Businesses often acquire other businesses through an asset purchase, rather than a stock purchase, so that the buyer does not inherit the liabilities of the seller. Not all business owners realize that federal labor law violations often are excluded from state law contract law, and buyers may be liable for seller’s violations no matter what their purchase agreement says. One US Court of Appeals recently extended federal common law successor liability to the Fair Labor Standards Act. 
The Seventh Circuit (with jurisdiction in Illinois, Indiana and Wisconsin) recently ruled in Teed v. Thomas & Betts Power Solutions, LLC, that a buyer of a company’s assets can’t rely on state law to keep a seller’s violations of the Fair Labor Standards Act(FLSA) from transferring to the buyer of the Seller company’s assets. Federal labor law claims are governed by federal common law, not state law.
The Court’s rationale was that it is not fair for deals in some states — but not others– to extinguish federal labor law violations upon sale of a company. In addition, employees with claims do not have power to stop the owner from selling the company to extinguish employment law violations. When certain criteria are met, the buyer (successor) is stuck with the seller’s liability, no matter what their contract says.
The concept is not new. The federal common law standard for successor liability has been applied to Labor Management Relations Act, National Labor Relations Act, Title VII of the Civil Rights Act, Age Discrimination in Employment Act, Family and Medical Leave Act. This ruling extends this doctrine to violations of the FLSA. It is likely that other circuits would adopt this holding, although currently it only applies to contracts under the laws of Illinois, Indiana and Wisconsin.
To determine whether successor liability will apply, the Seventh Circuit considered the following multi-part balancing test:
1. Whether the successor had notice of the pending law suit;
2. Whether the predecessor would have been able to provide the relief sought in the lawsuit before the sale;
3. Whether the predecessor could have provided relief after the sale;
4. Whether the successor can provide the relief sought in the suit (if not successor liability is a phantom); and
5. Whether there is continuity between the operations and work force of the predecessor and the successor – which favors successor liability because nothing really has changed.
It is now more important that ever to conduct thorough due diligence before purchasing another company, and to adjust the price or to reserve funds to account for labor violations. For more information, contact your business attorney or employment attorney.
