S & F Market Street Healthcare LLC v. National Labor Relations Board

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 17, 2008 Decided June 30, 2009

No. 07-1439

S&F MARKET STREET HEALTHCARE LLC, D/B/A WINDSOR

CONVALESCENT CENTER OF LONG BEACH,

PETITIONER

v.

NATIONAL LABOR RELATIONS BOARD,

RESPONDENT

Consolidated with 07-1502

On Petition for Review and Cross-Application for

Enforcement

of an Order of the National Labor Relations Board

John H. Douglas argued the cause and filed the briefs for

petitioner.

Amy H. Ginn, Attorney, National Labor Relations Board,

argued the cause for respondent. With her on the brief were

Ronald E. Meisburg, General Counsel, John H. Ferguson,

Associate General Counsel, Linda Dreeben, Deputy Associate

General Counsel, and Jill A. Griffin, Supervisory Attorney.

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Meredith L. Jason and Jason Walta, Attorneys, entered

appearances.

Before: GINSBURG and HENDERSON, Circuit Judges, and

RANDOLPH, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge GINSBURG.

GINSBURG, Circuit Judge: When S&F Market Street

Healthcare LLC acquired a nursing home previously operated

by a different company, it decided to meet its immediate

staffing needs in part by offering temporary employment to

employees of the prior operator. S&F informed the

employees it would consider hiring those who met S&F’s

“operational needs” and it would hire them on an at-will

basis, subject to a probationary period, to various drug and

background checks, and to their signing an arbitration

agreement. When it began operations, S&F implemented

these and other new terms and conditions of employment.

The National Labor Relations Board later held that,

because S&F failed to notify the employees that the terms and

conditions of their employment would change, S&F was a

“perfectly clear” successor within the meaning of NLRB v.

Burns International Security Services, 406 U.S. 272 (1972).

As such, S&F was bound by the collective bargaining

agreement (CBA) between its predecessor and the Service

Employees International Union and had violated § 8(a)(1) and

(5) of the National Labor Relations Act, 29 U.S.C. § 158(a)(1)

and (5), by unilaterally changing the terms and conditions of

employment prescribed in that CBA. Consequently, the

Board ordered S&F to restore the preexisting terms of

employment and to make the employees whole with back pay.

S&F petitions for review, and the Board cross-appeals for

enforcement, of that order.

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We hold the Board erred in concluding S&F was a

“perfectly clear” successor and was not entitled to implement

new terms and conditions of employment. We therefore grant

in part the petition for review and deny in part enforcement of

the Board’s order. We enforce the Board’s order as it relates

to matters S&F does not contest.

I. Background

S&F Market Street Healthcare LLC (d/b/a Windsor

Convalescent Center of North Long Beach) is affiliated with a

chain of nursing and assisted living facilities managed by SnF

Management and operated under the Windsor name. In 2004

S&F purchased Candlewood Care Center from Covenant Care

Orange Inc. Covenant Care had collective bargaining

agreements with the SEIU, Local 434B, covering two

different bargaining units at Candlewood.

Prior to assuming control of the Candlewood facility,

S&F concluded it would need to increase the level of care,

replace the staff, and renovate the building. Closer to taking

over on July 1, 2004 S&F decided it could not replace the

entire staff at once because the turnover would be too

disruptive to the residents. Instead, S&F decided to hire some

of Candlewood’s employees for up to 90 days while it

continued to recruit new employees.

In June 2004 S&F caused applications for employment to

be distributed to the existing staff. A cover sheet informed

the employees that S&F “intends to implement significant

operational changes” and “[c]urrent Candlewood employees

interested in positions with [S&F] must submit the attached

application for employment.” Further, it advised, only

“[a]pplicants who meet the [Company’s] operational needs

will be interviewed,” and any offer of employment “will be

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contingent on your passing a pre-employment physical, drug

test and acceptable reference and background checks.” The

job application itself required the applicant to affirm his or her

understanding that successfully passing the tests and checks

was a condition of employment, that any employment would

be at will, and that S&F “can change benefits, policies and

conditions at any time.”

At the end of June, S&F interviewed all the Candlewood

employees who had submitted applications. In each

interview, the applicant was informed that any possible

employment would be temporary and would last no more than

90 days.

