concluding that the plaintiff-employee of a subsidiary, who disregarded separate corporate forms in order to obtain worker's compensation benefits from the parent corporation, could not then rely on existence of separate corporate forms to maintain a tort actionSummary of this case from Estate of Burd v. Thompson Block Partners, Inc.
Docket No. 65372.
Argued December 6, 1983 (Calendar No. 1).
Decided December 28, 1984. Released February 11, 1985.
McCroskey, Feldman, Cochrane Brock (by J. Walter Brock) for the plaintiff. Smith, Haughey, Rice Roegge (by Lance R. Mather) for the defendant.
OPINION OF THE COURT
The facts in this matter appear undisputed and were succinctly stated by the Court of Appeals:
"The defendant, Firestone Tire Rubber Company (hereinafter 'Firestone'), is an Ohio corporation with its principal headquarters in Akron, Ohio. Firestone has various retail stores around the country, some of which are run as divisions of Firestone while some are wholly owned or majority-owned subsidiary corporations. In Muskegon, Michigan, Firestone has two outlets; one is operated as a division of Firestone, and the second is Muskegon Firestone Auto Supply and Service Stores, located at 925 Terrace Street, Muskegon, Michigan, hereinafter termed 'Muskegon Firestone'. Muskegon Firestone was a wholly owned subsidiary corporation at the time plaintiff's cause of action arose.
"Plaintiff James Wells worked at Muskegon Firestone and on October 21, 1971, while acting in the course of his employment changing a tube and tire on a truck rim manufactured by Firestone, the rim blew apart, injuring him seriously. Muskegon Firestone was originally a dealership but was set up as a Michigan corporation around 1930. Defendant Firestone purchased most of its assets at that time, allowing the manager to retain a minority stock interest. Defendant Firestone has owned 100% of the stock in Muskegon Firestone since around 1960. At the time of plaintiff's accident, all of the subsidiary's directors were employees of defendant. In early 1977, the corporation, Muskegon Firestone, was liquidated and is now run as a retail division of defendant.
"Firestone carried the worker's compensation coverage for all of the local branches including Muskegon Firestone. Plaintiff filed for compensation citing Firestone as his employer and commenced receiving benefits from Firestone's insurance carrier, Liberty Mutual Insurance Company, which continue to be paid at this time.
"Plaintiff, subsequent to receiving benefits from Firestone, commenced the instant third-party product liability suit against Firestone. Defendant Firestone moved for summary judgment on the basis that plaintiff was barred from bringing the action against Firestone by the exclusive remedy provision of the Michigan Worker's Disability Compensation Act of 1969, MCL 418.131; MSA 17.237(131).
"The trial court found that plaintiff was not an employee of defendant Firestone but of the separate corporate entity Muskegon Firestone. Summary judgment was denied and leave to appeal to this Court was granted on June 18, 1979." Wells v Firestone Tire Rubber Co, 97 Mich. App. 790, 791-793; 296 N.W.2d 174 (1980).
We note that the motion should have been denominated as one for accelerated judgment, pursuant to GCR 1963, 116.1(2), and it will be treated as one because no prejudice to plaintiff is alleged or apparent. See, e.g., Dagenhardt v Special Machine Engineering, Inc, 418 Mich. 520, 525, fn 3; 345 N.W.2d 164 (1984); Bednarski v General Motors Corp, 88 Mich. App. 482, 484, fn 1; 276 N.W.2d 624 (1979), and the authorities cited therein. We also note that the parties properly stipulated that any factual issues raised by defendant's motion could be resolved by the trial judge. See GCR 1963, 116.3.
We must decide whether plaintiff's products liability action is barred by the exclusive remedy provision of the Worker's Disability Compensation Act. That determination necessarily turns on whether an employment relationship existed between plaintiff and defendant. Stated more directly, the question is whether defendant was plaintiff's employer on the date of injury. In answering this question, we initially must determine what test is to be employed. We find direction from this Court's decision in Nichol v Billot, 406 Mich. 284, 293-294; 279 N.W.2d 761 (1979):
MCL 418.131; MSA 17.237(131).
MCL 418.101 et seq.; MSA 17.237(101) et seq.
"Prior to Tata v Muskovitz, 354 Mich. 695; 94 N.W.2d 71 (1959), the only test for determining whether a person was an employee or an independent contractor centered on the question of control. The control theory is the traditional common-law test used to delineate the master-servant relationship. The theory, in its delineation of the servant concept, has for its purpose the definition and delimitation of the scope of the master's liability under the doctrine of respondeat superior. Because most compensation acts contain no specific definition of the term 'employee', it was generally taken for granted that the common-law definition of employee, or servant, used for purposes of vicarious tort liability was to be used for purposes of workmen's compensation laws.
"In Tata v Muskovitz, supra, this Court adopted the dissenting opinion of Mr. Justice TALBOT SMITH in Powell v Employment Security Comm, 345 Mich. 455; 75 N.W.2d 874 (1956), in which he set forth the economic reality test as the proper guide to relevant interpretation of the workmen's compensation statute. See, also, Schulte v American Box Board Co, 358 Mich. 21; 99 N.W.2d 367 (1959); Goodchild v Erickson, 375 Mich. 289; 134 N.W.2d 191 (1965); Solakis v Roberts, 395 Mich. 13; 233 N.W.2d 1 (1975); Askew v Macomber, 398 Mich. 212; 247 N.W.2d 288 (1976)."
