Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-21-2003

Nesbit v. Gears Unlimited Inc
Precedential or Non-Precedential: Precedential

Docket No. 01-1195




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                         PRECEDENTIAL

                                 Filed October 21, 2003

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT


                   No. 01-1195


               NORMA J. NESBIT,
                              Appellant
                        v.
            GEARS UNLIMITED, INC.

   Appeal from the United States District Court
     for the Middle District of Pennsylvania
       (D.C. Civil Action No. 99-cv-00655)
      District Judge: Honorable Yvette Kane

             Argued March 22, 2002
Before: NYGAARD, ROTH and AMBRO, Circuit Judges

         (Opinion filed: October 21, 2003)
                 Donald A. Bailey, Esquire (Argued)
                 4311 North 6th Street
                 Harrisburg, PA 17110
                 Attorney for Appellant
                 John L. Senft, Esquire (Argued)
                 Barley, Snyder, Senft & Cohen
                 100 East Market Street
                 P.O. Box 15012
                 York, PA 17405
                 Attorney for Appellee
                              2



                 OPINION OF THE COURT

AMBRO, Circuit Judge:
  Title VII of the Civil Rights Act of 1964 prohibits
companies employing “fifteen or more” persons from
discriminating on the basis of sex in hiring, discharge,
compensation, or terms of employment. 42 U.S.C.
§§ 2000e(b), 2000e-2(a)(1). Norma Nesbit alleges that Gears
Unlimited, Inc. (“Gears”) terminated her employment as a
machine operator because of her sex. She concedes that
Gears did not employ fifteen persons during the pertinent
time period, but argues that we should also count the
employees at a related entity, Winters Performance
Products (“Winters”). Together, Gears and Winters had
more than fifteen employees. We hold that the District
Court properly refused to aggregate the number of
employees at these companies. Because Title VII does not
cover Gears by itself, we affirm the dismissal of Nesbit’s
complaint. But we part with the District Court on the path
to this result. It viewed Title VII’s “fifteen or more” person
requirement as jurisdictional. We affirm the dismissal of
Nesbit’s complaint on the merits rather than for lack of
subject matter jurisdiction.

        I.   FACTS AND PROCEDURAL HISTORY
  In 1973, Vaughn Winter, Sr. (“Vaughn Sr.”) founded
Winters, which manufactures “rear ends” for high-
performance automobiles. In 1990, he acquired Gears, a
transmission parts manufacturer. Vaughn Sr. and his wife,
Madeline Winter (“Madeline”), also formed Maverick
Industries, Inc. (“Maverick”), which warehouses automotive
parts, including parts produced at Winters. At the time of
the events relating to this suit — December 1994 through
August 1997 — Vaughn Sr. had a stake in three automotive
companies: Gears, Winters, and Maverick.
  The Winter family shares ownership and control of these
three companies. Vaughn Sr. owns ten percent of Gears,
with the remainder held in trust in equal shares for his
                              3


children — Nina and Vaughn Jr. Vaughn Sr. is president of
Gears and his children are corporate officers. He and
Madeline own Winters and Maverick in equal shares. He is
president of Winters and Maverick, and Madeline is the
Secretary/Treasurer at Winters.
  Gears and Winters occupy separate plants about one
mile apart in York, Pennsylvania. In almost all respects,
they operate independently. Their products are distinct —
Gears produces transmissions and Winters produces
automotive rear ends — and each company has its own
equipment and production lines. Winters contracts to buy
parts from Gears at market rates. The companies maintain
separate financial records and payrolls, write separate
checks, and file separate tax returns.
  Vaughn Sr. monitors operations at both Gears and
Winters. While he participates in day-to-day management
at Winters, Gears is managed by Randy Lau. Vaughn Sr.
testified that he visits the Gears facility only about twice a
month, usually because a machine has broken down.
Nesbit disputes this testimony, contending that Vaughn Sr.
spends time at Gears “pretty much every day.”
  The only area in which Gears and Winters cooperate
considerably is in hiring. Typically, if either Gears or
Winters has an opening, a Winters employee will place a
“help wanted” sign on the street in front of the Winters
building. Prospective employees obtain applications at the
Winters front office and return them there as well. If
Winters is hiring, either Vaughn Sr. or his wife will invite
qualified applicants for an interview. If Gears has an
opening, someone at Winters will communicate with the
applicant on Lau’s behalf and then direct him or her to the
Gears plant to interview with Lau. The hiring decision is
then Lau’s “prerogative.” However, Vaughn Sr. (who, as
noted above, normally does not participate in Gears
management) can request that Gears hire a particular
applicant and Gears will generally do so. Either Lau or the
Winter children normally decide whether to terminate an
employee, but Vaughn Sr. testified that he could ask Gears
to fire an employee who engaged in significant misconduct.
  On December 14, 1994, Nesbit submitted a standard
                                4


employment application to Winters for a machine operator
position. That day, either Vaughn Sr. or Madeline
interviewed her.1 The interviewer concluded that no
available positions at Winters would be suitable for Nesbit
and instead referred her to Gears, which hired her as a
machine operator.2 Vaughn Sr. personally accompanied
Nesbit to meet Lau, but the parties dispute whether
Vaughn Sr. or Lau actually made the hiring decision.
   Nesbit remained at Gears for two years and eight months.
She perceived that Lau was her “boss” and was “more or
less in charge” at Gears. Occasionally she also worked an
extra shift at Winters following her regular shift at Gears.
She would punch out on the time clock at Gears and then
punch in at Winters. When working a Winters shift, she
received a separate paycheck. Her hours at the two plants
were not consolidated for overtime pay.
  On August 19, 1997, Nesbit’s machine at Gears
“crashed,” leaving it unusable without repairs. Nesbit
became upset, which apparently caused her to develop a
headache and neck pains. She informed the acting
supervisor, Greg Pell, that she was leaving work to visit her
chiropractor. When she returned the next day, Lau was on
vacation,   and    Vaughn      Sr.   discharged    her    for
insubordination.
   After receiving permission from the Equal Employment
Opportunity Commission, Nesbit filed suit in the United
States District Court for the Middle District of Pennsylvania
alleging that Gears discriminated against her because of
gender. Gears moved to dismiss the complaint under
Federal Rule of Civil Procedure 12(b)(1) for lack of subject
matter jurisdiction on the basis that it employed fewer than
fifteen persons during the relevant time period and
therefore was not an “employer” subject to Title VII.
  Nesbit then filed an amended complaint alleging that