S&F’s director of human resources sent to each employee

who was selected a letter dated June 30 with the subject line

“OFFER OF TEMPORARY EMPLOYMENT.” The letter

explained, “As a temporary employee of Windsor, you are not

eligible for company benefits. ... Other terms and conditions

of your employment will be set forth in Windsor’s personnel

policies and its employee handbook.” The letter further stated

the employment was temporary because S&F had not yet

been able to assess the employee’s “skills and abilities” or

“the building’s ongoing operational and staffing needs.” It

also noted that employment was at will and that “[n]o later

than the expiration of the 90-day period, which ends on

September 29th, your employment with Windsor will end,

unless you are selected for regular employment.” In order to

accept the offer the addressee was required to sign and date

the letter. Those hired also had to sign an “Agreement to be

Bound by Alternative Dispute Resolution Policy,” which

provided that arbitration would be the exclusive means of

resolving all disputes relating to termination of employment,

unlawful discrimination, and sexual harassment.

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S&F began operations on July 1 with approximately 120

employees. Most were former Candlewood employees newly

employed on a temporary basis; 10 to 12 had not been

employed by Candlewood. Seventeen Candlewood

employees were not employed either because they had not

applied or because they were not chosen.

At a staff meeting on July 9, S&F distributed to the

employees handbooks describing Windsor’s policies and its

terms and conditions of employment. The temporary

employees received a handbook dated July 1, 2004 that did

not include information about employer-provided benefits.

The “regular” employees (i.e., those who had not worked for

Candlewood) received a handbook dated January 1, 2004,

reflecting the most recent revision of Windsor’s system-wide

policies; this version did include information about employer-

provided benefits.

S&F continued over the next three months to replace

former Candlewood employees with new employees. By

October 1 a majority of the company’s employees had been

hired from outside the Candlewood staff; some 30-40 of the

Candlewood employees hired initially as temporary

employees had been hired for regular employment and given

the January 1 version of the handbook.

Also following the takeover, S&F invested about

$500,000 to renovate the facility. Among other changes, S&F

repainted the employee lounge and the hallway where

Candlewood had hung a bulletin board for the use of the

Union, at which time S&F removed the bulletin board.

Meanwhile, on July 1 the Union requested bargaining

with S&F. The Company responded on July 7 that it had not

yet hired a representative complement of employees, so the

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Union’s demand for bargaining was premature. The Union

filed unfair labor practice charges, and the Board General

Counsel issued a complaint alleging that when S&F began

operating the facility on July 1, 2004, it became “a successor

to Candlewood” but refused to bargain with the Union, in

violation of § 8(a)(1) and (5) of the Act. The complaint

further alleged that since July 1, 2004 S&F had made

unilateral changes at the former Candlewood facility —

removing union-related materials from a bulletin board,

prohibiting the posting of union materials, and implementing

new employment policies — again in violation of § 8(a)(1)

and (5), and had violated § 8(a)(3) in several ways unrelated

to the issue of successorship.

Following a hearing, an Administrative Law Judge found

S&F was a successor to Candlewood. According to the ALJ,

the “temporary” employees were actually akin to probationary

employees because their work was to be evaluated during the

period of temporary employment and they did not have a

definite anticipated termination date. Therefore the temporary

employees could be counted in determining whether S&F had

a substantial and representative complement of employees,

and whether a majority of that complement were from

Candlewood, when S&F began operations on July 1. Having

answered both questions in the affirmative, the ALJ

concluded S&F was obligated to recognize and to bargain

with the Union as of July 1.

At the same time, the ALJ found S&F, although a

successor to Candlewood, was not a “perfectly clear”

successor because S&F’s pre-employment communications to

the Candlewood employees put them on notice that the terms

and conditions of their employment would change.

Accordingly, although S&F was obliged to recognize and to

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bargain with the Union, it was entitled first to establish the

initial terms and conditions of employment.

