Successor Liability For Employment-Related Claims: A Pain In The Assets

There is a myth that buyers are protected from employment liabilities arising under prior ownership if there is a broad disclaimer and if it is an asset purchase. Not so. Sure, the “general rule” is that a purchaser of another company’s assets does not assume the seller’s liabilities.*

But, employment law is the exception to that general rule:

For employment issues, courts impose liability on successors “when necessary” to protect and vindicate employment-related policies arising under employment statutes (including the discrimination laws) by considering:

  • whether the buyer knew or should have known of the claim before acquisition;
  • the ability of the seller to provide relief (e.g., does it still exist?); and
  • whether there has been substantial continuity of the same business.

EEOC v. MacMillan Bloedel Containers, Inc., 503 F. 2d 1086, 1094 (6th Cir. 1974).

Boilerplate disclaimers in purchase agreements lack traction when it comes to employment claims. Sheils, supra. Plus, “notice” — the most critical factor — may be direct, indirect, or inferred so a lack of actual knowledge is no safe harbor.

The most effective solution is granular due diligence. Because of the public policy issues that drive courts to extend statutory employment liabilities to purchasers, due diligence must be more thorough on employment-related issues than on anything else.

*Outside of the employment context, purchasers are seldom liable. Typically, there is liability only if: (1) there is an express or implied assumption of liability; (2) the transaction amounts to a consolidation, merger, or similar restructuring of the two corporations; (3) the purchasing corporation is a “mere continuation” of the seller; and/or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller’s debts. Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1325-26 (7th Cir. 1990).

Published In: General Business Updates, Labor & Employment Updates, Mergers & Acquisitions Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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