Following our departure from the common-law control test, this Court has consistently utilized the economic reality test when questions have arisen relative to the existence of an employment relationship. While this Court's earlier applications of the economic reality test dealt with the distinction between an independent contractor and an employee or, as in Farrell v Dearborn Mfg Co, 416 Mich. 267; 330 N.W.2d 397 (1982), with dual employers in a labor-broker situation, we believe it to be appropriate and consistent to utilize the economic reality test in determining in this case which of two separate corporations, parent or subsidiary, was plaintiff's actual employer for purposes of the Worker's Disability Compensation Act.
The economic reality test was succinctly described in Farrell, p 276:
"The issue of whether employment exists for purposes of the workers' compensation law has been frequently addressed by our courts. The standard to be used is the economic reality test, a broad approach which, in the oft-quoted language of Justice TALBOT SMITH, looks to the totality of the circumstances surrounding the performed work.
"'Control is a factor, as is payment of wages, hiring and firing, and the responsibility for the maintenance of discipline, but the test of economic reality views these elements as a whole, assigning primacy to no single one.' Schulte v American Box Board Co, 358 Mich. 21, 33; 99 N.W.2d 367 (1959).
"See, also, Tata v Muskovitz, 354 Mich. 695; 94 N.W.2d 71 (1959); Askew v Macomber, 398 Mich. 212; 247 N.W.2d 288 (1976); McKissic v Bodine, 42 Mich. App. 203; 201 N.W.2d 333 (1972); Nichol v Billot, 406 Mich. 284; 279 N.W.2d 761 (1979); Solakis v Roberts, 395 Mich. 13; 233 N.W.2d 1 (1975); Allossery v Employers Temporary Service, Inc, 88 Mich. App. 496; 277 N.W.2d 340 (1979).
"The economic reality test looks to the employment situation in relation to the statutory scheme of workers' compensation law with the goal of preserving and securing the rights and privileges of all parties. No one factor is controlling."
In this case, the Court of Appeals utilized the economic reality test and reversed the trial court because
"[t]he evidence indicates that while Muskegon Firestone was a separate corporate entity at the time plaintiff's cause of action arose, its operation was the same as the other retail divisions. The local store branch managers belonged to a program whereby they participated in the store's profits or losses; they ordered inventory from defendant on consignment and purchased some items outside the company for resale. The other retail store and Muskegon Firestone were both listed in the local telephone directory as divisions of Firestone. All dollar accounting was handled by the central accounting office of defendant. Local store managers did not issue company checks; they deposited all money in bank accounts in defendant's name. The local store managers received monthly profit and loss statements regarding their individual stores.
"Defendant calculated the expenses of each store in order to determine its annual operating profit or loss. Expenses charged to the stores included a percentage for worker's compensation insurance rates and other expenses attributable to payroll, rent, maintenance, etc.
"The evidence further indicated that the employees of Muskegon Firestone were under the supervision of defendant and subject to the rules and regulations thereof. The common practice, however, was for the local managers to do the hiring and firing. Certain of defendant's employees had the ability to hire and fire the local managers and could, if they chose, hire and fire other local employees. The local store manager acted within the framework of defendant's regulations. Employees of retail stores did not all belong to the same union as the employees of defendant. In fact, some retail personnel were unionized while others were not. In some cases, retail stores in an entire metropolitan area were organized in the same union regardless of whether they were separate corporations.
"Defendant's district supervisor, who testified that at the time of plaintiff's injury the employees of Muskegon Firestone were under his supervision and control, denied that retail store employees received different treatment depending on whether the store was a division or a separate corporation. In fact, all the retail employees were entitled to participate on the same basis in defendant's hospitalization and retirement benefit programs and other fringe benefits.
"Muskegon Firestone filed a separate corporate income tax return and issued its own W-2 forms to plaintiff and its other employees. However, all of these forms were processed at defendant's central tax department. Employees of Muskegon Firestone received paychecks from defendant through its central accounting office. Records of employment relating to plaintiff and other retail store employees were kept and administered by the personnel department of defendant Firestone.
"In balancing all of these factors for the purpose of applying the economic reality test, we find that defendant Firestone was plaintiff's employer within the meaning of the Worker's Disability Compensation Act of 1969. Therefore, the trial judge erred in refusing to grant defendant's motion for summary judgment on the ground that plaintiff's exclusive remedy is under the Worker's Disability Compensation Act." Wells, supra, pp 794-796.
Our balancing of those same factors persuades us that the Court of Appeals correctly applied the economic reality test to the facts of this case. However, further comment is warranted because the result, in effect, is a "reverse-piercing" of defendant's corporate veil.
We recognize the general principle that in Michigan separate entities will be respected. See Klager v Robert Meyer Co, 415 Mich. 402; 329 N.W.2d 721 (1982), Finley v Union Joint Stock Land Bank of Detroit, 281 Mich. 214; 274 N.W.2d 768 (1937), and Gledhill v Fisher Co, 272 Mich. 353; 262 N.W. 371 (1935).
However, the fiction of a distinct corporate entity separate from the stockholders is a convenience introduced in the law to subserve the ends of justice. When this fiction is invoked to subvert justice, it is ignored by the courts. Paul v University Motor Sales Co, 283 Mich. 587, 602; 278 N.W. 714 (1938). This of course means that, in general, even though Firestone is the parent company of Muskegon Firestone, its separate existence will be respected, unless doing so would subvert justice or cause a result that would be contrary to some other clearly overriding public policy. See, e.g., Cinderella Theatre Co, Inc v United Detroit Theatres Corp, 367 Mich. 424; 116 N.W.2d 825 (1962).
Although traditionally the doctrine of "piercing the corporate veil" has been applied to protect a corporation's creditors, or other outsiders, where the corporate entity has been used to avoid legal obligations, People ex rel Attorney General v Michigan Bell Telephone Co, 246 Mich. 198; 224 N.W. 438 (1929), Michigan courts have recognized that it may be appropriate to invoke the doctrine for the benefit of a shareholder where the equities are compelling. See, e.g., Montgomery v Central National Bank Trust Co of Battle Creek, 267 Mich. 142; 255 N.W. 274 (1934).