The Board affirmed the ALJ’s finding that S&F was a

successor to Candlewood but went on, with Member

Schaumber dissenting, to hold (1) as a matter of law, S&F

was a “perfectly clear” successor and, (2) as a matter of fact,

had “failed to clearly announce its intent to establish a new set

of conditions prior to inviting former [Candlewood]

employees to accept employment.” Windsor Convalescent

Ctr. of N. Long Beach, 351 N.L.R.B. 975, 980 (2007). The

Board concluded, therefore, that S&F did not have the right

unilaterally to set the initial terms and conditions of

employment. S&F petitions for review solely of the legal and

factual underpinnings of this determination.

The Board also held, and S&F does not contest, that S&F

refused to hire four union stewards, suspended or terminated

certain employees for engaging in protected activity, and

informed employees the facility would be nonunion, all in

violation of § 8(a)(1) and (3) of the Act; and, although a

successor employer, S&F failed to recognize and to bargain

with the Union, in violation of § 8(a)(5) of the Act. In

keeping with this court’s “longstanding rule,” Carpenters &

Millwrights, Local Union 2471 v. NLRB, 481 F.3d 804, 808

(2007), “[t]he Board is entitled to summary enforcement of

the uncontested portions of its order.” Flying Food Group

Inc. v. NLRB, 471 F.3d 178, 181 (2006).

II. Analysis

We turn now to the two rulings S&F does contest. First,

the Board held S&F was not only a successor but a “perfectly

clear” successor and therefore could not lawfully set the

initial terms and conditions of employment, as it did in

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issuing the employee handbooks and removing the union

bulletin board, without first having bargained with the Union.

Second, the Board held that, even if S&F were not a

“perfectly clear” successor, it could not unilaterally change

the terms and conditions of employment because, it found,

S&F had not specifically announced the new terms prior to

becoming the incumbent employer on July 1.

We must uphold an order of the Board unless it rests

upon a finding not supported by “substantial evidence,” 29

U.S.C. § 160(f), or the Board failed to apply the proper legal

standard or departed from precedent without giving a

reasoned justification therefor. Mail Contractors of Am. v.

NLRB, 514 F.3d 27, 31 (D.C. Cir. 2008). In this case we

conclude the Board erred in applying the exception in NLRB

v. Burns International Security Services for “perfectly clear”

successors. 406 U.S. at 294-95. In addition, its finding that

S&F failed to notify the employees of its intent to establish

new terms and conditions is unsupported by substantial

evidence, and its conclusion that S&F could not implement

any terms or conditions it had not specifically announced

prior to July 1 is an unjustified departure from Board

precedent.

A. “Perfectly Clear” Successor Status

In Burns, the Supreme Court explained that, “although

successor employers may be bound to recognize and bargain

with the union,” except in rare circumstances “they are not

bound by the substantive provisions of a collective-bargaining

contract negotiated by their predecessors but not agreed to or

assumed by them.” Id. at 284. The rare exception is for

“instances in which it is perfectly clear that the new employer

plans to retain all of the employees in the [bargaining] unit.”

Id. at 294-95. That is, “a successor employer is ordinarily

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free to set initial terms on which it will hire the employees of

a predecessor,” but a so-called “perfectly clear” successor

must bargain with the employees’ representative before it

changes any terms to which its predecessor had agreed. Id.

The “perfectly clear” exception is and must remain a

narrow one because it conflicts with the “congressional policy

manifest in the Act ... to enable the parties to negotiate for any

protection either deems appropriate, but to allow the balance

of bargaining advantage to be set by economic power

realities.” Id. at 288. In the Board’s leading case on the

“perfectly clear” exception, Spruce Up Corp., 209 N.L.R.B.

194 (1974), enf’d per curiam 529 F.2d 516 (4th Cir. 1975),

which came fast on the heels of Burns itself, the Board

recognized the importance of the employer’s right to set the

initial terms and conditions of employment and the correlative

narrowness of the “perfectly clear” exception. The employer

there had expressed a “general willingness” to hire his

predecessor’s employees, but also announced he was going to

change their commission rates. The employer “thereby made

it clear from the outset that he intended to set his own initial

terms, and that whether or not he would in fact retain the

incumbent [employees] would depend upon their willingness

to accept those terms.” 209 N.L.R.B. at 195. For that reason,

it could not be said the employer “plan[ned] to retain all the

employees in the unit” and the Board held the “perfectly

clear” exception did not apply. Id. The Board explained:

the caveat in Burns ... should be restricted to

circumstances in which the new employer has

either actively or, by tacit inference, misled

employees into believing they would all be

retained without change in their wages, hours,

or conditions of employment, or at least to

circumstances where the new employer ... has

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failed to clearly announce its intent to establish

a new set of conditions prior to inviting former

employees to accept employment.

