When a company is sold in an asset sale (as opposed to a stock sale), the buyer acquires the company’s assets but not necessarily its liabilities. Whether the liability is passed to the buyer is referred to as “successor liability”. In Wisconsin–as in most states–a buyer must expressly or implicitly assume liabilities to be considered a successor. However, if the liability is based on a violation of certain federal labor and employment laws, the federal common law standard for successor liability will be applied. The federal standard is more favorable to employees than state law standards and generally will result in a finding that the buyer is a successor and, therefore, is liable for valid claims made under federal labor and employment laws.
Historically, the federal standard has been applied to labor relations cases brought under the National Labor Relations Act (“NLRA”) discrimination cases brought under Title VII of the Civil Rights Act (“Title VII”), the Age Discrimination in Employment Act (“ADEA”), and the Americans with Disabilities Act (“ADA”). However, the federal successor liability standard has not been applied to wage and hour claims brought under the Fair Labor Standards Act (“FLSA”) . . . until now.
The Buyer is “Teed” Off About Successor Liability
In Teed v. Thomas & Betts Power Solutions, LLC, the Seventh Circuit held that the more “employee friendly” federal successor liability standard applies to FLSA claims. In Teed, J.T. Packard & Associates (“Packard”) had guaranteed a bank loan on behalf of S. R. Bray Corp. (“Bray”), its parent company. Bray subsequently defaulted on the loan. As a result, Bray’s assets-including its Packard stock-were assigned to a bank and placed in receivership.
Packard’s assets subsequently were purchased by Thomas & Betts Power Solutions, LLC (“Thomas”). In the purchase documents, Thomas required that it would be “free and clear of all liabilities.” Thomas specifically disclaimed liability with respect to the ongoing FLSA collective action instigated by Brian Teed. Thus, Thomas assumed that it had avoided a finding of successor liability with respect to the FLSA collective action.
The Seventh Circuit Extends the Federal Successor Liability Standard
The federal successor liability standard long has been applied to cases brought under the NLRA, Title VII, the ADEA, and the ADA. The Seventh Circuit held that the FLSA also is intended to protect worker’s rights-namely, a worker’s right to a standard of living. If successors are not found liable, an employer could intentionally violate the FLSA and avoid consequence by selling its assets without an assumption of liability by the buyer. The seller would then dissolve without meeting its wage obligations to its employees.
If the Wisconsin successor liability standard had been applied to Thomas, the company would have been free and clear with respect to Teed’s FLSA collective action. However, the Seventh Circuit found that successor liability is appropriate in suits to enforce federal labor or employment laws-even when the “successor disclaimed liability when it acquired the assets in question-unless there are good reasons to withhold such liability.” The Seventh Circuit reasoned that the purpose of labor and employment statutes are to protect employee rights and promote labor peace. Without successor liability, employers could avoid obligations to their workers through the sale of corporate assets.
Sellers and buyers should be aware that the federal successor liability standard will apply to any ongoing or potential claims brought under the FLSA. Under this standard, the courts will examine:
- Whether the buyer had notice of the pending lawsuit;
- Whether the seller would have been able to provide the relief sought prior to the sale;
- Whether the seller could have provided relief after the sale;
- Whether the buyer can provide the relief sought in the suit; and
- Whether there is continuity between the operations and workforce of the seller and the buyer.
If a buyer may be subject to successor liability for any pending federal labor and employment claim, including an FLSA claim, the buyer will not be able to disclaim successor liability, no matter how strong the purchase disclaimers may appear. Instead, buyers should carefully evaluate any pending or potential claims and account for these liabilities in their purchase price. Additionally, buyers should carefully consider indemnification language included in their agreements.
If you have any questions regarding this article, please contact your Davis & Kuelthau attorney.