1. The parties dispute whether Vaughn Sr. or Madeline conducted the
initial interview, though it is not important for our analysis.
2. Nesbit is plaintiff ’s maiden name and the name she uses in this
litigation. The name on her employment application and in Gears’
employment records is Norma J. Tran.
                                5


Gears and its “associate corporation” Winters Transmission,
Inc. — a company different from Winters that Vaughn Sr.
owned from 1955 to 1985 — were really a single employer
with more than fifteen employees. Gears moved again for a
dismissal, this time observing that the entity called
“Winters Transmission, Inc.” had ceased operation long
before Nesbit began working at Gears. Nesbit then filed a
second amended complaint, alleging that Gears and
Winters are associate corporations that together meet the
fifteen-employee threshold. On the basis of that allegation,
the District Court ordered discovery limited to the question
whether Gears and Winters constitute a single employer
under Title VII. Following discovery, the District Court
issued a memorandum and order in which it concluded
that Gears and Winters are separate entities and, because
Gears unquestionably employs fewer than fifteen persons
by itself, dismissed Nesbit’s complaint for lack of subject
matter jurisdiction. This appeal followed.

                     II.    DISCUSSION
A.   Is the Number         of   Employees   a   Jurisdictional
     Requirement?
   We first address whether Title VII’s fifteen-employee
threshold is a jurisdictional prerequisite — as the District
Court believed it was in dismissing Nesbit’s complaint
pursuant to Rule 12(b)(1) — or whether it is a substantive
element of a Title VII claim. Whether an aspect of a claim
concerns subject matter jurisdiction or the merits has at
least three implications. First, because subject matter
jurisdiction is non-waivable, courts have an independent
obligation to satisfy themselves of jurisdiction if it is in
doubt. See Mt. Healthy City Sch. Dist. Bd. of Educ. v. Doyle,

, 278 (1977). A necessary corollary is that the
court can raise sua sponte subject-matter jurisdiction
concerns. Second, if the fifteen-employee requirement is not
jurisdictional, a Title VII claim for which the number of
employees is in doubt nonetheless will support
supplemental jurisdiction under 28 U.S.C. § 1367 over state
claims. Da Silva v. Kinsho Int’l Corp., 

, 362 &
365 (2d Cir. 2000); 13B Wright, Miller & Cooper, Federal
Practice and Procedure § 3564, at 73-5 (2d ed. 1984). Third,
                                   6


in most contexts the question will be important to the
plaintiff ’s burden of proof. If an aspect of a claim concerns
jurisdiction, and when jurisdiction turns on whether a
particular fact is true as here (as opposed to whether the
complaint sufficiently alleges jurisdiction on its face), a
court may inquire into the jurisdictional facts without
viewing the evidence in a light favorable to either party. See
Mortensen v. First Fed. Sav. & Loan Ass’n, 

,
891 (3d Cir. 1977). By contrast, if an aspect of a claim
concerns the merits, on a Rule 12(b)(6) motion to dismiss
for failure to state a claim a court must accept the
complaint’s allegations as true, United States Express Lines
Ltd. v. Higgins, 

, 388 (3d Cir. 2002); on a Rule
56 motion for summary judgment it must view the evidence
in the light most favorable to the non-moving party and, if
there are disputes over genuine issues of material fact, they
are for the jury to resolve, Huang v. BP Amoco Corp., 

, 564 (3d Cir. 2001).
  1.   Relevant Caselaw
  The question whether Title VII’s fifteen-employee
threshold is a jurisdictional prerequisite when a plaintiff
brings a colorable Title VII claim has divided the courts of
appeals.3 The Second and Seventh Circuits conclude that it
is a substantive element that the plaintiff must prove
unless the claim that there are fifteen employees is so
obviously unfounded that it fails to raise a genuine federal
controversy. Da 

(2d Cir.);

3. In Walters v. Metropolitan Educational Enterprises, Inc., 

(1997), the Supreme Court granted certiorari to decide whether the
Seventh Circuit erred in dismissing a Title VII suit for lack of subject
matter jurisdiction because the defendant company lacked fifteen
employees during the relevant period. The Court reversed and remanded,
concluding that the Seventh Circuit had erred in determining the
number of employees, but did not address whether the fifteen-employee
requirement is jurisdictional or an element of the merits. 

  Moreover, in Hishon v. King & Spalding, 

(1984), the
Supreme Court found it “unnecessary to consider the District Court’s
invocation of Rule 12(b)(1) [lack of subject matter jurisdiction], as
opposed to Rule 12(b)(6) [failure to state a claim]” on a similar issue —
whether “Title VII [is applicable] to the selection of partners by a
partnership.” 

& n.2.
                                    7


Johnson v. Apna Ghar, Inc., 

, 1001-02 (7th
Cir. 2003), petition for cert. filed, 

(U.S.
Sept. 2, 2003) (No. 03-354); Papa v. Katy Indus., Inc., 

, 943 (7th Cir. 1999); Sharpe v. Jefferson Distrib.
Co., 

, 677-678 (7th Cir. 1998). Moreover, the
D.C. Circuit has held the Americans with Disabilities Act’s
(“ADA”) fifteen-employee threshold an element of the merits.
EEOC v. St. Francis Xavier Parochial Sch., 

,
623-25 (D.C. Cir. 1997). In this context, the ADA’s fifteen-
employee requirement is in all relevant respects
indistinguishable from Title VII’s.
  By contrast, the Fifth, Sixth, Ninth, Tenth, and Eleventh
Circuits have said that the fifteen-employee threshold is
jurisdictional. Greenless v. Eidenmuller Enters., Inc., 

, 198 (5th Cir. 1994); Armbuster v. Quinn, 

, 1335 (6th Cir. 1983); Childs v. Local 18, IBEW,

, 1382 (9th Cir. 1983); Owens v. Rush, 

, 287 (10th Cir. 1980);4 Scarfo v. Ginsberg, 

, 960 (11th Cir. 1999). Moreover, in Thurber v.
Jack Reilly’s, Inc., 

(1st Cir. 1983), the First
Circuit upheld a district court’s dismissal of a Title VII case
for lack of subject matter jurisdiction (although the basis
for the District Court’s dismissal in Thurber — lack of
jurisdiction or the merits — was uncontested; at issue was
the number of employees the employer had). The Fourth
Circuit also held that the number of employees is
jurisdictional in a case brought under the Family and
Medical Leave Act (“FMLA”), a holding that suggests it
would deem the number of employees jurisdictional in the
Title VII context as well. See Hukill v. Auto Care, Inc., 