Id. Thus, at bottom the “perfectly clear” exception is intended

to prevent an employer from inducing possibly adverse

reliance upon the part of employees it misled or lulled into not

looking for other work.

The Board adhered to its original understanding of Burns

as recently as Ridgewell’s, Inc., 334 N.L.R.B. 37 (2001),

enf’d 38 Fed. Appx. 29 (D.C. Cir. 2002). In that case, the

successor employer announced it would retain the incumbent

employees but only as independent contractors. The Board

found they continued to work as employees within the

meaning of the Act rather than as independent contractors.

334 N.L.R.B. at 37. Nevertheless, the employer’s

announcement, although legally erroneous, was sufficient to

avoid the “perfectly clear” exception because it “portended

employment under different terms and conditions” and

thereby put the employees “on notice that a new set of

employment conditions would be in effect.” Id.

In the present case the ALJ found S&F “informed the

Candlewood applicants that they would be employed only in a

temporary or probationary status for 90 days,” which “should

have signaled to the applicants that terms and conditions of

employment with [S&F] were not going to be identical with

those of its predecessor.” 351 N.L.R.B. at 1001. As in

Ridgewell’s, the employer’s announcement portended

employment under different — indeed, significantly different

— terms and conditions. Therefore, the ALJ held S&F did

not violate the Act by setting the initial terms and conditions

of employment.

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The Board, however, reversed the ALJ and applied the

“perfectly clear” exception because it found S&F had failed to

announce its intent to establish new terms and conditions

before it invited the former Candlewood employees to accept

employment. That finding is unsupported by substantial

evidence. On the undisputed facts of this case, no employee

could have failed to understand that significant changes were

afoot. The cover letter attached to each job application

foretold “significant operational changes,” identified various

pre-employment checks and tests to be passed, and explained

that any employment offered would be both temporary and at

will. The Board discounted the cover letter on the ground that

it “lacked any mention of intended changes to employees’

terms and conditions of employment.” Id. at 981. Yet under

Candlewood’s collective-bargaining agreements with the

Union, as any employee would know, each employee with 90

days on the job had vested “seniority rights” and could not be

terminated except for cause, which the Union could contest

through the negotiated grievance and arbitration procedure.

By announcing that any employment with S&F would be at

will, therefore, S&F was announcing a very significant

change in the terms and conditions of employment — both for

those who had been employed by Candlewood for 90 days or

more and for those who expected to be. In addition, by

requiring its new employees to agree to its own alternative

dispute resolution policy, S&F made it clear the grievance

mechanism the Union had negotiated with Candlewood would

not be available.

The Board not only muffed its reading of the record; it

also misread Burns to require more from the successor

employer than a portent of employment under different terms

and conditions. Recall that the “perfectly clear” exception

applies only to cases in which the successor employer has led

the predecessor’s employees to believe their employment

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status would continue unchanged after accepting employment

with the successor. Here, as we have seen, the employees had

every indication — from S&F’s job applications, interviews,

and letters offering employment — that S&F intended to

institute new terms of employment. Under a proper reading

of Burns and Ridgewell’s, therefore, S&F cannot be

considered a “perfectly clear” successor.

The Board attempts to distinguish Ridgewell’s as follows:

“An announcement that workers will be hired as ‘independent

contractors’ necessarily signals an intent to establish a new set

of [employment] conditions, because it signals an intent to

divest the predecessor’s employees of ‘employee’ status

altogether.” Id. at 981 n.28 (internal citation and quotation

marks omitted). That is obviously true but irrelevant: A

successor need not signal an intent to divest the predecessor’s

employees of their status as statutory employees in order to

signal its intent, as did S&F here, to establish new terms and

conditions of employment under which some of the

predecessor’s employees may be hired.

