Third Circuit Applies More Relaxed Federal Standard To Successors In FLSA Cases

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Guest Blogger: Lindsey Marcus

The Third Circuit Court of Appeals, which covers Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands, recently became the third appellate court to adopt the federal common law standard for successor liability in a Fair Labor Standards Act (FLSA) claim. The decision likely means that successor employers will find it increasingly difficult to avoid liability for wage and hour violations of their predecessors.

The Third Circuit held in Thompson v. Real Estate Mortgage Network et al. that under the federal common law standard for successor liability, which is a lower bar for a plaintiff to meet than most state-law standards, the plaintiff’s claims against her former employer and its successor were improperly dismissed by the district court.

Patricia Thompson was hired by defendant Security Atlantic Mortgage Company (Security Atlantic) in June 2009 as a mortgage underwriter. In February 2010, in response to a federal investigation, Thompson and many of her colleagues were asked by supervisors to fill out new job applications for Real Estate Mortgage Network (REMN). After Thompson did so, her paychecks were issued by REMN. However, most other aspects of her employment remained the same. She and her colleagues continued to do the same work, at the same desks, at the same location; and her pay rate, work email address, and direct supervisors remained the same. Security Atlantic subsequently went out of business.

Thompson alleged that Security Atlantic and REMN violated the FLSA and New Jersey wage and hour law by requiring her to work more than eight hours per day and 40 hours per week without paying her overtime compensation for all of her overtime hours, and misclassified her and other mortgage underwriters as exempt employees who were not entitled to overtime.

Following the lead of the Seventh and Ninth Circuits, the Third Circuit concluded that applying the three-factor federal common law standard to FLSA claims was a “logical extension of existing case law” the standard used for other federal employment statutes like Title VII. Those factors are: “(1) continuity in operations and work force of the successor and predecessor employers; (2) notice to the successor-employer of its predecessor’s legal obligation; and (3) ability of the predecessor to provide adequate relief directly.”

Applying those factors, the Third Circuit found that Thompson had adequately alleged that REMN was the successor of Security Atlantic as follows: there was seamless continuation of “essentially all facets of the business” when REMN took over; a small group of Security Atlantic managers were aware of systematic FLSA violations; those practices continued once REMN took over; and these managers assumed corporate leadership roles with REMN. Further, the defendants claimed that Security Atlantic was defunct, which the court construed as meaning that Security Atlantic would be unable to satisfy a judgment against it.

The Third Circuit’s decision adds to a growing chorus of federal courts applying a lower bar to claims of successor liability in FLSA lawsuits. What does that mean for your business if you are in acquisition mode? Where there will be significant overlap between the workforce and operations before and after sale, asset purchasers need to assume that successor liability may not simply be contracted away, and plan accordingly in negotiating the deal. Doug will offer some additional thoughts in light of this and another decision in an upcoming post.

Topics:  FLSA, Succession Planning, Successor Liability

Published In: Civil Procedure 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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