Third Circuit Embraces Successor Liability for Wage-and-Hour Violations of the Fair Labor Standards Act

by Cole Schotz

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.

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.

© Cole Schotz | Attorney Advertising

Written by:

Cole Schotz

Cole Schotz on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.