The Board quibbles over when the employees may have

received the June 30 offers of temporary employment,

suggesting that some employees may have received their

letters after S&F took over operations on July 1. The

anachronism, if it occurred, changes nothing, however. First,

as we have seen, the June 30 letter was not the only indication

S&F provided to the Candlewood employees that the terms

and conditions of their employment would change.

Furthermore, because that letter was the very instrument by

which the Company invited employees to accept employment

with S&F, it was necessarily received “prior to inviting

former employees to accept employment.” Spruce Up Corp.,

209 N.L.R.B. at 195. That some employees may have

received the letter immediately after the Company took over

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the operation rather than immediately before cannot make the

crucial difference under Burns unless the employees were

misled into expecting the terms of employment to continue

wholly without change.∗

∗

In that regard the Board recounts in a footnote testimony

indicating three former Candlewood supervisors told employees not

to worry about their employment prospects or future salaries. 351

N.L.R.B. at 981 n.29. But, as the Board acknowledges, the ALJ

made no finding that these statements occurred, id. at 981, let alone

that they were made by agents of S&F, which argues, fairly enough,

that former Candlewood supervisors were not authorized to speak

for S&F. In any event, the statements do not contradict S&F’s

announcement that any employment would be temporary and at

will. As the Board recognized in Spruce Up, Burns was not meant

to force an employer “to refrain from commenting favorably at all

upon employment prospects of old employees for fear he would

thereby forfeit his right to unilaterally set initial terms”; the

“perfectly clear” exception must be read narrowly so as not to

“encourage employer action contrary to the purposes of th[e] Act”

or “discourage continuity in employment relationships for such

legalistic and artificial considerations.” 209 N.L.R.B. at 195.

The only testimony that could provide support for the

contention that S&F misled employees is that of a Candlewood

employee who claimed S&F’s director of human resources, in

responding to employees’ concerns about their wages being

decreased, said “nothing was going to change.” In fact, the only

relevant evidence in the record is that nothing about their wages did

change during their period of temporary employment. In any event,

the alleged statement was denied both by another Candlewood

employee and by S&F’s human resources director and the ALJ did

not resolve the dispute. Taking into account the totality of S&F’s

communications to the Candlewood employees, even if credited

this piece of evidence is insufficient to support a finding that S&F

materially misled the Candlewood employees. See Pacific

Micronesia Corp. v. NLRB, 219 F.3d 661, 665 (D.C. Cir. 2000)

(“To meet the requirement of ‘substantial evidence,’ the Board

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Nevertheless, the Board concluded “there is no evidence

that [S&F], prior to the takeover, informed Candlewood

employees that those who were retained would be working

under different core terms and conditions of employment.”

351 N.L.R.B. at 981. We see two errors of law in this

restatement of the “perfectly clear” standard.

First, the focus upon “core” terms and conditions

misstates the rule, which is that the successor employer must

simply convey its intention to set its own terms and conditions

rather than adopt those of the previous employer. Granting

that a trivial change in employment conditions may not

suffice, there is no requirement in Burns or Spruce Up that the

intended change(s) involve “core” terms. Whatever that term

may mean, however, it surely includes instituting at-will

employment and eliminating the negotiated grievance and

arbitration procedure.

Second, the Board’s holding achieves precisely what

Burns and Spruce Up sought to avoid. In those cases the

Supreme Court and the Board respectively started from the

presumption that a successor employer may set its own terms

and conditions of employment and reserved the “perfectly

clear” exception for cases in which employees had been

misled into believing their terms and conditions would

continue unchanged. See Burns, 406 U.S. at 294-95; Spruce

Up, 209 N.L.R.B. at 109. In this case, the Board presumed

the predecessor’s terms and conditions must remain in effect

unless the successor employer specifically announces it will

change “core” terms and conditions. Thus does the exception

must produce ‘more than a mere scintilla’ of evidence; it must

present on the record ‘such relevant evidence as a reasonable mind

might accept as adequate to support a conclusion,’ taking into

consideration the ‘record in its entirety … including the body of

evidence opposed to the Board’s view’”) (internal citation omitted).

