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Express disclaimer does not let purchaser off the hook for successor FLSA liability

April 2nd, 2013  |  Joy Waltemath

Despite an express disclaimer at the time of sale that a company, which was acquiring the assets of an employer, would not be liable as a successor employer in pending FLSA litigation, the Seventh Circuit imposed successor liability anyway. Why? There was no good reason not to.

Here’s what happened: Packard, the original company, had its stock was acquired by S.R. Bray, but the Packard name was retained and it operated as a stand-alone entity. Its employees filed suit for overtime violations under the FLSA two years later. Several months after the FLSA suit was filed, Bray defaulted on a $60M bank loan. To pay as much of the debt to the bank as it could, Bray assigned its assets—including its stock in Packard, which was its principal asset—to an affiliate of the bank.

The assets of Packard were placed in receivership and auctioned off. Thomas & Betts was the winning bidder, paying about $22M.  One condition of the auction was that the assets be “free and clear of all Liabilities” that the buyer had not assumed. In addition, a more specific condition was that Thomas & Betts would not assume any of the liabilities that Packard might incur as a result of the pending FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard as a going concern and hired most of Packard’s employees.

Federal common law successor liability. The issue of successor liability determines whether the buyer acquires a company’s liabilities when the company is sold in an asset sale.  Wisconsin, the state whose law was applicable in this case, is one of the states that limit such liability. But when liability is based on a violation of a federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied—one that is more favorable to employees than most state law standards. So the Seventh Circuit looked at whether this federal standard applies when liability is based on the FLSA, and if so, whether the standard authorized imposing successor liability here.

If Wisconsin law governed the issue of successor liability, Thomas & Betts would be off the hook. However, state law does not control when the federal standard applies. The federal standard requires consideration of a multifactor test that the district judge used to find successor liability. Taking a slightly different approach, the Seventh Circuit agreed that successor liability is appropriate in suits to enforce federal labor or employment laws—even when the successor disclaimed liability when it acquired the assets in question—unless there are good reasons to withhold that liability.

No good reasons to withhold successor liability. Should a federal standard apply when, specifically, the source of liability is the FLSA? In the Seventh Circuit’s view, imposing successor liability helps achieve the goals of federal labor and employment statutes. The FLSA was passed to protect workers’ living standards, which is equally deserving of protection as other federal statutes that protect labor peace (NLRA) or provide antidiscrimination protection (Title VII). Workers don’t often find themselves in a position to head off a corporate sale by an employer aimed at extinguishing its wage-hour liability to them.

None of the arguments Thomas & Betts advanced to convince the court not to “extend” the federal standard to the FLSA were successful. And it was equally unsuccessful arguing that the standard wasn’t properly applied. Thomas & Betts argued that to allow the employees to obtain relief gave them a “windfall.” It said the employees had no right to expect that Packard would be sold, at least as a going concern; had it not been sold, but instead continued under Bray’s ownership, or broken up and its assets sold piecemeal, the bank loan would have precluded the employees from obtaining anything. But, countered the Seventh Circuit, to allow Thomas & Betts to acquire assets without their associated liabilities, thus stiffing workers who had valid claims under the Fair Labor Standards Act, is equally a “windfall.”

(Teed v Thomas & Betts Power Solutions, LLC, 7thCir, Case Nos. 12-2440 and 12-3029, March 26, 2013, Posner, R).