, 441 (4th Cir. 1999) (“A district court lacks
subject matter jurisdiction over an FMLA claim if the
defendant is not an employer as that term is defined in the
FMLA [which defines an employer as “any person . . . who
employs 50 or more employees.]”).
  The division is deeper than merely inter-circuit. Even

4. Likewise, in Trainor v. Apollo Metal Specialties, 

, 978 n.2
(10th Cir. 2003), the Tenth Circuit held that whether an employer
employs fifteen people is a jurisdictional question in a case brought
under the ADA.
                                     8


within certain circuits that have held Title VII’s fifteen-
employee threshold jurisdictional, there is conflict. While in
Owens the Tenth Circuit assumed (without analysis) that
the requirement is jurisdictional, in Wheeler v. Hurdman,

(10th Cir. 1987), that Court held that the
fifteen-employee threshold is both jurisdictional and
“intertwined with the merits of the case,” and therefore
should have been resolved as if on the merits. 

   The Eleventh Circuit is similarly conflicted. In Garcia v.
Copenhaver, Bell & Associates, M.D.’s, P.A., 

(11th Cir. 1997), the Court opined that the Age
Discrimination in Employment Act’s twenty-employee
threshold “goes to the merits of an ADEA case.” 

It reasoned that “the section of the ADEA that provides the
substantive relief ” — the section forbidding an employer
from discriminating — “is intertwined and dependent on
the section of the ADEA that defines the scope of the act”
— the section defining “employer” as one who employs more
than twenty employees. 

However, in a later
case, Scarfo, 

, the Eleventh Circuit dismissed
a plaintiff ’s Title VII claim for lack of subject matter
jurisdiction when the defendant fell short of fifteen
employees. A third case, Morrison v. Amway Corp., 

(11th Cir. 2003), recognized this intra-circuit
conflict and essentially joined both camps. It stated that, in
the FMLA context, a fifty-employee threshold “implicate[s]
both jurisdiction and the underlying merits.” 

(emphasis added). However, it held that Garcia correctly
disposed of the issue as a matter of procedure: “the district
court was required to find that jurisdiction exists and deal
with the objection as a direct attack on the merits of
plaintiff ’s case” because of the degree to which the
jurisdictional and merits inquiries were intertwined. 

-30 (internal quotation marks omitted).5

5. Moreover, all the circuits that have held the fifteen-employee threshold
jurisdictional have also stated — in the same case or in other cases —
that “where the jurisdictional facts are intertwined with the facts central
to the merits of the dispute[,] [i]t is the better view that . . . the entire
factual dispute is appropriately resolved only by a proceeding on the
merits.” Adams v. Bain, 

, 1219 (4th Cir. 1982); see Clark
v. Tarrant County, Texas, 

, 741-42 (5th Cir. 1986); Gould,
                                  9


  2.   Title VII’s Fifteen-Employee Requirement is an Element
       of the Merits
   With this conflict in mind, we begin our determination by
noting that subject matter jurisdiction is the “courts’
statutory or constitutional power to adjudicate” particular
cases. Steel Co. v. Citizens for a Better Env’t, 

,
89 (1998) (emphasis in original). Steel Co. requires that
courts normally should not conflate subject matter
jurisdiction with elements of an action’s merits. The
Supreme Court held that the elements of another federal
statute — the Emergency Planning and Community Right-
To-Know Act of 1986 (“EPCRA”), 42 U.S.C. § 11046(a)(1) —
are not jurisdictional prerequisites. Steel 

. In relevant part, EPCRA requires users of specified
hazardous chemicals to file annual reports detailing their
chemical inventories, waste-disposal methods, and recent
releases of chemicals from their facilities into the
environment, and provides that the “district courts shall
have jurisdiction in actions brought under subsection (a) of
this section against an owner or operator of a facility to
enforce the requirement concerned and to impose any civil
penalty provided for violation of that requirement.” 42
U.S.C. § 11046(c). The Steel Co. plaintiff, a group to protect
environmental rights, sued a Chicago manufacturer and
asserted past violations of EPCRA. After being notified that
it was in arrears on its filings, the manufacturer filed all
the overdue reports. The plaintiff nonetheless continued its
suit, seeking relief for past reporting violations.
  The District Court concluded that EPCRA does not
support suits for past violations and therefore dismissed
the plaintiff ’s complaint under both Rules 12(b)(1) and
12(b)(6). The Court of Appeals for the Fourth Circuit
reversed, holding that EPCRA permits such suits. The
Supreme Court determined that the case raised (1) whether

Inc. v. Pechiney Ugine Kuhlmann, 

, 451 (6th Cir. 1988);
Timberlane v. Bank of Am., 

, 1381 (9th Cir. 1984),
overruled on other grounds by Hartford Fire Ins. Co. v. California, 

(1993); Wheeler v. 

; Morrison v.
Amway 

. These cases highlight the unsettled
nature of the merits/jurisdictional question.
                               10


the plaintiff had constitutional standing and (2) whether
allegations of past violations state a cause of action under
EPCRA, Steel 

. As to the latter, the Court
decided that the past violations question was on the merits
and not a jurisdictional requirement. 

In so
doing, Steel Co. rejected attempts to portray the
requirement to prove all elements of a cause of action as
relevant to federal courts’ jurisdiction to hear a suit. The
Court reasoned that “[i]t is firmly established in our cases
that absence of a valid (as opposed to arguable) cause of
action does not implicate subject matter jurisdiction.” 

On the contrary,
    ‘[j]urisdiction . . . is not defeated . . . by the possibility
    that the averments might fail to state a cause of action
    on which petitioners could actually recover.’ Rather,
    the district court has jurisdiction if ‘the right of the
    petitioners to recover under their complaint will be
    sustained if the Constitution and laws of the United
    States are given one construction and will be defeated
    if they are given another . . . .’

(quoting Bell v. Hood, 

, 685 (1946)).
   The Court also criticized the implications of treating the
validity of a cause of action as jurisdictional. 