Our disregard of the separate corporate entities of Firestone and its wholly owned subsidiary is premised upon our recognition of the important public policies underlying the Michigan Worker's Disability Compensation Act and our belief that a contrary determination would be inequitable under the facts of this case. The statutory workers' compensation scheme was enacted for the protection of both employees and employers who work and do business in this state. The system assures covered employees that they will be compensated in the event of employment-related injuries. In addition, employers are assured of the parameters of their liability for such injuries. By agreeing to assume responsibility for all employment-related injuries, employers protect themselves from the possibility of potentially excessive damage awards. In order to effectuate these policies, the statute has been liberally construed to provide broad coverage for injured workers. See, e.g., Farrell v Dearborn Mfg Co, supra.
If the statute is to be construed liberally when an employee seeks benefits, it should not be construed differently when the employer asserts it as a defense to a tort action brought by the employee who claimed and accepted benefits arising from that employment relationship. There is absolutely no evidence that defendant maintained Muskegon Firestone for the purpose of insulating itself from its workers' compensation liabilities. Defendant supplied workers' compensation benefits through its insurance company and accepted responsibility for the work-related injuries of its Muskegon employees. Indeed, under the facts and circumstances of this case, we would not have permitted Firestone to shield itself behind its wholly owned subsidiary in order to avoid payment of workers' compensation benefits to plaintiff. Cf. Williams v Lang (After Remand), 415 Mich. 179; 327 N.W.2d 240 (1982).
It is also significant that plaintiff did not rely upon the corporate distinction between Firestone and Muskegon Firestone. In fact, plaintiff disregarded this distinction when he asserted that Firestone was his employer for the purpose of obtaining workers' compensation payments. Plaintiff should not now be permitted to deny the relationship which he asserted and upon which Firestone relied in assuming responsibility for payment of workers' compensation benefits.
Plaintiff also argues that his cause of action is not barred by the exclusive remedy provision of the Worker's Disability Compensation Act because his injuries did not arise out of the employment relationship. He maintains that more than one type of relationship existed between himself and defendant at the time he was injured. We reject this attempt to apply the so-called "dual-capacity doctrine."
The Michigan Court of Appeals has rejected several dual capacity claims and found them insufficient to avoid the exclusive remedy provision in situations factually analogous to the instant case. See Neal v Roura Iron Works, Inc, 66 Mich. App. 273; 238 N.W.2d 837 (1975), lv den 396 Mich. 841 (1976); Peoples v Chrysler Corp, 98 Mich. App. 277; 296 N.W.2d 237 (1980); Bourassa v ATO Corp, 113 Mich. App. 517; 317 N.W.2d 669 (1982), lv den 414 Mich. 966 (1982); Handley v Wyandotte Chemicals Corp, 118 Mich. App. 423; 325 N.W.2d 447 (1982).
The dual-capacity doctrine recognizes that an employer can, under certain circumstances, occupy a status other than that of an employer with respect to his employee. See, e.g., Mathis v Interstate Motor Freight System, 408 Mich. 164, 184; 289 N.W.2d 708 (1980). However, the doctrine is applicable only in those situations where the employer has a second identity which is completely distinct and removed from his status as employer.
This fundamental requirement for the application of the dual-capacity doctrine is set forth in 2A Larson, Workmen's Compensation Law, § 72.81, p 14-229:
"An employer may become a third person, vulnerable to tort suit by an employee, if — and only if — he possesses a second persona so completely independent from and unrelated to his status as employer that by established standards the law recognizes it as a separate legal person."
The great majority of American jurisdictions have held that an employer who manufactured the injury-causing device cannot be held liable to his employee under a products liability theory. Id., § 72.83, p 14-239. Furthermore, the fact that the injury-causing product was also sold to the public is unimportant:
"What matters is that, as to this employee, the product was manufactured as an adjunct of the business, and furnished to him solely as an employee, not as a member of the consuming public. What the employer does with the rest of his output cannot change this central fact." Id., § 72.83, p 14-246 (emphasis in original).
We conclude that plaintiff was employed by defendant and was injured while acting in the course and within the scope of his employment. We affirm the judgment of the Court of Appeals.
WILLIAMS, C.J., and RYAN and BRICKLEY, JJ., concurred with CAVANAGH, J.
Wells, an employee of Muskegon Firestone Auto Supply and Service Stores, was injured in the course of employment by the explosion of a tire rim manufactured by Firestone Tire Rubber Company. At the time of the accident, Firestone owned all the capital stock of Muskegon Firestone and substantially controlled its management and operations. The Court of Appeals in the application of an "economic reality test" determined that Firestone was Wells' employer within the meaning of the workers' compensation act, and that therefore Wells' products liability claim was barred by the exclusive remedy provision of the workers' compensation act.
MCL 418.131; MSA 17.237(131).
We would hold that "economic reality" is not determinative of the question which of the two separate corporations, parent or subsidiary, was Wells' actual employer for purposes of the exclusive remedy provision of the act. Applying general principles we conclude that Muskegon Firestone, and not Firestone, was Wells' employer, and therefore the exclusive remedy provision does not bar Wells' action against Firestone.
