Suppose you are in the business of supplying some type of services to a governmental entity under a government contract. You have recently competed against other contractors and won the right to perform a contract previously performed by an unrelated company who, in fact, is your competitor. Suppose further that your competitor had employed an individual who, at the time you undertook the contract, was away on military service. You may not think that you would be obligated to “reemploy” this individual upon his or her return from service; after all, you had never employed that individual in the first place and you did not purchase, merge with, or acquire the assets of his or her previous employer. That employer is not out of business and, in fact, you may well compete against that employer in the future. Nonetheless, you most likely do have a reemployment obligation towards that individual. Your company may well be deemed a “successor in interest” to the previous employer.
On October 13, 2010, President Obama signed into law the Veterans’ Benefits Act of 2010 (“VBA-2010”), Public Law 111-275. Among other provisions, the VBA-2010 amended the definition of a successor in interest under the Uniform Services Employment and Reemployment Rights Act (“USERRA”) in a way that may be unexpected to employers, particularly service providers in the government contract area who frequently compete on contracts to perform services and replace an unrelated company in the performance of those contracts. There are many instances where a private sector service provider has been providing some sort of services to a governmental entity; for example, a private company may have provided Base Operating Services to an Air Force Reserve Airbase. Many of these entities employ individuals who are on active reserve status with a branch of the military. It may happen that while an employee is away on deployment, his or her employer loses its government contract. A completely new and unrelated entity may come in to provide the services previously provided by the service member’s employer. The question becomes, does that new entity have an obligation to reemploy the service member with whom it had no previous employment relationship upon that service member’s return from active duty? The short answer is that such a duty may well be imposed upon it by VBA-2010, whether or not the new contractor had any prior relationship with the service member or his pre-service employer.
In general, USERRA imposes an obligation on employers to reemploy those who have been serving in the uniformed services if (i) that person has given advance written or verbal notice of service to the employer, (ii) the service member’s cumulative length of military absences with that employer has not exceeded five years, and (iii) the service member timely reports or submits a timely application for reemployment. 38 U.S.C. § 4312. This provision is relatively straight forward and generally understood by employers. A question arises, however, when the pre-service employer is no longer the employer when the employee returns from military service. This could happen for a number of reasons: the employer has been acquired by or merged with another company, the employer has gone out of business, or the employer has lost the contract to perform services at the location where the employee had been employed and a new, unrelated company is now performing services at that location. In the latter situation, the new company may well believe that it does not have any reemployment obligations to employees of the predecessor contractor. The new company is probably wrong in that belief as regards predecessor employees who were absent due to military service at the time the new contractor took over.
USERRA has always defined an employer to include a “successor in interest”. 38 U.S.C. § 4303(4). Prior to the VBA-2010, however, USERRA did not define who was considered a successor in interest. Federal regulations promulgated in 2006 indicated that a company’s status as a successor could be determined by considering whether there was substantial continuity of business operations between the predecessor employer and the purported “successor”; these regulations spelled out a number of factors to be considered. 20 C.F.R. § 1002.35. Unfortunately, the federal courts were divided as to whether there first needed to be a formal between the two companies. The Eleventh Circuit Court of Appeals held that some sort of acquisition, merger, transfer of assets, sale of assets, etc. must have taken place between the two companies before one would even look at the “substantial continuity” factors to determine whether USERRA obligations could be imposed on the “successor”. Coffman v. Chugach Support Services, Inc., 411 F. 3d 1231 (11th Cir. 2005). Under Coffman, a contractor who won the right to perform a government contract would have no reemployment obligations to a predecessor contractor’s employees unless the contractor had acquired, merged with, or purchased the assets of the predecessor. In other words, a contractor could never have been deemed a successor in interest simply because it won the right to perform a contract previously performed by another contractor.
In contrast, other courts concluded that successor status should be determined solely by reference to the substantial continuity factors, even if there were no previous relationship or merger between the predecessor and successor companies. Cobb v. Contract Transport, Inc., 452 F. 3d 543 (6th Cir. 2006) (considering provisions of the Family Medical Leave Act) and Murphree v. Communications Technologies, Inc., 460 F. Supp. 2d 702 (E.D. La. 2006). Still another federal Circuit Court of Appeals appeared to split the baby: it issued an opinion that affirmed a lower court opinion that appeared to adopt the substantial continuity test while simultaneously citing with approval to those pages of the Coffman decision that held that a formal acquisition or merger was a prerequisite to imposition of successor status upon a company. Reynolds v. RehabCare Group East, Inc., 591 F. 3d 1030 (8th Cir. 2010).
Congress stepped into this breach and enacted VBA-2010, which amended USERRA to direct that the determination of “successor in interest” status should be made by reference to the substantial business continuity factors previously found only in USERRA’s regulations. The newly amended statute mandates that the regulation’s multi-factor test be used to determine whether an entity should be deemed a successor in interest; these multi-factors are:
- Substantial continuity of business operations;
- Use of the same or similar facilities;
- Continuity of work force;
- Similarity of jobs and working conditions;
- Similarity of supervisory personnel;
- Similarity of machinery, equipment and production methods; and
- Similarity of products or services.
38 U.S.C. § 4303(4)(D). The amended statute further directs that an entity’s awareness of a pending or potential USERRA claim at the time of “merger, acquisition, or other form of succession” shall not be considered when applying the multi-factor test. Id.
Obviously, many government contractors will use the same facilities, employ many of the same employees in similar jobs and working conditions, have similar supervisory personnel, use similar machinery, and provide similar products or services as did their predecessors. Using our earlier example, a contractor providing base operating services at an airbase will use the same facilities, machinery, etc. to provide the same services as did its predecessor. If it also hires many of the predecessor’s employees, it most likely will be considered a successor to the predecessor.
It appears that the intent behind amending VBO-2010 was to overrule the Coffman decision and to negate any argument that a formal merger, acquisition, or transfer or sale of assets was necessary before a court could even consider the substantial business continuity factors to determine whether successor in interest status could be imposed on a “succeeding” entity. It could be argued that VBA-2010 fails to accomplish this goal as effectively as it may have; nonetheless, a prudent contractor will assume that Coffman is no longer good law and will assess its status as a successor through an examination of the substantial business continuity factors now set forth in USERRA, particularly when a proper request for reemployment is received from a service member who had been employed by the predecessor contractor.
In conclusion, any reemployment request from a service member should be reviewed very carefully, whether or not the “employer” was also the pre-service employer, as the obligation to reemploy is mandatory if the contractor is considered to be the “successor in interest” to the entity previously performing the government contract. The penalties for failure to reemploy can be substantial and may include liquidated damages in an amount double to the actual damages for willful violations, as well as attorney’s fees and costs.
* Helene G. Bradley is a Senior Associate in the Philadelphia office of McBreen & Kopko. Her practice areas include civil litigation, with a particular emphasis on employment law, state and federal income taxation, and wills, trusts and estates. Ms. Bradley received her B.A., cum laude, in 1979 from the University of Notre Dame and her J.D., summa cum laude, in 1982 from the University of Notre Dame Law School.
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