Under that approach, each element of every cause of action
would have a legitimate claim to being a jurisdictional
requirement — essentially eviscerating the distinction
between the jurisdictional and merits inquiry (and requiring
a court to dismiss a claim for lack of jurisdiction whenever
the plaintiff does not prevail). The Court made plain,
however, that subject matter jurisdiction is lacking if the
alleged basis for jurisdiction “clearly appears to be
immaterial and made solely for the purpose of obtaining
jurisdiction or where such a claim is wholly insubstantial
or frivolous.” 

  We presaged Steel Co. in a case decided five years earlier.
In Growth Horizons, Inc. v. Delaware County, 

, 1280-81 (3d Cir. 1993), the District Court dismissed
a claim under the Fair Housing Act for lack of subject
matter jurisdiction. The Fair Housing Act makes it
unlawful, inter alia, “[t]o discriminate in the sale or rental,
                                    11


or to otherwise make unavailable or deny, a dwelling to any
buyer or renter because of a handicap.” 42 U.S.C.
§ 3604(f)(1). The District Court concluded that the
defendant did not “make unavailable or deny” housing to
the plaintiff and that the Fair Housing Act was therefore
not implicated. We reversed, holding that “[a] district court
has federal question jurisdiction in any case where a
plaintiff with standing makes a non-frivolous allegation that
he or she is entitled to relief because the defendant’s
conduct violated a federal statute.” Growth 

. We further explained that “[d]ismissal for lack
of jurisdiction is not appropriate merely because the legal
theory alleged is probably false, but only because the right
claimed is ‘so insubstantial, implausible, foreclosed by prior
decisions of this Court, or otherwise completely devoid of
merit as not to involve a federal controversy.’ ” 

81 (citing Kulick v. Pocono Downs Racing Ass’n, 

, 899 (3d Cir. 1987) (quoting Oneida Indian Nation v.
County of Oneida, 

, 666 (1974))); see also 2
Moore’s Federal Practice § 12.30[1], at 12-36 (3d ed. 2000)
(“Subject matter jurisdiction in federal-question cases is
sometimes erroneously conflated with a plaintiff ’s need and
ability to prove the defendant bound by the federal law
asserted as a predicate for relief — a merits-related
determination.”).6

6. The Restatement (Second) of Judgments: Subject Matter Jurisdiction
§ 11 (1982) also addresses the question whether an issue affects subject
matter jurisdiction or the merits, ultimately concluding that there is no
principled way to distinguish between the two. It notes that “[t]here is a
strong tendency in procedural law to treat various kinds of serious
procedural errors as defects in subject matter jurisdiction . . . because
characterizing a court’s departure in exercising authority as
‘jurisdictional’ permits an objection to the departure to be taken
belatedly.” Restatement (Second) of Judgments: Subject Matter
Jurisdiction § 11 cmt. e. Relevant to the question here, it goes on to note
that
    [t]he difficult problems are encountered when the issues on which
    the court’s subject matter jurisdiction depends are not so clearcut.
    [For example,] if the court has jurisdiction of actions of more than
    a specified amount, there can be uncertainty in whether a particular
    claim exceeds that amount. The problem can be particularly difficult
                                   12


   Turning to Title VII, we note that those courts that have
held the fifteen-employee requirement jurisdictional have
provided no reasons for their holding; rather, they have
assumed it so or stated the conclusion without meaningful
analysis. Moreover, in reading 42 U.S.C. § 2000e(b) we
perceive no congressional intent to make the requirement
jurisdictional. Indeed, Title VII contains an explicit
jurisdictional section, § 2000e-5(f)(3), which provides that
“[e]ach United States district court and each United States
court of a place subject to the jurisdiction of the United
States shall have jurisdiction of actions brought under this
subchapter.” By contrast, § 2000e(b) — in which the fifteen-
employee requirement appears — is a definitional section,
defining “employer.” We doubt that Congress intended this
definitional section to have subject matter jurisdictional
import. If Congress had so intended, we believe its intention
would be clearer. Notably, § 2000e(b) does not even contain
the word “jurisdiction.” Compare 28 U.S.C. § 1331 (“The
district courts shall have original jurisdiction of all civil
actions arising under the Constitution, laws, or treaties of
the United States.”); 

(explicitly making diverse
citizenship    and    a    $75,000     amount-in-controversy
jurisdictional prerequisites). Moreover, congressional debate
(albeit postdating the requirement that an “employer” have
more than fifteen employees) reveals that at least some
legislators regard the fifteen-employee minimum not as
jurisdictional but as an element of the cause of action. See
137 Cong. Rec. H9505-01 (Daily ed. Nov. 7, 1991)
(statement of Rep. Brooks) (“[W]hen a company has less
than 15 employees, there are no damages available
whatsoever because there is no cause of action under our
current antidiscrimination statutes.”).




    when the issue determining subject matter jurisdiction parallels an
    issue going to the merits.

cases the Restatement concludes that “the matter in
question can plausibly be characterized either as going to subject matter
jurisdiction or as being one of merits or procedure.” 

    Most Plausible Arguments for Making             Fifteen-
         Employee Requirement Jurisdictional

    a.    Commerce Clause Argument
   Perhaps the most plausible reason for finding that the
fifteen-employee requirement is jurisdictional is that it
concerns a “dispute[ ] as to the existence of a fact that is
essential to a constitutional exercise of Congress’s power to
regulate.” Da 

(suggesting this as a
situation “[l]ess clearly placed on one side of the
jurisdiction/merits line”). As discussed, Title VII applies to
“employers” and defines an “employer” (in relevant part) as
“a person engaged in an industry affecting commerce who
has fifteen or more employees.” 42 U.S.C. § 2000e(b).
Because Congress enacted Title VII under its Commerce
Clause power, EEOC v. Ratliff, 

, 1315-16 (9th
Cir. 1990), the requirement that an employer be “in an
industry affecting commerce” is the statute’s constitutional
basis. And because the requirements that the employer be
“in an industry affecting commerce” and that the employer
have “fifteen or more employees” appear side by side in the
statute, it is arguably reasonable to read § 2000e(b)’s
“fifteen employee” minimum as relevant to Title VII’s
Commerce Clause basis as well. That is, one might read the
fifteen-employee        threshold   as    reflecting  Congress’s
determination that only those companies with fifteen or
more employees have the requisite substantial effect on
interstate commerce to permit Congress to enact the
statute. See Legislative History of Titles VII and XI of Civil
Rights Act of 1964, at 2108 (1964) (“The bill proceeds upon
a theory . . . that the quantum of employees is a rational
yardstick by which the interstate commerce concept can be
measured.”) (separate minority views of Reps. Poff and
Cramer, Members, House Comm. on the Judiciary); cf.
Willis v. Dean Witter Reynolds, Inc., 