Prior case law does not support the application of an economic reality test in this case. This Court in Tata v Muskovitz, 354 Mich. 695; 94 N.W.2d 71 (1959), and Nichol v Billot, 406 Mich. 284; 279 N.W.2d 761 (1979), did not, by applying a flexible approach to a limited aspect of workers' compensation law, make "economic reality" the touchstone for other workers' compensation determinations. In Tata this Court decided that the "control test" was an inappropriate measure for determining whether an injured worker was an independent contractor or an employee, who then would be entitled to workers' compensation benefits. In reasoning to that conclusion, this Court adopted the dissenting opinion of Justice TALBOT SMITH in Powell v Employment Security Comm, 345 Mich. 455; 75 N.W.2d 874 (1956), which stated an "economic reality test." In Nichol, a third-party tort action where the question again was whether a worker was an independent contractor or an employee, this Court applied an economic reality test. The Court said that, as compared to the control test, the economic reality test achieved "a freer and more realistic balancing of all the relevant factors in each case to determine which persons are properly denominated employees . . . [and] which persons should be properly denominated independent contractors."
Nichol, supra, p 298.
In Funk v General Motors Corp, 392 Mich. 91; 220 N.W.2d 641 (1974), and Dagenhardt v Special Machine Engineering, Inc, 418 Mich. 520; 345 N.W.2d 164 (1984), this Court affirmed the general rule allowing an injured employee of a subcontractor to maintain a third-party action against the employer of the subcontractor. That general rule is not fully consistent with economic reality analysis. An employee of a subcontractor — or the subcontractor himself if there are no other employees — pursues the goals of the employer of the subcontractor, is paid, at least indirectly, by the employer of the subcontractor and, questions of control aside, generally functions as an employee of the employer of the subcontractor. On that basis, many states treat the employers of subcontractors as employers of the subcontractor's employees for purposes of the exclusive remedy provision. Neither the Legislature nor this Court, however, has adopted this widely accepted, economically based rule.
See, generally, Dagenhardt, supra, fn 47, p 559 (dissenting opinion of LEVIN, J.).
See Dagenhardt, supra, p 557 (dissenting opinion of LEVIN, J.), citing 2A Larson, Workmen's Compensation Law, § 72.31(a), pp 14-111 ff.
The economic reality test is a substitute for the control test. The control test is a means of characterizing an employment relationship, of determining whether the employment was of a subcontractor or of a servant. In the instant case, however, there is no employment relationship between Firestone and Muskegon Firestone. The issue here is not whether the control test should be abandoned and an economic reality test adopted. The control test has never been determinative of whether the corporate veil should be pierced or which member of a corporate family is the "actual" employer of a worker. The issue here is whether an economic reality test should be made determinative of whether parent and subsidiary corporations are a single entity; more specifically, of whether they are a single entity for the purposes of the exclusive remedy provision of the workers' compensation act.
See Tata, supra (employee/independent contractor); Schulte v American Box Board Co, 358 Mich. 21; 99 N.W.2d 367 (1959) (employee/independent contractor; SMITH, J., concurring, applied economic reality test); Goodchild v Erickson, 375 Mich. 289; 134 N.W.2d 191 (1965) (employer/broker); Solakis, fn 3 supra (dual employer); Askew v Macomber, 398 Mich. 212; 247 N.W.2d 288 (1976) (employer/broker); Nichol, supra (employee/independent contractor); Farrell v Dearborn Mfg Co, 416 Mich. 267; 330 N.W.2d 397 (1982) (dual employer/broker).
The vast majority of states do not extend the reach of the exclusive remedy provision of a workers' compensation act by treating parent and subsidiary corporations as a single entity. Courts in California, Colorado, Connecticut, Florida, Illinois, Kentucky, Maryland, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Washington, refused to treat dominant parent and servient subsidiary corporations as a single entity for this purpose. The intermediate Georgia appellate
California: Gigax v Ralston Purina Co, 136 Cal.App.3d 591; 186 Cal.Rptr. 395 (1982). (The facts were disputed, it being unclear whether the plaintiff was an employee of a division of the defendant or of a subsidiary of the defendant. The court stated that the employee of a dominated subsidiary could sue the parent corporation on a products liability theory. The court also stated that an employee, injured while working for one division of a corporation could maintain an action based on a tort committed by a separate corporate division that was engaged in a separate enterprise. The court adopted an enterprise liability standard based on the "hard realities" of intracorporation organization. See Davis, Workmen's compensation — Using an enterprise theory of employment to determine who is a third Party tort-feasor, 32 U Pitt L R 289 ).
Colorado: Peterson v Trailways, Inc, 555 F. Supp. 827 (D Colo, 1983). (Employees of wholly owned subsidiary sued parent for failure to provide safe workplace. This case contains a thorough discussion of the issue.) See also Gaber v Franchise Service, Inc, 680 P.2d 1345 (Colo App, 1984).
Connecticut: Gregory v Garrett Corp, 578 F. Supp. 871 (SD NY, 1983). (Employee of parent sued subsidiary on products liability and negligence theories.)
Florida: Gulfstream Land Development Corp v Wilkerson, 420 So.2d 587 (Fla, 1982). (Employee of wholly owned subsidiary sued parent as a property owner. Parent and subsidiary were insured under the same workers' compensation insurance policy.) Gulfstream overruled Goldberg v Context Industries, Inc, 362 So.2d 974 (Fla App, 1978).
Illinois: McDaniel v Johns-Manville Sales Corp, 487 F. Supp. 714 (ND Ill, 1978). (Employees of "various related companies" sued other related companies for injuries arising out of exposure to asbestos.)Kentucky: Boggs v Blue Diamond Coal Co, 590 F.2d 655 (CA 6, 1979). (Employees of wholly owned subsidiary sued parent for negligent performance of a safety maintenance contract. This is the most influential case on the issue.)
Maryland: Thomas v Hycon, Inc, 244 F. Supp. 151 (DC, 1965). (Employee of wholly owned subsidiary sued parent truck-owner for injuries occasioned by defective brakes. Parent and subsidiary had a joint workers' compensation insurance policy.) See also Heinrich v Goodyear Tire Rubber Co, 532 F. Supp. 1348 (D Md, 1982).
