SUCCESSOR CORPORATIONS COULD BE LIABLE FOR PREDECESSORS’ FEDERAL WAGE LAW VIOLATIONS

Under Florida law, a corporation that acquires the assets of another corporation generally does not assume the liabilities of the predecessor corporation.  The successor corporation will acquire its predecessor’s liabilities only to the extent it agreed to acquire those liabilities in the asset purchase agreement.  Many states have similar laws regarding a successor corporation’s liability.  The analysis changes, however, when the predecessor’s liability stems from federal statutes like the federal Fair Labor Standards Act (“FLSA”).  In other words, a predecessor corporation’s failure to pay its employees minimum or overtime wages under the FLSA could result in liability to the successor corporation.

Some federal courts have held that a successor corporation could, as a matter of federal law, acquire the FLSA liabilities of its predecessor despite state law to the contrary.  Under federal law, courts consider the following factors, or slight variants thereof, to determine whether a successor corporation acquired its predecessor’s FLSA liabilities: (1) whether the successor corporation had notice of the predecessor’s liabilities; (2) whether there is continuity in operations and work force of the successor and processor; and (3) whether the predecessor has the ability to directly provide adequate relief.

In March 2013, the Seventh Circuit applied those factors, among others, in Teed v. Thomas & Betts Power Solutions, L.L.C., 711 F.3d 763 (7th Cir. 2013), and found the successor corporation liable for its predecessor’s FLSA violations.  The successor corporation in Teed purchased the assets of its predecessor through an auction.  The asset transfer agreement contained a specific condition that the transfer be “free and clear of all Liabilities” including any liabilities stemming from the predecessor’s pending FLSA litigation.  The federal appellate court noted that if “state law governed the issue of successor liability, [the successor corporation] would be off the hook.”  Teed, 711 F.3d at 765.  However, the court held that federal law, not state law, governed.  Consequently the court found that the successor corporation acquired its predecessor’s FLSA liabilities despite the exclusion in the the asset transfer agreement.  The court in Teed found that “[i]n the absence of successor liability, a violator of the [FLSA] could escape liability … by selling its assets without an assumption of liabilities by the buyer … and then dissolving.”  Teed, 711 F.3d at 766.

On April 3, 2014, the Third Circuit also applied those factors to find that the successor corporation could have acquired its predecessor’s FLSA liabilities.  Thompson v. Real Estate Mortg. Network, 2014 U.S. App. LEXIS 6150 (3d Cir. Apr. 3, 2014).  The court based its decision on the fact that the successor corporation might have “had knowledge of [the predecessor]’s allegedly improper overtime practices prior to the transfer”; that “all facets of the [predecessor’s] business … including operations, staffing, office space, email addresses, employment conditions, and work in progress, remained the same”; and that the predecessor was defunct, which meant that “it is likely incapable of satisfying any award of damages.”  Thompson, 2014 U.S. App. LEXIS 6150, at *22-24.

As the above cases demonstrate, a corporation’s liability under the FLSA should be a factor to consider when determining the purchase price in any asset purchase agreement.  Judging from the Seventh Circuit’s decision in Teed, even if the asset purchase agreement expressly states that the successor corporation does not assume any liabilities, and even if state law imposes a contrary rule, federal law could impose such liabilities on the successor corporation.  Although neither the Sixth Circuit nor the Third Circuit incorporates Florida, some federal courts in Florida have found that if the Eleventh Circuit—i.e., the circuit court of appeals incorporating Florida—were “faced with the issue, the Eleventh Circuit Court of Appeals would find that successor liability exists under the FLSA.”  Cuervo v. Airport Servs., 2013 U.S. Dist. LEXIS 163239, at *5-6 (S.D. Fla. Nov. 15, 2013).

Peter T. Mavrick has successfully represented many employers in labor and employment matters.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.