, 311 (6th
Cir. 1991) (noting “Congress’s determination in Title VII
that any employer with 15 or more employees necessarily
implicates interstate commerce”); 

(“[I]t is difficult to imagine any activity, business or industry
employing 15 or more employees that would not in some
degree affect commerce among the states.”) (quoting A.
                             14


Larson & L.K. Larson, Employment Discrimination § 5.31, at
2-40 (1987)).
   This argument, while well-made, nonetheless is
unconvincing. First, the very wording of 42 U.S.C.
§ 2000e(b) suggests that the requirements that an employer
be “in an industry affecting commerce” and have “fifteen or
more employees” are separate and independent, and that it
is a mistake to conflate the two. Even if a putative employer
has twenty employees, it is not covered by Title VII if not in
an industry affecting commerce. Second, while the
preceding Commerce Clause-based justification for Title
VII’s fifteen-employee requirement makes intuitive sense, it
finds little support in the legislative history. We note that
the 1972 amendments to Title VII lowered the minimum
number of employees from twenty-five to fifteen. Patricia
Davidson, Comment, The Definition of “Employee” Under
Title    VII:  Distinguishing    Between     Employees    and
Independent Contractors, 53 U. Cin. L. Rev. 203, 206 (1984)
(noting this change). It lacks logic that, pre-1972, Congress
believed that it took twenty-five employees for a substantial
effect on interstate commerce but changed its mind in
1972. Furthermore, as initially proposed, the 1972
amendment to Title VII contained an eight-employee
threshold. See 

n.4. The
threshold was ultimately raised to fifteen employees as the
result of a political compromise, see 

(among
other reasons) “to protect ethnic businesses and small
businesses.” 

& n.23. Thus, the
fifteen-employee threshold appears motivated by policy —
to spare small companies the expense of complying with
Title VII — rather than Commerce Clause considerations.
  Even assuming that Congress lacks authority to enact a
statute does not mean that a federal court lacks
jurisdiction to review actions brought under that statute.
When disposing of a claim brought under an
unconstitutional statute, courts ordinarily deny the claim
on the merits, on the ground that the statute under which
relief is sought is unconstitutional, rather than for lack of
subject matter jurisdiction. Martin v. United Way of Erie
County, 

, 447 (3d Cir. 1987); Kulick v. Pocono
Downs Racing Ass’n, Inc., 

(3d Cir. 1987)
                              15


(noting the difference between congressional jurisdiction
and federal courts’ Article III jurisdiction, and concluding
that “[e]lements of a claim that are called jurisdictional
because they relate to Congress’s jurisdiction remain
questions of the merits”); see also Plaut v. Spendthrift Farm,
Inc., 

(E.D. Ky. 1992), aff ’d, 

(6th Cir. 1993), aff ’d, 

(1995).

    b.   Jurisdictional Statements in Other Supreme Court
         Cases
  EEOC v. Arabian American Oil Co., 

(1991),
can be read to suggest that the fifteen-employee
requirement is jurisdictional. In that case, the Supreme
Court decided whether Title VII “applies extraterritorially to
regulate the employment practices of United States
employers who employ United States citizens abroad.” 

The Court addressed the question not as whether Title
VII granted plaintiffs a cause of action for extraterritorial
violations, but rather whether Title VII granted
extraterritorial jurisdiction, see 

and affirmed the
dismissal of the complaint for lack of jurisdiction. 

In Arabian American Oil Co., however, a policy
consideration       —     namely,    the    significant   effect
extraterritorial application of U.S. law might have on
international      relations    —     favored    viewing     the
extraterritoriality question as one of jurisdiction. That is,
even if parties did not raise the question of Title VII’s
extraterritorial application, Congress would likely have
intended courts to raise the issue sua sponte in the interest
of harmonious international relations. Such concerns of
international comity are not present here.
  By analogy, some may find EEOC v. Commercial Office
Products Co., 

(1988), to counsel for finding
jurisdictional the fifteen-employee requirement. In that
case, the Supreme Court stated that “Title VII does not give
the EEOC jurisdiction to enforce the Act against employers
of fewer that 15 employees.” 

n.5. But this does
not address the question before us. Title VII grants the
EEOC power “to prevent any person from engaging in any
unlawful employment practice.” 42 U.S.C. § 2000e-5(a).
Thus, if an entity (a “person” under the statute) employs
                              16


fewer than fifteen employees, by § 2000e-5(a)’s terms, the
EEOC lacks power (jurisdiction). By contrast, Title VII’s
jurisdictional grant to the federal courts is broader. See 

(“Each United States district court and each
United States court of a place subject to the jurisdiction of
the United States shall have jurisdiction of actions brought
under this subchapter.”).
  4.   Judicial Administration Reasons for Fifteen-Employee
       Requirement Being an Element of a Title VII Claim
       rather than a Jurisdictional Requirement
   As a policy matter — which is ultimately the gut of our
inquiry — it also makes little sense to regard the fifteen-
employee threshold as jurisdictional. Such a holding would
require a federal court to determine whether a company
had fifteen employees during the relevant period, even if the
parties so stipulated. To require a federal court to engage in
such a fact-intensive inquiry sua sponte — which might in
some cases require a federal appellate court to dig through
an extensive record, including pay stubs and time sheets —
appears to be a waste of scarce judicial resources, and we
doubt that Congress intended such a result. See Da 

(“[I]nstitutional requirements of a judicial
system weigh in favor of narrowing the number of facts or
circumstances that determine subject matter jurisdiction.”);

(“Surely the number of employees
is not the sort of question a court (including appellate
court) must raise on its own . . . .”).
  To hold the requirement jurisdictional also implies that a
court would need to decide whether an entity employed
more than fifteen individuals before reaching a Title VII
action’s merits — even if the merits were more easily
resolved than the “jurisdictional” question. Steel 