Mississippi: Index Drilling Co v Williams, 242 Miss. 775; 137 So.2d 525 (1962). (Employee of first wholly owned subsidiary brought action for negligence against second wholly owned subsidiary that was engaged in same line of work. Employee had received workers' compensation from a third wholly owned subsidiary, probably under a borrowed servant theory.)
Missouri: Boswell v May Centers, Inc, 669 S.W.2d 585 (Mo App, 1984). (Employee of parent sued subsidiary.)
New Jersey: Mingin v Continental Can Co, 171 N.J. Super. 148; 408 A.2d 146 (1979). (Employee of one wholly owned subsidiary sued parent and second wholly owned subsidiary under a products liability theory. All corporations were insured under the same workers' compensation insurance policy.) See also Lyon v Barrett, 89 N.J. 294; 445 A.2d 1153 (1982).
New York: Samaras v Gatx Leasing Corp, 75 A.D.2d 890; 428 N.Y.S.2d 48 (1980). (Employee of subsidiary brought products liability action against parent.) See also Thomas v Maigo Corp, 37 A.D.2d 754; 323 N.Y.S.2d 106 (1971); Daisernia v Co-Op GLF Holding Corp, 26 A.D.2d 594; 270 N.Y.S.2d 542 (1966); Foley v New York City Omnibus Corp, 112 N.Y.S.2d 217 (1952).North Carolina: Phillips v Stowe Mills, Inc, 5 N.C. App. 150; 167 S.E.2d 817 (1969). (Employee of wholly owned subsidiary sued parent as building owner.)
Oklahoma: Love v Flour Mills of America, 647 F.2d 1058 (CA 10, 1981). (Employee of wholly owned subsidiary sued parent. Court appeared ready to allow action, but held parent had violated no duty to this employee.)
South Carolina: Brown v Moorhead Oil Co, 239 S.C. 604; 124 S.E.2d 47 (1962). (Employee of uninsured, wholly owned subsidiary was not allowed to collect workers' compensation benefits from insured wholly owned subsidiary that was engaged in same work.)
Tennessee: Latham v Technar, Inc, 390 F. Supp. 1031 (ED Tenn, 1974). (Employee of wholly owned subsidiary sued parent for breach of a nondelegable duty concerning dangerous objects. Parent and subsidiary were insured by the same workers' compensation policy.)
Texas: Stoddard v Ling-Temco-Vought, Inc, 513 F. Supp. 314 (CD Cal, 1980). (Employee of subsidiary brought products liability and negligence actions against parent. Parent and subsidiary were covered by same workers' compensation policy.)
Washington: Peterick v State, 22 Wn. App. 163; 589 P.2d 250 (1977). (Employee of 92%-owned subsidiary brought action against parent. Held: parent had violated no duty owed to this employee.)
In Harvey v Fine Products Co, Inc, 156 Ga. App. 649; 275 S.E.2d 732 (1980), and Beck v Flint Construction Co, 154 Ga. App. 490; 268 S.E.2d 739 (1980), the Georgia appellate court barred actions against parent corporations brought by employees of subsidiaries. The court reasoned that the parent owed no duty to the employee unless the subsidiary was an "alter ego" of the parent. And if the subsidiary was an alter ego, then the parent was entitled to immunity to the same extent as the subsidiary.
Beck cites three cases to support its argument that the parent of an "alter ego" subsidiary enjoys immunity, but all are inapposite. In Yancey v Green, 129 Ga. App. 705; 201 S.E.2d 162 (1973), an employee of the board of education was barred from suing board members individually. In Mull v Aetna Casualty Surety Co, 120 Ga. App. 791; 172 S.E.2d 147 (1969), an employee's action based on negligent inspection by the defendant insurer was barred because a Georgia statute protected insurers from such suits. The court stated that the insurer was the "alter ego" of the employer. In Southern Wire Iron, Inc v Fowler, 217 Ga. 727; 124 S.E.2d 738 (1962), the court would not allow an employee to sue his employer's president.
The cases rely on an alter ego theory that is not followed in Michigan. See fn 14.
A United States District Court applying Georgia law had reached a contrary result prior to Beck and Harvey. In O'Brien v Grumman Corp, 475 F. Supp. 284 (SD NY, 1979), the court rejected the defendant parent corporation's claim that the immunity of its subsidiary should protect it from suit by an employee of the subsidiary.
In Louisiana, the employee of a subsidiary may not sue the parent corporation. This result, however, is mandated by statute. In Braud v Dixie Machine Welding Metal Works, Inc, 423 So.2d 1243, 1245 (La App, 1982), the court noted that a statute prohibited an employee from suing a stockholder of his employer. That statute, La Rev Stat Ann, § 23:1032, provides:
"The rights and remedies herein granted to an employee or his dependent on account of an injury or compensable sickness or disease for which he is entitled to compensation under this Chapter, shall be exclusive of all other rights and remedies of such employee . . . against his employer, or any principal, or any officer, director, stockholder, partner or employee of such employer or principal." (Emphasis added.)
In Coco v Winston Industries, Inc, 330 So.2d 649 (La App, 1975), an employee of a subsidiary was injured while he arguably was pursuing the business of the parent corporation. The employee sued the parent as principal. The court discussed "alter ego" immunity, but the decision rests on the above-mentioned statute. The discussion of alter ego status was necessary because, under the Louisiana statute, the defendant, as principal, would be immune only if it was engaged in the same business as the employer of the injured employee. By showing that the employee's employer (i.e., the subsidiary) was merely the alter ego of the defendant principal (i.e., the parent), the court proved that the defendant principal necessarily was engaged in the same business as the employee's employer. Therefore, the defendant principal was immune from suit by the employee. See also Nichols v Uniroyal, Inc, 399 So.2d 751 (La App, 1981).
