Corporations beware: the Eighth Circuit announces new criteria for parent corporation liability and constructive notice of harassment.

• Author: Hall, Lawrence S.

Sandoval v. American Building Maintenance, Incorporated (1)

1. INTRODUCTION

   In today's corporate environment, businesses face many sources of potential litigation, including products liability, employment issues, and harassment in the workplace, just to name a few. Large corporations can limit this liability by forming subsidiary corporations that insulate the parent corporation from liability with respect to the acts of its subsidiary. (2) Without this protection, investments in parent corporations would suffer because of the increased exposure to liability. (3) Under the limited liability doctrine, parent corporations can exercise a normal level of control over their subsidiaries without being held liable for their subsidiaries' actions. (4) However, courts are willing to look behind this corporate veil if the parent corporation exercises a high level of control beyond the normal parent-subsidiary relationship. (5)

   One of the primary sources of potential liability for corporations involves a variety of harassment claims under Title VII. (6) For a corporation to be liable for harassment, the plaintiff employee must show that whatever entity she is attempting to hold responsible, whether it be a parent or subsidiary corporation, either knew or should have known about the harassment. (7) If the employer knew about incidents of harassment, then it is said to have actual notice of the harassment. (8) Moreover, if the harassment was so pervasive and widespread that the employer should have known about the harassment, then the employer is deemed to have been on constructive notice of the harassment. (9) Unless the plaintiff proves actual or constructive notice, the claim will fail as a matter of law. (10)

   Two major issues for parent corporations are how to treat subsidiaries when forming harassment policies and how to deal with complaints of harassment relating to their subsidiary corporations. A parent corporation has two options. (11) First, it may take a hands-on approach and exert control over the subsidiary, thus making the parent more likely to be held liable for any damages caused by the subsidiary. Second, it may take a completely hands-off approach and hope to avoid liability for any unlawful activities that take place at one or more of its subsidiaries. While control in the area of harassment may not prove determinative when deciding whether a parent corporation sufficiently dominates its subsidiary, it is certainly a factor that the court is likely to consider. (12)

   In Sandoval v. American Building Maintenance Inc., the United States Court of Appeals for the Eighth Circuit announced two very important principles affecting corporations in regard to harassment liability. (13) First, in looking at parent-subsidiary corporate relationships, the court re-established a four-factor test, which was vacated by the Eighth Circuit in 2007, that determines whether a parent corporation can be held liable for the acts of its subsidiaries. (14) Second, when looking at a hostile work environment claim, the Eighth Circuit held that events involving harassment at multiple locations of which the defendant corporation was aware can be admitted to show that harassment was sufficiently severe and pervasive to put the company on constructive notice of the harassment. (15)

2. FACTS AND HOLDING

   Eleven plaintiffs brought sexual harassment, hostile workplace, and other employment-related claims against American Building Maintenance Industries, Inc. (ABMI), alleging violations under Title VII of the Civil Rights Act (16) and the Minnesota Human Rights Act. (17) Additionally, the plaintiffs brought an identical claim against American Building Maintenance of Kentucky (ABMK), a subsidiary corporation of ABMI. (18)

   The plaintiffs alleged that they experienced sexual harassment, discrimination, highly offensive sexual comments, and inappropriate touching. (19) They claimed that these actions by their direct supervisors had a material effect on the terms and conditions of the plaintiffs' employment. (20) The plaintiffs further alleged that the defendants had actual and constructive notice of such harassment but allowed it to continue. (21)

   The United States District Court for the District of Minnesota dismissed the eight original plaintiffs' amended complaint that added the subsidiary corporation as a defendant because, although the plaintiffs were made aware that subsidiary ABMK was actually their employer, they failed to make a timely motion to amend; however, the plaintiffs who were added to the suit in the amended complaint were allowed to proceed against the subsidiary ABMK. (22) ABMK filed a motion for summary judgment arguing that there was not sufficient evidence to move forward with the claims of sexual harassment, hostile workplace, or any other employment-related claims. (23) ABMI also filed a motion for summary judgment, arguing that, as the parent corporation, it was not the employer of any of the plaintiffs and therefore was not responsible for any damages resulting from the alleged harassment. (24) The district court granted both ABMI's and ABMK's summary judgment motions. (25) The district court held that ABMI did not exercise enough control over ABMK to be considered an employer of the plaintiffs. (26) Further, the lower court found that there was insufficient evidence to proceed on any type of sexual harassment, hostile workplace, or any other employment-related claims against ABMI or ABMK. (27)

