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Tuesday, 06 August 2013 14:32

Seventh Circuit Affirms Successor Liability for Federal Employment Claims

Have you ever questioned what happens to federal claims under the Fair Labor Standards Act ("FLSA") when a business is bought and sold?  If you are a Wisconsin buyer, beware.  Federal law covering our area stands in contrast to Wisconsin law.  Teed v. Thomas & Betts Power Solutions provides that the buyer is liable for FLSA claims even when disclaimed in the purchase agreement.


Factual Background


In 2006, JT Packard & Associates' ("Packard") stock was acquired by the S.R. Bray Corporation ("Bray").  Packard retained its corporate identity and continued to operate as its own entity.  In 2008, Packard's employees filed a lawsuit alleging various FLSA violations.  Several months after the lawsuit was filed, Bray defaulted on a bank loan that Packard (now its subsidiary) had guaranteed.


To repay the debt, Bray assigned its assets, including the stock in Packard, to an affiliate of the bank, which then acutioned the assets.  Thomas and Betts Power Solutions ("Thomas") was the highest bidder, and structured the sale as an "asset purchase."  The agreement stated that Thomas was purchasing Bray "free and clear of all liabilities" and that Thomas would not assume any of the liabilities Packard might incur in the FLSA litigation, which had not yet concluded.  Significantly, Thomas continued operating Packard and retained most of Packard's employees.


The Packard employees then substituted Thomas as a defendant in their FLSA litigation, over Thomas' objection.  Thomas then made an offer of judgment, whcih was accepted, and proceeded to appeal the judgment on grounds of improper substitution.




The Court began its analysis by stating that if Wisconsin law governed liability, Thomas would be "off the hook" because of the conditions of the sale.  However, the Court held that when liability is based on a violation of a federal statute (such as the FLSA) the federal standard applied.  In determing whether successor liability would apply, the Court considered the following factors: 1) Did the successor have notice of the pending lawsuit; 2) Was the predecessor able to provide the relief sought in the lawsuit before the sale; 3) Could the predecessor have provided relief after the sale; 4) Could the successor provide the relief sought in the lawsuit; and 5) Was there continuity between the operations and workforce of the predecessor and the successor.


The Court found that Thomas did know of the pending lawsuit; that Packard and Bray could not provide the relief sought in the lawsuit before, or after, the sale; that Thoams could provide the relief sought in the lawsuit; and finally, that there was continuity in the operations and workforce between Thomas and Bray.


The Court reasoned that, unless there are good reasons for withholding successor liability, it is appropriate to enforce liability in suits involving federal labor or employment laws, despite an explicit disclaimer of the same from the successor company.  Absent successor liability, a violator of the FLSA could escape its liability by selling its assets at a higher price without having the purchasing company assume its liabilities, while also giving the purchaser a windfall.


What Does This Mean for Employers?


Teed has exposed asset purchasers to successor liability for FLSA claims despite express disclaimers int he sales contract.  The same risk is presented by other federal employment claims.  Buyers should take extra precaution when deciding a purchase price, possibly by reducing the price by the amount of potential liability, or placing a portion of the purchase price in escrow until liabilities have been determined.  For sellers, Teed may affect the market of potential buyers if the company may not have been in full compliance witht he FLSA.  In any event, both buyers and sellers should proceed with cuation when structuring an asset purchase.  For more information about this or any other employment law matter, please contact Attorney Peter J. Culp.

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