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Even when care is taken to structure a business acquisition, including attempts to limit or avoid the potential liabilities of the acquired company, the transaction can result in the purchaser succeeding to unexpected employment claims. A purchaser of the assets of an existing company can be held liable for the acquired company’s violations of the U.S. federal Fair Labor Standards Act (FLSA) as a successor in interest under federal common law, which may include claims for unpaid minimum wage and overtime.
Several U.S. federal appellate courts have adopted the federal common law standard on FLSA successor liability, which presents a lower bar to relief than most state jurisprudence, and other federal jurisdictions have applied variations of this standard. Under this standard, successor liability attaches under certain conditions, including: (a) there is continuity in the operations and work force of the successor and predecessor employers; (b) there is notice (or, sometimes, constructive notice) to the successor employer of the pre-existing legal obligation, and (c) the predecessor has the ability to provide adequate relief.
A recent example of the application of this standard is explained in the interesting Pennsylvania case of Herzfeld v. 1416 Chancellor, Inc., where the plaintiff, Ms. Herzfeld, worked as an exotic dancer at a nightclub called The Gold Club. Ms. Herzfeld’s suit alleged that 1416 Chancellor, Inc. had improperly classified herself and other dancers as independent contractors and denied them minimum wage and overtime as required by the FLSA. The Gold Club was purchased by APM Club, Inc., which specifically denied liability in the asset purchase agreement for the FLSA claims previously filed by Ms. Herzfeld.
After the purchase, APM Club, Inc. continued to operate The Gold Club with very little change in operations. Ms. Herzfeld added the new owner to her lawsuit, alleging that it was also liable for the FLSA violations. Despite the contractual denial of liability, the court allowed Ms. Herzfeld to pursue her pre-acquisition FLSA claims against APM Club, Inc., under the doctrine of successor liability.
If you are considering an asset purchase, you must evaluate existing and potential employment liability issues. Your due diligence review should include a review of any employment violations that could lead to successor liability so that necessary measures can be discussed and implemented prior to closing the deal. To avoid costly surprises, meet with your Ally Law member firm employment and labor lawyers to ensure that all potential issues have been addressed and that you understand how federal and state employment laws may impact your company post-acquisition. For more information about our services in this area, contact us at yourally@ally-law.com.
Click here for the complete article by Jeffrey B. Cadle of Ally Law member Obermayer Rebmann Maxwell & Hippel, LLP.