. This result too is undesirable.
                       * * * * * * * * *
   In this context, we hold that, while the matter is not free
from doubt, the fifteen-employee threshold is a substantive
element (whether an “employer” exists) of a Title VII claim
and is not jurisdictional. Federal jurisdiction is implicated
only when the Title VII claim “clearly appears to be
immaterial and made solely for the purpose of obtaining
                               17


jurisdiction or where such a claim is wholly insubstantial
or frivolous,” Steel 

, neither of which is
the case here.
B.        Should We Consolidate the Number of Employees at
          Gears and Winters?
  As the District Court looked beyond Nesbit’s complaint
and reviewed discovery on whether Gears employs more
than fifteen people, it should have resolved the issue under
the summary judgment standard rather than as a motion
for judgment on the pleadings. Fed. R. Civ. P. 12(c).
Nonetheless, we may affirm its disposition for any reason
supported by the record. Grayson v. Mayview State Hosp.,

, 109 (3d Cir. 2002). Though the District
Court analyzed this case as jurisdictional rather than on
the merits, Nesbit fails nonetheless. Gears and Winters are
plainly separate entities that cannot be consolidated to
meet the fifteen-employee threshold.
     1.    The National Labor Relations Board’s “Integrated
           Enterprise” Test
   Several courts of appeals have borrowed a four-part test
— commonly called the “integrated enterprise” test or the
“single employer” test — from the National Labor Relations
Board (“NLRB”) to determine when two nominally distinct
companies should be treated as a single entity under Title
VII. See Anderson v. Pacific Maritime Association, 

, 929 (9th Cir. 2003); RC Aluminum Industries, Inc. v.
National Labor Relations Board, 

, 239 (D.C.
Cir. 2003); Parker v. Columbia Pictures Indus., 

, 341 (2d Cir. 2000); Artis v. Francis Howell North Band
Booster Ass’n, Inc., 

, 1184 (8th Cir. 1998);
Frank v. U.S. West, Inc., 

, 1362 (10th Cir.
1993); 

; 

; 

; Trevino v.
Celanese Corp., 

, 403-04 (5th Cir. 1983). The
four factors of the NLRB test are “(1) interrelation of
operations, (2) common management, (3) centralized control
of labor relations, and (4) common ownership or financial
control.” 

(citation omitted); see also
NLRB v. Browning-Ferris Indus. of Pa., 

,
1122 (3d Cir. 1982) (discussing the test in the labor
                             18


context). Among these factors, “[n]o single factor is
dispositive; rather, single employer status under this test
‘ultimately depends on all the circumstances of the case.’ ”
Pearson v. Component Tech. Corp., 

, 486 (3d
Cir. 2001) (describing but not adopting the test in a case
applying the Worker Adjustment Retraining Notification Act)
(citation omitted). “[T]he heart of the inquiry is whether
there is an absence of an arm’s-length relationship among
the companies.” Knowlton v. Teltrust Phones, Inc., 

, 1184 (10th Cir. 1999) (citations omitted); Browning-

. Moreover, “[c]ourts applying this
four-part standard in Title VII and related cases have
focused on the second factor: centralized control of labor
relations.” 

.
   The Seventh Circuit has rejected the NLRB’s four-factor
test as unhelpful in the anti-discrimination context. Papa v.
Katy Indus., Inc., 

, 942-43 (7th Cir. 1999). In
addition, other courts have occasionally listed, but
essentially ignored, the NLRB factors in Title VII cases,
focusing instead on which entity actually made the
allegedly discriminatory employment decision. See, e.g.,
Lusk v. Foxmeyer Health Corp., 

, 777 (5th Cir.
1997); see also Marc Crandley, Note, The Failure of the
Integrated Enterprise Test: Why Courts Need to Find New
Answers to the Multiple-Employer Puzzle in Federal
Discrimination Cases, 75 Ind. L.J. 1041, 1059-71 (2000)
(arguing against application of the NLRB test in the Title VII
context and presenting alternative options).
  As the National Labor Relations Act (“NLRA”) and Title VII
address aspects of employer-employee relations, there is
surface appeal to applying the NLRB’s test in the Title VII
context. But given the different policies animating the two
statutes, the NLRB test does not self-steer to the Title VII
context. That test is designed to determine whether the
NLRB may decide a particular labor dispute. UA Local 343
United Ass’n of Journeymen & Apprentices of Plumbing &
Pipefitting Indus. of U.S. & Canada, AFL-CIO v. Nor-Cal
Plumbing, Inc. 

, 1470 (9th Cir. 1994) (“[I]f the
NLRB finds that [two firms] constitute a single unit . . . the
collective bargaining agreement with the union firm [may]
be extended to the non-union firm.”); 

1064-65; see also Murray v. Miner, 

, 404 (2d
Cir. 1996) (describing the test’s purpose to be “to protect
the collective bargaining rights of employees and to advance
industrial stability”). If the company at issue satisfies the
NLRB test, it will in many cases be required to submit to
collective bargaining. 

. But if a
defendant in a Title VII suit is deemed an “employer” within
the meaning of the statute, it may be subject to liability.
   Because the NLRA and Title VII ask whether entities are
a single enterprise for different reasons, it does not follow
that the NLRB’s test is any more relevant to Title VII cases
than any of the other tests for determining whether two
companies should be regarded as one. To the contrary, for
purposes of determining whether two companies are a
single employer, the NLRA’s policy goals point in a different
direction than Title VII’s. As discussed, a significant
purpose of the fifteen-employee minimum in the Title VII
context is to spare small companies the considerable
expense of complying with the statute’s many-nuanced
requirements. See 

; 

n.4 (reviewing the legislative history behind
the fifteen-employee minimum). This goal suggests that the
fifteen-employee minimum should be strictly construed. By
contrast, the NLRB’s jurisdiction was intended to be
expansive, suggesting a more lenient test for labor cases.
See 

. Thus we deem there is
little reason to refer to the NLRB’s test in deciding whether
two entities should together be considered an “employer”
for Title VII purposes. We instead adopt a different
framework, tailored to Title VII’s policy goals.
  2.   Our Framework
   In Papa, the Seventh Circuit developed its own test to
determine whether two nominally distinct entities should be
considered as one for Title VII purposes. The Court began
with the “basic principle of affiliate liability[,] . . . that an
affiliate forfeits its limited liability only if it acts to forfeit it.”