   In holding that ABMI was not the plaintiffs' employer, the district court looked to Brown v. Fred's, Inc., where the Eighth Circuit had previously held, "[T]here is a strong presumption that a parent company is not the employer of its subsidiary's employees, and the courts have found otherwise only in extraordinary circumstances." (28) Applying Brown, the court held that in order for a parent company to be responsible for the acts of its subsidiary under Title VII the court must find that "(1) the parent company so dominates the subsidiary's operations that the two are one entity and therefore one employer" or that "(2) the parent company is linked to the alleged discriminatory action because it controls individual employment decisions." (29) Consistent with the rationale in Brown, the court held that ABMI did not exercise sufficient control to be held liable as an employer under Title VII. (30)

   With respect to ABMK, the district court found that there was insufficient evidence to move forward with any of the employment-related claims. (31) In relation to the hostile work environment claims, the district court stated that the plaintiffs had to prove that unwelcome harassment was "sufficiently severe or pervasive enough as to affect a term, condition, or privilege of employment by creating an objectively hostile or abusive environment." (32) The court recognized that the alleged harassment should be looked at not alone but in the context of the larger circumstances and facts. (33) The court also ruled that the plaintiffs could not rely on the incidents of harassment of which they were not aware in order to prove that the harassment was severe and pervasive. (34) With respect to notice, the district court found that "the pattern-or-practice method of proving discrimination" was not available to these plaintiffs. (35) The court concluded that the evidence presented fell short of showing that the harassment was sufficiently severe and pervasive. (36) The plaintiffs appealed the district court's grant of the defendants' summary judgment motions, both as to the claims for lack of timely pleading and for the substantive complaints of harassment. (37)

   The Eighth Circuit affirmed in part and reversed in part the ruling of the district court. (38) Notably, the Eighth Circuit applied and re-established a four-factor test outlined in Baker v. Stuart Broadcasting Co. that the district court had declined to follow. (39) The Eighth Circuit stated that the four-pronged integrated enterprise test set forth in Baker should be used when determining whether parent companies are responsible for the acts of their subsidiary corporations under Title VII. (40) Applying the Baker test, (41) the court found that ABMI's relationship with ABMK was sufficient to establish a genuine issue of material fact as to whether ABMI was the plaintiffs' employer, and, thus, the issue should be decided at trial. (42) According to the Eighth Circuit, the Baker test is determinative in deciding whether a parent corporation will be held responsible for the acts of its subsidiary. (43) As to proving harassment, the Eighth Circuit held that evidence of widespread harassment can put a corporation on constructive notice. (44)

3. LEGAL BACKGROUND

   In order to understand the significance of the Sandoval decision, it is important to look at prior decisions from the Eighth Circuit and other circuits involving these issues. When will parent corporations be liable for the acts of their subsidiaries? When will companies be put on constructive notice of sexual harassment?

   1. Parent Corporation Liability

   The integrated enterprise test was first recognized by a federal court in the 1972 decision Williams v. New Orleans Steamship Ass'n. (45) The United States District Court for the Eastern District of Louisiana cited a decision from the Equal Employment Opportunity Commission (EEOC) (46) as support for why the integrated enterprise test should be used. (47) The Williams court concluded that "courts ought to ... give great weight to an agency's interpretation of the statute that it administers." (48) Although the court did not set out a specific test, it concluded that it would look at the interchange of employees, centralized control of labor relations, and other standards that are used by the National Labor Relations Board (NLRB) in order to determine whether the enterprise was sufficiently integrated to create overarching liability. (49) The court looked at New Orleans...