A new federal appeals court ruling on March 26, 2013, shows the old warning "buyer beware" applies not just to used cars but also to companies.
In Teed v. Thomas & Betts Power, +2013 U.S. App. LEXIS 5972 (7th Cir. 2013), the 7th Circuit Court of Appeals ruled that if a company buys another company that has a liability under the Fair Labor Standards Act (FLSA), the buyer can inherit that liability under a legal doctrine known as successor liability.
Under most state laws, successor liability applies only when a buyer expressly or implicitly assumes the seller's liabilities. However, under federal employment laws such as the National Labor Relations Act (NLRA) and Title VII of the Civil Rights Act of 1964, a more employee-friendly standard has been applied.
In Teed, the court concluded that the same standard should apply in FLSA lawsuits because an FLSA violator could escape liability by:
Selling its assets;
Closing the sale without the buyer assuming liability; and
Dissolving the company.
The standard for successor liability, as outlined in Musikiwamba v. ESSI, Inc., +760 F.2d 740 (7th Cir. 1985), involves the following five factors:
Whether the purchasing company had notice of the pending lawsuit;
Whether the purchased company would have been able to provide the relief sought in the lawsuit before the sale;
Whether the purchased company could have provided relief after the sale;
Whether the purchasing company can provide the relief sought in the suit; and
Whether there is continuity between the operations and workforce of the purchased company and the purchasing company.
The defendant in Teed had carried on the operations and workforce of the company it bought, was well aware of the lawsuit that had been pending against it at the time of purchase, and was able to provide the relief sought. For these reasons, the 7th Circuit ruled that successor liability applied, even though the second and third factors had weighed in favor of the defendant. The defendant owed about $500,000 to settle the employees' FLSA lawsuit.
Advice for Employers
Employers that are grooming themselves for sale should audit their FLSA compliance lest potential buyers uncover a liability that could make them think twice. Likewise, employers that are considering buying another company should carefully audit the target company's FLSA compliance with the understanding that they could inherit any liability.