Liability for FLSA and SCA Claims After An Asset Purchase
“The English colloquialisms such as … a pig in a poke or buy a pig in a poke mean that something is sold or bought without the buyer knowing its true nature or value, especially when buying without inspecting the item beforehand.”
—Wikipedia
Under what circumstances will a company that purchases another company be liable for the Fair Labor Standards Act (“FLSA”) or Service Contract Act (“SCA”) liabilities of the acquired company under the doctrine of “successorship liability?” In particular, can an asset sale, rather than a stock purchase or merger, insulate the Buyer from liabilities incurred by the Seller?
The concept of successorship liability is relatively recent in the FLSA and SCA context and, even in the context of broader labor law principles, there are few hard-and-fast rules to turn to. Nevertheless, the short answer is that a company that acquires all or substantially all the assets of another company and continues its operations—providing the same services in the same locations with the same employees and the same equipment—may be found liable for the FLSA (and likely the SCA) liabilities of the predecessor.
This liability, however, is of a secondary nature, with the Seller still primarily liable. As an innocent purchaser for value, a Buyer’s liability is likely contingent on the Seller’s inability to pay, a prospect that may not be all that probable given the size and financial stability of the Seller. But it still means that the Buyer in an asset transaction can be pulled into the litigation and can incur legal expenses and other costs as a result, even if the Seller assumes full liability. Of course, the actual outcome of any dispute will be fact specific. At the minimum, though, it is safe to say that the apparent successor in such circumstances will bear the burden of showing why it would not be fair to impose such liability. Thus, we believe it would be important for a Buyer, even with a financially responsible Seller, to consider how best to protect its interest by adding specific terms in the sales agreement for indemnity, financial reserves, warranties, and/or other disclaimers of liability.
The doctrine of successorship liability originates from general principles of labor relations law. A rule of law relating to collective bargaining is not automatically transportable to the world of wage and hour law. However, the doctrine of successorship liability has made that leap. The first case stating that the doctrine of successorship liability could apply in the FLSA context was Steinbach v. Hubbard, 51 F.3d 843 (9th Cir. 1995). In that case, the plaintiffs were former employees of Hubbard Ambulance Services, Inc., which had filed a bankruptcy petition. Care Ambulance (“Care”) had entered negotiations with Hubbard over the possible sale of Hubbard’s assets to Care. Negotiations failed to produce an agreement and, instead, Hubbard and Care agreed to a one-year lease of assets at $600 per month, an employment contract for Hubbard’s principal, and an agreement to buy conditioned on receipt of bankruptcy court approval. Care hired Hubbard’s nine employees and provided ambulance services from the same office, operating at first under the name “Hubbard/Care.” The operations manager remained the same. Care continued to use a vehicle leased from Hubbard for a time, and virtually the same medical equipment. Care also made a down payment on the purchase agreement, but the bankruptcy court never approved the sale, and Care discontinued its efforts to purchase Hubbard’s assets, moved its offices, terminated its lease, and returned all leased equipment to Hubbard.
Given these facts, the court refused to apply the doctrine to the facts before it, finding the “failure to ever permanently transfer the business dispositive.” 51 F.3d at 846. The court explained further that the form of the transaction ordinarily makes no difference to the existence of successorship liability but, in this case, the “FLSA's policies would best be promoted by finding no liability.” Id. at 848. This is because the opposite result would discourage companies from entering into temporary relationships with bankrupt companies that benefit everyone, including employees. “Permitting shopping for dying companies increases the chances such companies may find buyers, thus also increasing the chances buyers will be found who perhaps may satisfy existing FLSA liabilities,” the court said. Id. at 847. It possibly may be inferred, however, that if the sale had gone through, the Ninth Circuit might have ruled differently and imposed successorship liability.
In Cooke v. Jasper, 2010 WL 4312890 (S.D. Tex. 2010), another, more recent FLSA case, the district court noted that courts have set forth different tests for determining whether successorship liability exists in a discrimination context. For example, in Bates v. Pacific Maritime Ass’n, 744 F.2d 705, 709-10 (9th Cir.1984), the court listed three factors governing successor liability determination:
(1) Continuity in operations and workforce,
(2) The successor’s notice of the claim, and
(3) The ability of the predecessor employer to provide relief.
In EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086, 1094 (6th Cir. 1974), the court identified nine factors to be considered in determining whether successor liability should be imposed:
(1) Whether the successor company had notice of the charge or pending lawsuit prior to acquiring the business or assets of the predecessor;
(2) The ability of the predecessor to provide relief;
(3) Whether there has been a substantial continuity of business operations;
(4) Whether the new employer uses the same plant;
(5) Whether he uses the same or substantially the same work force;
(6) Whether he uses the same or substantially the same supervisory personnel;
(7) Whether the same jobs exist under substantially the same working conditions;
(8) Whether he uses the same machinery, equipment, and methods of production; and
(9) Whether he produces the same product.
In light of the above, it appears that a company that acquires all or substantially all of the assets of another company and continues its operations—providing the same services in the same locations with the same employees and the same equipment—may be liable for the FLSA and other wage and hour liabilities of the predecessor. Courts will consider a number of factors the most important of which are whether the successor was on notice of potential liabilities and whether the predecessor is unable to satisfy such liabilities. Any dispute is likely to be a fact intensive issue that could require considerable discovery and evade summary judgment. At the minimum, it is safe to say that the apparent successor will bear the burden of showing why it would not be fair to impose such liability. If it cannot do so, it can be held responsible for FLSA liabilities going back two to three years, depending on the employer’s willfulness and the application of the FLSA statute of limitations.