In a recently decided case, Thompson v. Real Estate Mortgage Network, Case No. 12-3828 (3d Cir. Apr. 3, 2014), the Third Circuit Court of Appeals determined for the first time that a successor-employer may be held financially accountable for its predecessor’s wage-and-hour violations under the Fair Labor Standards Act (“FLSA”). This ruling potentially exposes employers to additional claims under the FLSA and provides plaintiffs with further potential sources of recovery for wage-and-hour claims.
The plaintiff in Thompson sought to hold her previous employer, as well as its predecessor company, liable for alleged failures to pay her overtime compensation in violation of the FLSA and the New Jersey state wage-and-hour laws. (Slip Op. at 4-5). The FLSA allows employees to recover damages where employers fail to pay sufficient overtime compensation when an employee works over forty (40) hours in a given week, among other things. See 29 U.S.C. § 207(a)(1). New Jersey’s wage-and-hour law similarly requires employers to compensate certain employees for overtime worked “in excess of 40 hours in any week.” N.J.S.A. § 34:11-56a4.
Thompson filed suit under both laws against Security Atlantic Mortgage Company (“Security Atlantic”), her original employer, and Real Estate Mortgage Network (“REMN”), the successor company to Security Atlantic. (Slip Op. at 3-4). One issue addressed by the Third Circuit in evaluating whether Thompson sufficiently plead her claims against either defendant was whether REMN, as an alleged successor to Security Atlantic, could be held liable for any wage-and-hour violations committed by its predecessor. In determining that issue of first impression, the Third Circuit examined whether the New Jersey state law test for successor liability applied or the less burdensome federal common law approach.
As the Third Circuit explained, the federal common law “presents a lower bar to relief than most state jurisprudence” to protect employment-related policies. (Slip Op. at 16). It requires consideration of the following factors in determining whether successor liability should be imposed: “(1) continuity in operations and work force of the successor and predecessor employers; (2) notice to the successor-employer of its predecessor’s legal obligations; and (3) ability of the predecessor to provide adequate relief directly.” Id. By contrast, under New Jersey law, successor companies are considered legally distinct from their predecessors and do not assume any debts or obligations of the predecessor unless: (1) the successor agrees to assume such liabilities; (2) the transaction amounts to a consolidation or merger of the buyer and seller; (3) the purchasing company is merely a “continuation” of the selling company; or (4) the transaction was consummated to fraudulently escape its liabilities and debts. (Id. at 14-15).
The Court determined the federal common law standard governed whether successor liability applied to Thompson’s claims as “the logical extension of existing case law,” pointing to the Seventh and Ninth Circuit’s adoption of the same broad test. (Slip Op. at 17). In part, the Court reasoned that adopting the less stringent standard for successor liability would make it more difficult for violators to escape liability by selling assets without the buyer assuming the associated liabilities. (Id. at 18). The Court also explained the broader approach comports with the federal statute’s purpose of fostering labor peace and protecting workers’ rights. (Id. at 17).
Under the approach embraced by the Third Circuit, the Court determined Thompson satisfied her pleading burden. As to the first factor, she alleged “all facets of the business at issue, including operations, staffing, office space, email addresses, employment conditions and work in progress, remained the same” after the successor company took over, thus showing a “continuity in operations and work force.” Id. (citations omitted). As to the second factor of notice to the successor company, Thompson alleged Security Atlantic was controlled by a small management group, including two individuals who worked at both companies and possessed ongoing knowledge of the “systematic” FLSA violations. (Id. at 22). Finally, as to the third factor, she alleged the predecessor company was now “defunct”, meaning it would likely be unable to satisfy any damages awarded to Thompson. Id. Accordingly, the Court found Thompson asserted a plausible claim for relief under the FLSA through the federal common law theory of successor liability.
As a result of the Third Circuit’s adoption of this less stringent successor-liability test, employers should understand and inquire about potential FLSA and state wage-and-hour violations when acquiring new business operations to assess the risk of successor liability for a predecessor’s non-compliant actions.