are said to have the same business purpose when they deal in the same product or service. For example, companies have been found to share substantially identical business purposes where both companies manufactured paint brushes, were involved in heating, air conditioning, and ventilation industry, or performed masonry construction. However, companies are said to have different business purposes when they are engaged in different but related lines of business. For example, one company manufacturers clothing and another markets and sells clothing.
FACTOR 3: OWNERSHIP
The two companies should not have identical owners. Common ownership is substantially similar when the existing company holds an ownership interest in the new company or when the two companies are under common ownership by a third entity. Common ownership can also be inferred where businesses are held by close family members. Although common ownership is an important factor that courts will consider in determining whether the companies are alter egos, it alone is not enough.
Courts have found that when the only factor is common ownership, there is no
alter ego. Nevertheless, the companies should be created with different ownership interests / different owners in order to avoid alter ego liability.
FACTOR 4: OPERATIONS
The next factor is whether the new company has separate business operations. Choose a business name that is different such that existing customers and employees will not confuse the two entities. When filing the articles of incorporation or any formation documents, ensure that the filing fee is paid with the new company’s funds, not the existing company’s funds. Additionally the companies must have different offices, stationary, telephone numbers, addresses, computer systems, books and records, file its own taxes, insurance policies, bank accounts, human resources, payroll systems, and professional services. If the two companies’ operations remain completely separate there is a strong argument that the companies are not substantially similar to warrant the court finding the companies’ alter egos.
FACTOR 5: SUPERVISORS
Each company needs to have separate supervisors for the projects. The same supervisor cannot supervise the projects for the existing company and the new company. Courts have considered the supervisor to be the person who negotiates the contract, is the ultimate decision maker for important questions, including issues as diverse as bond requirements, indemnity issues, and whether the company will provide equipment for the project. Therefore, companies should maintain separate supervisors not only on the project but in the behind the scenes operations as well.
FACTOR 6: MANAGEMENT
Management between the companies need to be substantially different. A Court found there was substantially similar management between companies where the project management team of the new company was comprised almost entirely of people who had worked or were working for the existing company. The Court not only considered the similarity of the project management team but also that the bid was prepared by an individual who worked both for the new company and the existing company. However, a manager of the existing company is permitted provide limited business advice and operation support during the new company’s early stages. Additionally, the court will not find common management when there is a mere transfer of lower and middle managers.
In appointing management, the new company must choose upper level managers with no affiliation to the existing company. Any advice received from any management of the existing company must be extremely limited and only during the first few months of the new company’s existence.
FACTOR 7: CUSTOMERS
The next factor is whether the new company has different customers than the existing company. Courts have found alter ego based in part on one long-time customer in common, the companies serving substantially the same customers, and sharing of at least some of the same customers. Therefore, depending on the local marketplace, the companies should have different customers.
FACTOR 8: EQUIPMENT
The final factor is whether the new company has separate equipment, tools, supplies or other resources in connection with their operations. A court will consider whether the two companies shared important, expensive pieces of equipment in determining alter ego liability. It is important that the companies have separate equipment with their respective names on it. If it is not financially viable that each company have separate equipment, the new company could lease the equipment from the existing company so long as there is a formal agreement between the companies and the company leasing the equipment receives the fair market value for the leased equipment.
The above factors represent a court’s major considerations in determining whether the two companies are actually alter egos. However, it should be noted that the test for alter ego is dependent upon circumstances of the individual case.