(emphasis in original). It proceeded to find three
situations in the Title VII context when a company and its
affiliates forfeit limited liability and thus are deemed a
single employer: (1) where a company has split itself into
entities with less than fifteen employees with the intent to
                              20


evade Title VII’s reach; (2) when a parent company has
directed the subsidiary’s discriminatory act of which the
plaintiff is complaining; or (3) when a court would
otherwise pierce the corporate veil (i.e., look behind the
corporate form to hold a corporation’s shareholders
personally liable). 

   We too will consider a company and its affiliates a single
employer under Title VII (1) when a company has split itself
into entities with less than fifteen employees intending to
evade Title VII’s reach or (2) when a parent company has
directed the subsidiary’s discriminatory act of which the
plaintiff is complaining. However, on the third part of this
disjunctive test, we articulate a slightly different standard
from the Seventh Circuit. Rather than applying the test for
veil piercing imported from the corporation law context
(because individual shareholder liability is not implicated
here), we will apply the factors courts use to determine
when substantively to consolidate two or more entities in
the bankruptcy context. When courts substantively
consolidate two entities, they treat the assets and liabilities
of each as belonging to a single entity. We explain in
further detail each test.

    a.   Splitting a Single Company into Two or More to
         Evade Title VII
  When a plaintiff proves that a company has split itself
into multiple entities to evade coverage under Title VII, we
consider those entities a single company for purposes of
meeting the fifteen-employee threshold. “The privilege of
separate incorporation is not intended to allow enterprises
to duck their statutory duties.” 

.
  A plaintiff need not prove that evading Title VII was the
only reason that a business split itself into multiple
entities. Rather, it must make a prima facie case that this
was a substantial motivating factor, after which the burden
will shift to the defendant to produce evidence rebutting the
plaintiff ’s proof. Relevant to a prima facie case are
considerations such as (1) lack of a reasonable business
justification, (2) whether the business split was one that, as
an operational matter, would more sensibly be contained
                                   21


within a single business entity (e.g., the two companies
make the same product or inputs for the same product),
and (3) statements from those familiar with the industry
suggesting that the company was split into multiple entities
to evade Title VII.

    b.   Parent Directing Subsidiary’s Act
   When the companies sought to be aggregated for Title VII
purposes are in a parent-subsidiary relationship, we shall
deem a parent and subsidiary a single employer when the
parent has directed the subsidiary to perform the allegedly
discriminatory act in question. By directing such an act,
the parent disregards the separate corporate existence of
the subsidiary and thus forfeits the right to be treated as a
separate entity for Title VII purposes. Moreover, in such a
situation the parent itself has committed the act in
question and thus should share responsibility with the
subsidiary. See 

.

    c.   Substantive Consolidation
   Absent either of the first two situations, we shall look to
the factors courts use in deciding whether substantively to
consolidate two or more entities in the bankruptcy context.
While these factors vary from circuit to circuit, the test at
base seeks to determine whether two or more entities’
affairs are so interconnected that they collectively caused
the alleged discriminatory employment practice. More
colloquially, the question is whether the “eggs” — consisting
of the ostensibly separate companies — are so scrambled
that we decline to unscramble them. We note, however,
that substantive consolidation is an equitable remedy and
is difficult to achieve.7

7. In addressing whether substantively to consolidate two entities in the
bankruptcy context, courts have developed a number of different tests.
Some have applied a seven-factor test, first set forth in In re Vecco
Construction Industries, Inc., 

(Bankr. E.D. Va. 1980). Those
factors are: “(1) The presence or absence of consolidated financial
statements; (2) The unity of interests and ownership between various
corporate entities; (3) The existence of parent and intercorporate
guarantees on loans; (4) The degree of difficulty in segregating and
                                     22


 We adopt an intentionally open-ended, equitable inquiry
— which we consider one of federal common law — to

ascertaining individual assets and liabilities; (5) The existence of
transfers of assets without formal observance of corporate formalities; (6)
The commingling of assets and business functions; [and] (7) The
profitability of consolidation at a single physical location.” 

see
also In re Mortgage Inv. Co., 

, 610 (Bankr. W.D. Tex. 1990);
Holywell Corp. v. Bank of N.Y., 

, 347 (S.D. Fla. 1986); In re
Donut Queen, Ltd., 

, 709 (Bankr. E.D.N.Y. 1984) (all applying
the Vecco seven-factor test).
  The First Circuit, in Pension Benefit Guarantee Corp. v. Ouimet Corp.,

(1st Cir. 1983), posed five nonexclusive factors a court
should consider when contemplating substantive consolidation: whether
(1) the parent owns a majority of the subsidiary’s stock; (2) the entities
have common officers or directors; (3) the subsidiary is grossly
undercapitalized; (4) the subsidiary transacts business solely with the
parent; and (5) both entities disregard the legal requirements of the
subsidiary as a separate corporation. 

  In In re Augie/Restivo Baking Co., 

(2d Cir. 1988), the
Second Circuit surveyed the caselaw and extracted two fundamental
principles guiding the substantive consolidation inquiry: (1) “whether
creditors dealt with the entities as a single economic unit and did not
rely on their separate identity in extending credit” and (2) “whether the
affairs [of the two companies] are so entangled” that consolidation will be
beneficial. 

(internal quotation marks omitted). The Ninth
Circuit has also adopted this test. See In re Bonham, 

, 766
(9th Cir. 2000).
  The Eighth Circuit considers three factors: (1) “the necessity of
consolidation due to the interrelationship among the [entities]”; (2)
“whether the benefits of consolidation outweigh the harm to creditors”;
and (3) “prejudice resulting from not consolidating the debtors.” In re
Giller, 

, 799 (8th Cir. 1992).
  Finally, the D.C. and Eleventh Circuits have adopted a two-part test.
First, the proponent of consolidation must make a prima facie case,
demonstrating: (1) that “there is substantial identity between the entities
to be consolidated; and (2) [that] consolidation is necessary to avoid
some harm or to realize some benefit.” Eastgroup Props. v. S. Motel Ass’n,
Ltd., 