In this state, with the exception of the instant case, the cases uniformly suggest that an employee of a subsidiary corporation may maintain an action against the parent corporation. In the similar situation in which an employee brings an action against the sole and individual shareholder of the employer corporation, the courts of this state have refused to extend the bar of the exclusive remedy protection by piercing the corporate veil.
Choate v Landis Tool Co, 486 F. Supp. 774 (ED Mich, 1980) (parent corporation does not obtain immunity based on its subsidiary's immunity); Rick v R L C Corp, 535 F. Supp. 39 (ED Mich, 1981) (court suggests that parent does not obtain subsidiary's immunity, but court held that parent did not owe a duty to this particular employee); Oliver v St Clair Metal Products Co, 45 Mich. App. 242; 206 N.W.2d 444 (1973) (court treats parent and subsidiary as distinct entities).
Robards v Estate of Kantzler, 98 Mich. App. 414; 296 N.W.2d 265 (1980) (court refuses to give shareholder the immunity of his wholly owned corporation); Elliott v Smith, 47 Mich. App. 236; 209 N.W.2d 425 (1973) (employee's survivors may not obtain workers' compensation benefits from sole proprietorship owned by sole shareholder of uninsured employer corporation).
Economic reality analysis would destabilize workers' compensation and corporate law. The courts of this state generally respect the separateness of corporate entities, and pierce the corporate veil only to prevent fraud or injustice. Total domination by a parent corporation of a subsidiary does not justify piercing the corporate veil. As this Court said in Gledhill v Fisher Co, 272 Mich. 353, 358; 262 N.W. 371 (1935):
"It is not enough that the subsidiary is so organized and controlled as to make it 'merely an instrumentality, conduit or adjunct' of its stockholders. It must further appear that to recognize their separate entities would aid in the consummation of a wrong." The opinion of the Court would disregard the corporate forms of the entities solely because Firestone dominated or controlled its subsidiary.
See also Klager, fn 13 supra, p 411, and Gottlieb v Arrow Door Co, 364 Mich. 450, 452; 110 N.W.2d 767 (1961). Three Michigan cases suggest that "domination" alone justifies piercing the corporate veil. But on close reading, it is clear that more than domination is necessary. In People ex rel Attorney General v Michigan Bell Telephone Co, 246 Mich. 198, 204-205; 224 N.W. 438 (1929), the Court held that a Michigan corporation had been established by American Telephone and Telegraph Company "to avoid full investigation and control by the public utilities commission of the State to the injury of the public." The Court also observed that the Michigan corporation was no more separate from ATT in "carrying on a telephone business than is the ordinary station agent engaged in conducting and carrying on the railroad business of his employer." The Court concluded: "Where a corporation is so organized and controlled and its affairs so conducted as to make it a mere instrumentality or agent or adjunct of another corporation, its separate existence as a distinct corporate entity will be ignored and the two corporations will be regarded in legal contemplation as one unit."
The only question presented in that case, however, was whether the Michigan company could claim a credit for the sum of money paid to ATT for certain services, or whether the credit would be granted only according to ATT's actual cost of providing the services. ATT's domination over the Michigan company made the contract between them appear to be less than an arm's length transaction and, therefore, an inadequate way to determine the actual "cost" of providing the services and the resulting credit.
The controversy did not present the question of whether ATT would be held liable for all the legal obligations of the Michigan corporation, and the opinion gives no indication that ATT would be held liable.
In Western Casualty Surety Co v Birmingham Contracting Co, 74 F. Supp. 200 (ED Mich, 1947), the court held that the corporation was not dominated by an individual shareholder as his alter ego, without explaining what type of domination would have been required to hold the shareholder personally liable for the corporation's debts. All the court said was that "[w]here, as here, a plaintiff claims an individual defendant [is] personally liable on an alter ego theory for debts of a corporation and partnership of which he is a stockholder and partner, and plaintiff does not prove that such defendant was the real recipient of the assets or income of either entity, nor that either entity was dominated or operated by him as his alter ego, such individual defendant is not personally liable for such debts." Id., p 208 (emphasis added).
In Shirley v Drackett Products Co, 26 Mich. App. 644; 182 N.W.2d 726 (1970), the plaintiff was injured by a defective product manufactured by the defendant's parent corporation. Because the defendant subsidiary corporation distributed only the parent's products, and had no separate identity of its own, the Court of Appeals held that the subsidiary was liable for the parent's tort. In reaching this conclusion, the Court relied on Bathory v Procter Gamble Distributing Co, 306 F.2d 22 (CA 6, 1962), another case involving the distribution of a parent's products by a wholly owned and dominated subsidiary. In both cases, however, the courts were considering the retailers' immunity rule which protected distributors from liability for negligent manufacture in cases in which the distributors acquired the product for resale from a responsible manufacturer without knowledge of its danger. The Bathory court did not couch the issue in terms of piercing the corporate veil. Rather, the court argued that "[t]he reasons for the rule protecting a retailer or distributor from liability for negligence . . . do not exist in this case." Id., p 29 (emphasis added). The Bathory court did not pierce the corporate veil; it merely held that in certain cases involving dominated corporations, the retailers' immunity rule would not apply. Shirley and Bathory applied an exception to the retailers' immunity rule and did not create a novel ground for piercing the corporate veil.
Significantly, no court has cited Shirley as authority for the proposition that the corporate veil can be pierced without a finding of misconduct. To the extent that Shirley does stand for this proposition, the case has been criticized. See Petrella, Comment: Piercing the corporate veil in Michigan, 61 U Det J Urb L 81 (1983).
