Can You Create Separate Entities to Avoid Federal Employment Laws?

Navigating Entities to Avoid Federal Employment Laws

Can you create separate entities in order to avoid certain Federal Employment Laws to apply to your company? 

There are various federal laws in place to protect employees and violating these laws can expose employers to liability. Many of these laws are triggered when a company has a minimum of one employee, however some federal laws do not apply unless a company has a higher threshold of employees. 

For example, Title VII of the Civil Rights Act of 1964 (Title VII), the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA) apply to companies with a minimum of 15 employees and 20 employees for the ADEA. These three federal laws cover discrimination in employment and the workplace, such as race, gender, age, and disabilities. 

How do Federal Employment Laws impact companies? 

When these laws apply to companies this can potentially mean having to implement certain policies and procedures, training employees, and making accommodations for specific employees. For the ADA, if an employer is aware that an employee has a disability covered by the ADA then they are required by law to make reasonable accommodations that allow the employee to perform the job function. Further, if a company is found to have discriminated against an employee based on a protected characteristic in violation of one of these laws, then they will likely be subject to monetary penalties. In turn, this could lead to higher operating costs for the company. 

Can I avoid triggering these Federal Employment Laws? 

You may be wondering if you can just divide your company into smaller entities in order to avoid reaching the minimum employee threshold required by law. Federal courts have addressed a similar question in determining whether to aggregate separate companies in order to reach Title VII threshold. 

In Papa v. Katy Industries, Inc., the Court of Appeals for the Seventh Circuit pointed out that the purpose of exempting small businesses from Title VII is to, “spare very small firms from the potentially crushing expense of mastering the intricacies of the anti-discrimination laws, establishing procedures to assure compliance, and defending against suits when efforts at compliance fail.”

The court here determined that there are three circumstances in which the existence of an affiliated company could trigger liability under Title VII: 1) where the proper conditions are present for a creditor of one corporation to “pierce the veil” and sue a parent or other affiliate; 2) when an entity divides itself for the express purpose of avoiding liability under the discrimination laws; and 3) if the parent corporation directed the discriminatory act, practice, or policy that the employee of the subsidiary is complaining about. 

The Seventh Circuit further applied its ruling in Papa to car dealerships in Prince v. Appleton Auto, LLC. The court determined that although the dealerships were all related, they were still legally separate and the LLC owners properly maintained corporate formalities and records. Therefore, they were not to be aggregated for Title VII purposes. 

In conclusion, the three instances laid out by the Seventh Circuit may not necessarily apply in every jurisdiction. However, courts would likely frown upon companies creating separate entities just to avoid liability under federal employment discrimination laws. If you have questions or concerns about how federal employment laws apply to you and your company, please feel free to reach out to our office and have a consultation with one of our attorneys. 

EPGD Business Law is located in beautiful Coral Gables. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Eric Gros-Dubois

Founding partner Eric Gros-Dubois established EPGD Business Law in 2013. With over a decade of experience expanding the firm and leading it to its current success, Eric now primarily manages the corporate division of EPGD. Given Eric’s educational background, holding both a JD and MBA, combined with his own unique experience of starting a business from scratch and growing it to a multi-million dollar firm, he brings a specialized and invaluable perspective to those seeking legal assistance for themselves and their businesses. Having now instilled his same values in our team of skilled corporate associates, Eric leads a firm that is always ready, willing, and equipped to handle any and every legal matter that a business owner may have.


*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.

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