The U.S. Court of Appeals for the Third Circuit has concluded
that a successor employer could be held liable for Fair Labor
Standards Act (FLSA) violations committed by a predecessor
company.
The complaint in this matter, titled Thompson v. Real Estate
Mortgage Network, was filed in 2011 by a mortgage underwriter
who asserted that her former employer violated the FLSA and New
Jersey state law by misclassifying her as exempt from the overtime
wage requirements. The plaintiff was hired in June 2009 as a
mortgage underwriter for Security Atlantic Mortgage Company
(Security Atlantic). Soon after joining Security Atlantic, the
plaintiff attended a training class taught by a representative from
a different mortgage company called Real Estate Mortgage Network
(REMN). The employee who conducted the training represented that
REMN was the sister company of Security Atlantic.
In February 2010, allegedly in response to an investigation from
the U.S. Department of Housing and Urban Development, Security
Atlantic asked the plaintiff and her colleagues to complete a job
application to work for REMN. The plaintiff completed the
application. Going forward, the plaintiff's paychecks were
issued by REMN rather than Security Atlantic. The plaintiff's
rate of pay, supervisors and contact information all remained
unchanged after she began working for REMN. The plaintiff resigned
from REMN in August 2010. She later filed a lawsuit alleging
violations of the FLSA and the New Jersey Wage and Hour Law against
Security Atlantic, REMN and two individual officers of REMN. The
District Court dismissed the case. On April 3, the Third Circuit
reversed and remanded for further proceedings.
On appeal, the plaintiff sought to hold REMN liable for Security
Atlantic's FLSA violations under two distinct theories: joint
employer liability and successor liability. On the plaintiff's
joint employer argument, the Third Circuit concluded that the
plaintiff alleged sufficient facts to survive a motion to dismiss.
Under the FLSA, multiple entities can be responsible for an
individual employee's wages if both entities exercise
significant control over the employee.
In a precedential ruling, the Third Circuit went further to
conclude that REMN could be liable to the plaintiff not only on the
joint employer theory, but also on the theory that REMN, as a
successor in interest to Security Atlantic, assumed liability for
Security Atlantic's FLSA violations. In so holding, the Third
Circuit rejected the defendant's argument, based on New Jersey
state law, that a successor corporation is legally distinct from
its predecessors and does not assume any debts or liabilities of
its predecessors, with limited exceptions. The Third Circuit
adopted the federal common law standard for successor liability,
which presents a lower threshold for imposing liability on
successor corporations. This federal common law standard for
successor liability has been applied to claims brought under other
federal statutes, including the Labor Management Relations Act, the
National Labor Relations Act, Title VII and ERISA.
The Third Circuit's decision to extend the federal common law
standard of successor liability to FLSA claims is consistent with
the law in other circuits. The Third Circuit adopted the reasoning
promoted by the Seventh Circuit in the 2013 case Teed v. Thomas
& Betts Power Solutions. In that case, the Seventh Circuit
explained, "In the absence of successor liability, a violator
of the [FLSA] could escape liability, or at least make relief much
more difficult to obtain, by selling its assets without an
assumption of liabilities by the buyer (for such an assumption
would reduce the purchase price by imposing a cost on the buyer)
and then dissolving."
In light of this Third Circuit precedent, employers may be liable
for wage and hour violations committed by any predecessor entities.
As a result, employers are advised to carefully investigate any
potential wage and hour violations involving a predecessor company
before completing any asset purchase agreement or other type of
merger.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.