Respecting the corporate forms in this case would not "aid in the consummation of a wrong." Rather, we would thereby honor the corporate structure established by Firestone. As the Court of Appeals for the Sixth Circuit said in a similar situation in Boggs v Blue Diamond Coal Co, 590 F.2d 655, 662 (CA 6, 1979):
"[A] business enterprise has a range of choice in controlling its own corporate structure. But reciprocal obligations arise as a result of the choice it makes. The owners may take advantage of the benefits of dividing the business into separate corporate parts, but principles of reciprocity require that courts also recognize the separate identities of the enterprises when sued by an injured employee."
At least seven courts either cite or quote Boggs on this point. See Gigax, fn 8 supra, p 604; Peterson, fn 8 supra, p 833; Gregory, fn 8 supra, pp 886-887; Gulfstream, fn 8 supra, p 589; Love, fn 8 supra, p 1062; Stoddard, fn 8 supra, p 326; Choate, fn 11 supra, p 776. See also Daisernia, fn 8 supra, p 594.
Economic reality analysis could be viewed as creating a new employment relationship between Wells and Firestone. So viewed, economic reality analysis overturns traditional concepts of consensual employment. In Schulte v American Box Board Co, 358 Mich. 21, 24; 99 N.W.2d 367 (1959), this Court acknowledged that "the relationship of employer and employee, unless created by statute, is a contractual relationship." As applied until now, the economic reality test has not violated this principle, because the test has been used only to characterize existing contractual relationships. Here, however, the test would determine whether two seemingly separate parties are one entity. Economic reality would be used not to characterize a contractual relationship, but to eliminate a parent subsidiary relationship. It would, in the instant case, create a new, rather than characterize an existent, employment relationship.
In Peterson v Trailways, Inc, 555 F. Supp. 827, 831-832 (D Colo, 1983), a United States District Court analyzed this aspect of the Court of Appeals decision in this case, and, noting that the economic reality test was developed to decide the independent contractor/employee question in cases implicating coemployee or employer immunity, criticized the extension of the doctrine:
"Inasmuch as analysis of the employee independent contractor distinction assumes the existence of a consensual relationship among the relevant parties, Wells' extension of the 'economic reality test' to cases raising this initial question seems unwarranted. Thus adherence to the indicators of 'economic reality,' may well threaten the economic interests of the 'employee' since his consent or agreement receive no conscious analysis, but are considered at best as a matter of implication."
The court supported this statement by quoting from Professor Larson's treatise on workers' compensation law:
"Compensation law . . . is a mutual arrangement between the employer and employee under which both give up and gain certain things. Since the rights to be adjusted are reciprocal rights between employer and employee, it is not only logical but mandatory to resort to the agreement between them to discover their relationship. To thrust upon a worker an employee status to which he has never consented would not ordinarily harm him in a vicarious liability suit by a stranger against his employer, but it might well deprive him of valuable rights under the compensation act, notably the right to sue his own employer for common-law damages."
1C Larson, fn 6 supra, § 47.10, p 8.233. Larson is also cited for this proposition in Gregory, fn 8 supra, p 876.
The application of the exclusive remedy provision becomes, under any concept of economic reality, "a matter of implication," and therefore subject to manipulation. Here, an employer argues that "economic reality" requires that a parent and subsidiary be treated as one entity, with the result that the parent is shielded from suit by the subsidiary's employee. In Gigax v Ralston Purina Co, 136 Cal.App.3d 591; 186 Cal.Rptr. 395 (1982), in contrast, an employee sued his corporate employer alleging a tort committed by a division of that corporation other than the one for which the plaintiff worked. The court applied an analysis based on "substance" and "hard realities," and stated that such actions were not necessarily barred by the exclusive remedy provision and could be maintained in proper circumstances.
Gigax, supra, p 607. See also fn 8.
The abolition of the corporate form "bright line" would unnecessarily complicate the compensation of workers' injuries. The original application of the economic reality test did not create substantial administrative problems because the test replaced the equally ambiguous control test, and because the contracting provision of the workers' compensation act made application of the test unnecessary in some cases. Here, however, a well-established, simple framework would be replaced by an amorphous "test" that provides courts with little guidance.
See Powell, supra, pp 471-474 (dissenting opinion of SMITH, J.).
MCL 418.171; MSA 17.237(171).
"There is, however, an inherent difficulty in determining the 'economic realities' of a given employment relation. As our Court of Appeals aptly stated in McKissic v Bodine, 42 Mich. App. 203, 208; 201 N.W.2d 333 (1972), 'the problem with economic reality is that it is a conclusion, and it is not a test in the sense that there are any well-defined criteria upon which an objective determination can be based.'"
Justice TALBOT SMITH, in his influential dissent in Powell, supra, pp 471-474, emphasized the need for a standard with a "definite meaning." SMITH rejected the control test, in large part, because it "failed to achieve either uniformity or certainty." He recognized that "[t]he administration of an act designed to relieve human want should not be made to depend upon our resolution of such verbal antics." The economic reality test has proved no more certain in its application than the control test, but with its "freer determination," it may be the lesser of two evils. We are not in this case faced with two evils. The traditional "corporate status" test provides a certain, predictable test which permits parties to plan their affairs and courts to resolve disputes.
The control test, which originally limited an employer's vicarious liability, was also inappropriate because workers' compensation involves different issues than tort law. Professor Larson explains:
"This tort liability arose out of detailed activities carried on by the servant, resulting in some kind of harm to a third person. The extent to which the employer had a right to control these detailed activities was thus highly relevant to the question whether the employer ought to be legally liable for them." 1C Larson, fn 6 supra, § 43.42.
