Judge Rules That Manufacturer, Subsidiary Companies Are “One Operator”

By Ellen Smith

In a stunning ruling that may impact any company with subsidiaries that operates in the mining industry, Judge Kenneth Andrews determined on March 9 that Austin Powder Co. and it’s U.S. subsidiary companies function as one “operator” for purposes of the Mine Act, and the subsidiaries are not separate entities that function independently.

The question of whether Austin Powder is an “operator” under the Mine Act came up in 15 dockets with 22 citations and orders that were consolidated at the Federal Mine Safety and Health Review Commission for the purpose of determining whether Austin Powder and its subsidiaries constitute a “unitary operator” for the purposes of the Mine Act.

The unitary operator theory was developed under Berwind Natural Resources Corp. case in 1995, used to “flesh out the definition of ‘operator’ under the Mine Act.”

Austin Powder argued that the subsidiary company should be held liable for any violation committed by that subsidiary. The Secretary argued that Austin Powder could be held liable as an “operator” under Sec. 3(d) of the Mine Act, based upon the “unitary operator” theory. 
The unitary operator test established these factors:

  1. Interrelation of operations.
  2. Common management.
  3. Centralized control over mine health and safety.
  4. Common ownership.
Restructuring of Austin Powder

The company and Secretary stipulated that beginning on or about Dec. 21, 2004, Austin Powder made the business decision to restructure the company and spin-off its corporate divisions performing services at mines into separate, legal entities, operating as wholly-owned subsidiaries and organized as limited liability companies pursuant to Delaware state law. Each subsidiary was governed by several contract agreements that covered “capital contributions,” employee and equipment leasing agreements, and supply issues. Each subsidiary company obtained its own ATF license. 

Austin Powder stated that the Secretary is ignoring corporate law since the subsidiaries are separate and distinct legal businesses. 

While there is some interrelationship of operations and some common management, each subsidiary was formed under state laws, Austin Powder argued. The business between Austin Powder and the subsidiary companies “is governed by formal, written, arms-length contracts setting the obligations of each entity, and the LLCs have operational independence.” In addition, each subsidiary blasting company develops its own procedures based on regional geologic differences. The ultimate responsibility for implementing and enforcing safety policies and compliance with health and safety laws rests with the 12 wholly-owned divisional subsidiary LLCs, Austin Powder said.

Organizational Structure

The judge was in agreement with the Secretary that Austin Powder and its subsidiary companies functioned as one operator, once there was a breakdown of the organizational structure.

Prior to 2004, each LLC was a division under the corporate umbrella of Austin Powder. Over a three-year period, from 2004-2007, Austin’s board of managers reorganized the divisions as corporations under Delaware state law, each as a limited liability corporation. The principle business address remained as Austin Powder’s business address in Cleveland. The ATF license for each of the 12 LLCs listed the Cleveland address, and the board of managers retained control over each LLC. 

In 2006, the board members had Austin enter into an agreement with each LLC. Two of the agreements provided for a contribution of assets in exchange for a 100-percent ownership interest, and the assumption of certain liabilities by the LLCs. The 10 remaining agreements provided for employee, services, transportation and supply agreements between Austin Powder and the LLCs.

An employee leasing agreement provides that Austin Powder leases employees to the LLCs, and the employees are on the Austin Powder payroll. While the LLC can hire or fire any employee, it’s Austin Powder that conducts the employee screening and approval process. Judge Andrews stressed that it’s Austin Powder that controls the policies governing human resources.

Similarly, the LLCs rely on Austin Powder for invoicing, collectio, and accounting services. While a single federal tax return is filed for Austin Powder Co., the company provides the information and documentation for each LLC to file state returns. Credit cards are provided by Austin Powder to the LLCs. Judge Andrews stressed in this instance that the handling of revenues is controlled by Austin Powder.

Insurance policies are negotiated by Austin Powder with LLCs names as parties. Employee health, life, workers’ comp, liability, vehicle and other insurance coverage is all held by Austin Powder. Vehicles and vehicle support services are provided by Austin Powder, which is also responsible for vehicle insurance, registration and maintenance. Austin Powder also provides the supplies for the blasting work for each LLC. Austin Powder maintains the corporate website, and customers contact the headquarters in Cleveland.

“The APC organization is not held out to the world as being compromised of separate and distinct corporations that function independently,” Judge Andrews wrote. “Not adequately explained is just how this day-to-day conduct of business is different from the time prior to the reorganization when the LLCs were divisions that performed the same work and were considered an integral part of APC. The responsibility placed on the LLCs to perform the work at mines does not vitiate the functional integration of the entities.” 

Common Management

There is a common management between Austin Powder and its LLCs, and the three members of Austin Powder’s board of directors are also the board of managers over each of the LLCs, and the secretary and treasurer of Austin Powder is also the person to head accounting and finance for each LLC. 

Judge Andrews also found a centralized control over mine health and safety through Austin Powder’s mandatory, standardized orientations and training program for new hires, as well as an Austin Powder Employee Handbook for each new hire. 

Austin Powder provides all software that records all blasts carried out by each LLC, and it also conducts the blaster training. Employees who drive for the LLCs must go through an Austin Powder driver candidate training program, and they are also given an Austin Powder Driver Handbook that includes the company’s processes and practices required of every driver.

In this case, Judge Andrews said there is an “essential interdependence of the entities.”  Austin Powder “has a direct and immediate interest the activities of the subsidiary to ensure and protect the success of the business enterprise. I find this to be substantial involvement.”

“Despite Respondent’s argument of ‘operational independence,’ local decision making required to fulfill the contractual obligations at a mine site neither functionally separates the LLC from Austin Powder nor disturbs the close cooperation between the entities. Austin Powder must have field operations to perform the revenue generating work and the LLCs must have Austin Powder support, oversight, guidance and control to efficiently, competently, safely and lawfully satisfy the obligations Austin Powder enters into with its client mine operators.

“Companies are free to organize in any lawful manner,” the judge said, “ but if its activities bring it under the jurisdiction of the Mine Act the form of the company will be secondary to the substance of intra-organization relationships.” In this case, Austin Powder and the LLCs “are so interrelated they function as a single entity,” and both entities qualify as an “operator” under the Mine Act.

AUSTIN POWDER CO., 3/9/2016, FMSHRC(J) Nos. PENN 2012-116-R et al; 23 MSHN D-615

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