7th Circuit Finds Small Auto Dealer Exempt From Title VII Claims

November 16, 2020

A terminated employee of a small business sued his former employer for discrimination under Title VII of the Civil Rights Act of 1964. The trial court entered summary judgment (dismissal without a trial) in favor of the employer because it employed fewer than 15 employees and therefore wasn’t subject to Title VII. The employee appealed to the U.S. 7th Circuit Court of Appeals (whose rulings apply to all Wisconsin employers), arguing the employer was one member of a network of closely related businesses that shared common ownership, management, a web page, and other resources. He argued the employees of all the related businesses should be counted when determining whether the employer met the 15-employee threshold under Title VII. The appellate court affirmed summary judgment, finding that although the businesses were substantially integrated, they sufficiently maintained their corporate forms. Therefore, aggregating the employees for Title VII purposes was inappropriate.

Employer Was Member of Five-Entity Dealership Network

Appleton Auto, LLC (known as Applecars), belonged to a network of five affiliated but corporately distinct used car dealerships in Wisconsin. Applecars alone employed fewer than 15 employees, but if the employees of all five related dealerships were combined, their number would exceed the 15-employee threshold for Title VII purposes.

Each dealership was owned by a separate limited liability company (LLC), and each LLC shared a number of factors including ownership, management, a website, marketing, accounting, inventory, and employment records. The dealerships also maintained corporate formalities, however, because each:

  • Was separately billed for management services and use of the website;
  • Had its own general manager, bank account, and financial reports;
  • Covered its own taxes;
  • Paid its own employees including issuing W-2 forms; and
  • Entered into its own business contracts.

When is it Appropriate for Court to ‘Pierce the Corporate Veil’?

The 7th Circuit noted Congress exempted small businesses from Title VII. The Act defines “employer” as “a person engaged in an industry affecting commerce who has [15] or more employees for each working day in each of [20] or more calendar weeks in the current or preceding calendar year.” Quoting Papa v. Katy Industries, Inc., the appellate court stated:

The purpose of exempting small businesses from Title VII was not to encourage discrimination by them but rather “to spare very small firms from the potentially crushing expense of mastering the intricacies of the antidiscrimination laws, establishing procedures to assure compliance, and defending against suits when efforts at compliance fail.”

Referring to the decision in Papa v. Katy Industries, Inc., the 7th Circuit discussed the grounds upon which the court can “pierce the corporate veil” and thereby disregard the separate LLCs and treat them all as one entity. It noted one such situation is to allow a creditor of a subsidiary to sue a parent or other affiliate, when because of neglect of corporate formalities or a holding out of the parent as the real party with whom a creditor of a subsidiary is dealing, the parent (or other affiliate) should be held liable for the torts (wrongful acts) or breaches of contract by the subsidiary.

The 7th Circuit noted the mere integration of operations isn’t enough, however, because firms too tiny to achieve the realizable economies of scale in their industry will go under unless they can integrate some of their operations with those of other companies, whether by contract or by ownership. Instead, the test for determining whether the corporate forms should be disregarded for the purposes of aggregating the number of employees under Title VII is whether the two entities “neglected forms intended to protect creditors from being confused about whom they can look to for the payment of their claims.”

Because state law governs whether the corporate veil should be pierced, the 7th Circuit also noted Wisconsin’s standard: “Piercing the corporate veil is appropriate only when applying the corporate fiction would accomplish some fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable claim.”

Applecars Maintained Corporate Formalities

In examining the operations of Applecars and the related dealerships, the 7th Circuit affirmed the grant of summary judgment. The dealerships properly kept records and maintained separate financial accounts, and there was no evidence that respecting the dealerships’ corporate forms would allow them to accomplish some fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable claim. Prince v. Appleton Auto, LLC, No. 20-1106 (7th Cir., Oct. 21, 2020).

Bottom Line

Title VII, which intentionally exempts small employers, may apply to small, closely related entities that fail to observe corporate formalities. Small businesses that share resources, ownership, or management should be careful to maintain a distinct legal identity for each entity and observe such other formalities as maintaining separate accounts, financial statements, and tax payments. Finally, although small employers are exempt from Title VII, the Wisconsin Fair Employment Act has no such exemption, mirrors Title VII, and contains broader requirements.

This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.