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in Burns swallow the rule in Burns. Under the proper

standard, S&F clearly comes within the protection of the rule

rather than the straightjacket of the exception: It was never

“perfectly clear that the new employer plan[ned] to retain all

of the employees in the unit,” Burns, 406 U.S. at 294-95, let

alone that it did so “with no notice that they would be

expected to work under new and different terms,” Spruce Up,

209 N.L.R.B. at 195 n.7. On the contrary, the Company

announced it would retain only those who met certain pre-

employment tests and stated its intent to set new initial terms

and conditions of employment.

B. Announcing Terms and Conditions After the July 1

Takeover

The Board held in the alternative that even if S&F had

expressed a “sufficiently clear intent to change employment

terms” and thus avoided being deemed a “perfectly clear”

successor, S&F “still had an obligation to bargain over any

unannounced specific changes to terms and conditions of

employment occurring after July 1, including dismantling the

bulletin board and issuing new handbooks.” 351 N.L.R.B. at

982 n.31. In the Board’s view, that is, a successor employer

may change preexisting terms and conditions of employment

only to the extent it has specified those changes in advance of

assuming control over the operation.

The Board’s novel rule in this case misapplied its own

precedent and that of the Supreme Court. In Burns, the

Supreme Court was perfectly clear that a successor employer

is not bound by the substantive provisions of a CBA

negotiated by its predecessor: “It is difficult to understand

how [the successor employer] could be said to have changed

unilaterally any pre-existing term or condition of employment

without bargaining when it had no previous relationship

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whatsoever to the bargaining unit and, prior to July 1, no

outstanding terms and conditions of employment from which

a change could be inferred.” 406 U.S. at 294. True to this

teaching, the Board in Spruce Up did not require the employer

to announce in advance all (or indeed any) new terms it

intended to establish upon taking over; it was sufficient that

the employer had announced its intention to establish new

terms. See 209 N.L.R.B. at 195. S&F, having put the

employees on notice of that intention, was not bound by the

Candlewood CBA but was free unilaterally to implement its

own initial terms and conditions of employment.

In support of its view, the Board offers Banknote Corp. of

Am., 315 N.L.R.B. 1041 (1994), enf’d 84 F.3d 637 (2d Cir.

1996). In that case the Board correctly stated that an

employer is free to set initial terms and conditions prior to

hiring its predecessor’s employees. 315 N.L.R.B. at 1042.

The wrinkle in that case was that, when interviewing for jobs

with the new employer, “the employees were told [working

conditions] would be about the same.” Id. at 1043.

Subsequent changes were thus a deviation from the terms

under which the employees were told they were being hired.

Banknote therefore stands for the principle that once an

employer has hired its predecessor’s employees under any

specified terms and conditions of employment — its own or

those in its predecessor’s CBA — it must bargain over

subsequent changes.

In this case, the offer of temporary employment S&F

made to former Candlewood employees, which they had to

sign in order to accept employment with S&F, incorporated

by reference the employee handbook; and the handbook

expressly stated the initial terms and conditions of

employment that S&F set when it hired the employees. To

reiterate the relevant facts, the successor employer: (1) before

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soliciting job applications, informed the predecessor’s

employees of its intention to change the terms and conditions

of employment; (2) upon hiring the predecessor’s employees,

explained that the new terms and conditions were set out in

detail in the employee handbook; and (3) shortly after

assuming operations, gave each employee a copy of the

handbook. These steps together constitute the process by

which the employer set the initial terms and conditions; it did

not accept its predecessor’s terms nor set its own initial terms,

hire the employees upon those terms, and then unilaterally

change them. Because the employer did not change any terms

it previously established but merely replaced its predecessor’s

terms with its own, it was not required first to bargain with

the Union over the content of the employee handbook or its

removal of the bulletin board during its initial renovation.

III. Conclusion

For the reasons set out above, we hold S&F was not a

“perfectly clear” successor under Burns, nor was it obligated

to bargain over initial terms and conditions simply because

those terms had not been specifically announced prior to July

1, 2004. We therefore grant the petition for review and deny

enforcement of the Board’s order insofar as it requires that

S&F restore the terms and conditions of employment

established by its predecessor and make its employees whole

for losses caused by its failure to apply the terms and

conditions of employment that existed prior to its

commencing operations. We grant the Board’s cross-

application for enforcement with respect to those aspects S&F

does not contest.

So ordered.