, 249 (11th Cir. 1991); see also In re Auto-Train, 

, 276 (D.C. Cir. 1987). The Eastgroup Court noted that, in
making this prima facie case, the proponent for consolidation may want
to use the Vecco factors or the Ouimet factors discussed above.
                                    23


determine when substantively to consolidate two entities.
While in the bankruptcy context the inquiry focuses
primarily on financial entanglement,8 for Title VII the focus
more often rests on the degree of operational entanglement
— whether operations of the companies are so united that
nominal employees of one company are treated
interchangeably with those of another. Relevant operational
factors include (1) the degree of unity between the entities
with respect to ownership, management (both directors and
officers), and business functions (e.g., hiring and personnel
matters), (2) whether they present themselves as a single
company such that third parties dealt with them as one
unit, (3) whether a parent company covers the salaries,
expenses, or losses of its subsidiary, and (4) whether one
entity does business exclusively with the other. That is not
to say that the considerations showing financial
entanglement9 are not relevant in Title VII cases; they
assuredly are. Indeed, the line between operational and
financial may be blurred (e.g., when the third parties
dealing with entities as one unit are creditors). However, we
assume that financial entanglement will be present less
frequently in Title VII cases than in bankruptcy cases and
will be harder for a Title VII plaintiff to prove, given that a
typical Title VII plaintiff has more limited resources and an

. Once the proponent for consolidation has
made this showing, “the burden shifts to an objecting creditor to show
that (1) it has relied on the separate credit of one of the entities to be
consolidated; and (2) it will be prejudiced by substantive consolidation.”
Id.; see In re 

.
8. See generally Mary Elizabeth Kors, Altered Egos: Deciphering
Substantive Consolidation, 49 U. Pitt. L. Rev. 381, 385 (1998) (“In cases
where the disentanglement of the assets and liabilities of various entities
is prohibitively expensive or even impossible, substantive consolidation
may significantly increase creditor recoveries.”).
9. Among them are (1) the degree of difficulty in segregating and
ascertaining individual assets and liabilities, (2) the existence of
transfers of assets without formal observance of corporate formalities, (3)
the existence of parent and intercorporate loan guarantees, (4) whether
the subsidiary is grossly undercapitalized, and (5) the existence of
consolidated financial statements.
                                   24


attorney who does not specialize in financial transactions.10
Proving extensive financial entanglement will, however,
bolster a Title VII plaintiff ’s case.
  3.   Application of Our Disjunctive Test
   Under the standard just discussed, and viewing the facts
in the light most favorable to Nesbit, we nonetheless hold
that no reasonable jury would consider Gears and Winters
a single employer under Title VII for purposes of the fifteen-
employee requirement. First, there is no record evidence
that Gears and Winters split themselves into separate
entities to evade Title VII. Nor has Nesbit alleged that Gears
and Winters hold themselves out as one entity or that they
remain separate only to evade anti-discrimination laws. On
the contrary, such a claim is implausible, as Vaughn Sr.
assumed his ownership interests in Gears and Winters
seventeen years apart, and the two companies produce
different products.
  Second, because Gears and Winters do not have a
parent-subsidiary relationship, the second situation for
combining employees (a direction from the parent to the
subsidiary to discriminate) does not exist. In any event,
there is no evidence that one corporation (Winters) ordered
the other (Gears) to commit a Title VII discriminatory act.
  Finally, Nesbit sets out no evidence — other than Gears’

10. Employees or prospective employees are generally not sophisticated
parties and typically do not have the opportunity to conduct extensive
due diligence on employers to ascertain whether they will be protected by
Title VII should they accept an offer of employment. This is in contrast
to the arms-length commercial transactional process by which parties
often become creditors in a bankruptcy case. In that context, the parties
typically urging substantive consolidation are sophisticated and have
had an opportunity to conduct due diligence on the debtor in question
to determine its assets, liabilities, and corporate structure, and to
bargain accordingly. Thus, absent exceptional circumstances, voluntary
creditors should be able to recover only from the entity with which they
have bargained. See Christopher W. Frost, Organizational Form,
Misappropriation Risk, and the Substantive Consolidation of Corporate
Groups, 44 Hastings L.J. 449, 453 (1993) (“[U]nlike voluntary creditors,
tort claimants are unable to bargain for protection against, or
compensation for, the increased risk limited liability imposes.”).
                                  25


and Winters’ common ownership — suggesting that
substantive consolidation would make sense under the
factors discussed. The two companies have different
management. Nesbit described Randy Lau as “her boss”
and conceded he was “more or less in charge” at Gears.
While Vaughn Sr. fired Nesbit, we do not consider this a
significant indication that Winters and Gears do not
operate at arms length. Because Vaughn Sr. is president of
Gears and a ten percent shareholder, it is unsurprising
that he occasionally participated in Gears’ management.11
He was involved in Nesbit’s termination only because Lau
was unavailable on vacation when Nesbit was terminated.
Added to this, there is no indication that Gears and Winters
ignored corporate formalities.
   That Gears and Winters coordinate in recruiting job
applicants likewise does not make them a single entity
under Title VII. Our outcome might be different if Gears
had no say in hiring its own employees, if Gears and
Winters held themselves out to job applicants as a single
company, if the two companies’ human resources functions
were entirely integrated, and/or if they did not maintain
separate payrolls and finances. However, such a situation
is not present here. Moreover, there is no record evidence
that third parties dealt with Gears and Winters as one unit,
that Gears and Winters covered the salaries of the other’s
employees, or that Gears and Winters did business
exclusively with each other.
  In the absence of more significant operational
entanglement, common ownership and de minimis
coordination in hiring are insufficient bases to disregard
the separate corporate forms of Gears and Winters. We
therefore decline to view Gears and Winters as one entity
for Title VII purposes. As Nesbit concedes that Gears alone
employs fewer than fifteen employees, it is not an

11. While Vaughn Sr. is a director of both Gears and Winters, this fact
does not aid Nesbit here. His directorships are likely incidental to his
stock ownership, as is often the case among closely held corporations.
And as discussed, the overlapping ownership and management of Gears
and Winters are insufficient, without more, to warrant substantive
consolidation.
                              26


“employer” under 42 U.S.C. § 2000e(b) and Nesbit’s suit
cannot succeed.

                    III.   CONCLUSION
  We hold that whether an entity employs fifteen or more
workers is a merits question rather than a jurisdictional
inquiry. Thus, because the District Court relied on
materials external to the pleadings, it should have
evaluated under the summary judgment standard Nesbit’s
argument for viewing Gears and Winters collectively. Even
under that standard, there is no basis to view Gears and
Winters together as a single employer. Because Gears alone
employs fewer than fifteen employees, we affirm the District
Court’s dismissal of Nesbit’s complaint, albeit on the merits
rather than for lack of subject matter jurisdiction.

A True Copy:
        Teste:

                   Clerk of the United States Court of Appeals
                               for the Third Circuit