Workers' compensation, however, involves separate issues that make control irrelevant.
"[Workers'] compensation law is concerned not with injuries by the employee in his detailed activities, but with injuries to him as a result not only of his own activities (controlled by the employer as to details) but of those of co-employees, independent contractors and other third persons (some controlled by the employer, and others not). To this issue, the right of control of details of his work has no such direct relation as it has to the issue of vicarious tort liability." 1C Larson, fn 6 supra, § 43.42.
See also Nichol, supra, p 296; Powell, supra, pp 467-469 (dissenting opinion of SMITH, J.).
See Peterson, supra, p 832.
The workers' compensation act gives no indication that the Legislature intended for the term "employer" to have other than its normal meaning or that the Legislature intended to grant parent corporations exclusive remedy protection. The Legislature could, of course, have done so. Workers' compensation legislation frequently accords protection to particular parties. In many states, employers of subcontractors are immunized from third-party liability. In Louisiana, shareholders of an employer corporation are protected by the exclusive remedy provision. In this state, the Legislature immunized insurance inspectors. There is no reason to suppose that the Legislature intended, but simply neglected, to provide express protection for parent corporations in Firestone's position. We would not infer such an intent and thereby deprive Wells of his common-law action. As stated by Professor Larson:
The 1952 amendment that provides the basis for this third-party action (1952 PA 155, now MCL 418.827; MSA 17.237) and the exclusive remedy provision (MCL 418.131; MSA 17.237) are of central importance to this analysis.
See fn 6.
See fn 8.
1969 PA 317, amending MCL 418.131; MSA 17.237(131).
Unlike the independent contractor/employee and employer/broker questions which have been considered by this Court on numerous occasions (see fn 7), there are no inherent ambiguities in the determination involved in this case. The Legislature could readily have extended exclusive remedy protection to the parent of a wholly owned subsidiary insured under the same workers' compensation policy as the parent.
"[T]here is no strong reason of compensation policy for destroying common law rights . . . [and] every presumption should be on the side of preserving those rights, once basic compensation protection has been assured."
Larson, fn 6 supra, § 72.50, p 14-95. Larson is quoted on this point by Boggs, fn 8 supra, p 660, and Choate, fn 11 supra, p 776.
This Court should not bar Wells from relying on the separate corporate forms of the parent and the subsidiary on the basis that he chose to disregard those forms when applying for workers' compensation payments. The record does not reveal why Wells listed Firestone as his employer. Firestone has not claimed that Wells waived his third-party claim by listing Firestone as his employer. The question whether Wells did thereby waive his third-party claim is a question of fact, and not of law, which must first be raised before and decided by the WCAB.
Wells may have been urged to so file his claim by Muskegon Firestone, or he simply may have erred. Muskegon Firestone also listed Firestone as Wells' employer. Muskegon Firestone may have done so because Firestone carried the workers' compensation insurance for both corporations and was therefore more likely to be involved in the administration of compensation payments. Wells and Muskegon Firestone may both have been more concerned with completing the paperwork and with initiating payment than with observing the formalities.
At any rate, these representations are not necessarily controlling. At the time of the accident, Wells was an employee of Muskegon Firestone. The subsequent representations would not operate retroactively to eliminate this employment relationship or to create a new one with Firestone. It does not appear that Wells' representation misled Firestone in such a manner that it is now necessary to disregard the corporate form to secure justice. Firestone has not alleged that Wells acted in bad faith.
We would follow the vast majority of jurisdictions and hold that economic reality is not a basis for piercing the corporate veil. The economic reality test was devised to avoid inappropriate use of the control test, but that concern is not relevant here since control alone is not determinative of whether the corporate veil should be pierced, or which member of a corporate family employs a worker. The question whether there is an employment relationship between Firestone and Wells should be resolved by consent and not by implication. Applying the economic reality test in this context would permit corporations to avoid the reciprocal obligations inherent in their choice of corporate structure and would deny employees of many subsidiary corporations of the right they undoubtedly had, at the time the Legislature authorized third-party actions by employees who had received workers' compensation benefits, to maintain a third-party action.
The disposition which we believe to be correct makes it unnecessary to consider the dual capacity question. In this connection we note that the opinion of the Court extends the bar of the exclusive remedy provision by disregarding corporate forms in determining which of two separate entities is the "real" employer, but nevertheless treats the form as unimpeachable for the purpose of deciding whether the bar of the exclusive remedy provision applies where it is alleged that the employer is acting in a dual capacity.
The opinion of this Court may go further than is necessary to preserve the policy of the exclusive remedy provision. In the instant case, a customer of Muskegon Firestone supplied the defective Firestone product. Suppose a Firestone or Muskegon Firestone employee was injured in the course of employment as a consequence of the blowout of a Firestone tire on a rented automobile. It is questionable whether the bar of the exclusive remedy provision should preclude maintenance of a products liability action against Firestone.
This Court has recognized that the bar of the exclusive remedy provision may be superseded by other statutory policies. The products liability statute provides statutory authority for a products liability action, and suggests an inquiry whether the Legislature intended that a products liability action be barred by the exclusive remedy provision.
See Mathis v Interstate Motor Freight System, 408 Mich. 164; 289 N.W.2d 708 (1980) (no-fault automobile insurance benefits); Boscaglia v Michigan Bell Telephone Co, 420 Mich. 308; 362 N.W.2d 642 (1984) (sexual/ethnic discrimination). See also 2 Larson, supra, § 68.10, p 131 (intentional torts).
MCL 600.2945 et seq.; MSA 27A.2945 et seq.
KAVANAGH and BOYLE, JJ., concurred with LEVIN, J.