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Successor company not joint employer with regard to overtime claims, but successor liability issue must be determined

By Marjorie Johnson, J.D.

Though an indemnification clause in the purchase agreement did not automatically prevent liability under the successor liability doctrine, which required a further factual analysis, the record undisputedly established that the successor was not a joint employer.

A successor company was not liable as a joint employer as a matter of law for a FLSA collective action for unpaid overtime brought by two warehousemen who quit their jobs prior to the sale of the business, but it was not totally free and clear since triable issues precluded summary judgment on the issue of successor liability. A federal district court in Texas also rejected the employer’s bid to calculate damages using a formula based on a monthly average of wages instead of the traditional weekly-average formula, but the employer was granted partial summary judgment on its undisputed contention that the employees’ damages would be limited by either the two-year or three-year statutes of limitations (Hernandez v. ARC Trading Co., November 1, 2019, Horan, D.).

Action filed in 2017, after employees quit. The two warehousemen claimed that they worked an average of 60 and 67 hours a week, respectively, but were never paid overtime wages. The first employee worked from December 15, 2011 until August 2014 and from December 2014 until July 15, 2017. He filed this collective FLSA action in August 2017. The second employee worked for the employer from January 2013 until March 2015, and opted-in to the lawsuit in December 2017.

Ownership transferred to successor in 2018. On February 1, 2018, the employer’s owner transferred 100 percent of the shares of the company to the successor. The purchase agreement contained a liability and indemnification clause in which the employer’s owner agreed to be liable for any claims arising prior to the sale. The employees subsequently amended their complaint to add the successor as defendant.

Triable issue as to successor liability. The successor sought summary judgment under the liability and indemnification clause of the purchase agreement. However, even if the employer’s owner unambiguously agreed to be responsible for any and all claims that arose before she sold the company, that fact did not establish that there was no genuine issue of material fact as to the employees’ claim under the doctrine of successor liability.

The transfer of shares to the successor occurred after the two employees quit their jobs (35 months and seven months, respectively). The purchase agreement contained a liability and indemnification clause in which the employer’s owner, on the company’s behalf, agreed to hold the successor harmless and indemnify it “from any and all claims made by any person or entity which arise out of or are derivative of the operation of [the company].” However, the existence of such an agreement did not automatically determine liability under the successor liability doctrine, which is determined utilizing the Fifth Circuit’s nine-factor test.

The court explained that whether a predecessor “may have indemnification obligations to a successor for any judgment entered against the successor for pre-sale liabilities is a separate matter from whether a successor can be liable to the plaintiffs in the first instance—possibly triggering a contractual indemnification obligation of the predecessor to the successor—under the doctrine of successor liability for the predecessor’s FLSA violations.” Thus, since the successor relied only on the liability and indemnity agreement, the court denied its motion for summary judgment as to the employees’ claims based on successor liability.

Not joint employer. However, the successor and its owner were entitled to summary judgment as to the employees’ claims against them as joint employers. The undisputed evidence showed that they did not know who the employees were, and that the two were never employed or paid wages by the successor or its owner. It also showed that they quit their jobs with the employer prior to its sale of the company on September 1, 2018. Thus, they failed to create a triable issue as to whether the successor was directly liable under the FLSA as a joint employer rather than under the doctrine of successor liability.

Statutory limitation to damages. The court also granted the employer’s motion for partial summary judgment insofar as it sought to limit the employees’ damages to the maximum amount allowed under the FLSA’s applicable statute of limitations. Because the employees agreed that their claims were limited by the two- or three-year statute of limitations (an issue to be determined at trial), the court granted ARC’s motion in that regard, thus limiting damages to those accruing during the applicable statute of limitations period.

Damages calculation. However, the court rejected ARC’s bid to calculate damages using a formula based on a monthly average of wages instead of the traditional weekly-average formula.

In their depositions, the employees were initially asked for a “ballpark number” of damages they claimed. The first testified that he was owed about $24,000 while the other testified that he was owed about $2,000. Both of these numbers were similar to the amounts they each estimated in their initial disclosures, which did not include all of the weeks that they were employed. They also stated in their depositions that they were entitled to overtime pay for the entire time they worked for the employer.

The employer now sought to limit the amount of the employees’ potential damages under a formula which derived a monthly average by dividing the damages amount stated in the employees’ deposition by the total number of months they each worked to obtain a monthly average, which was then multiplied by the number of months worked during the statute of limitations. The court declined to apply the employer’s proposed formula, much less limit the employees’ damages as a matter of law based on that formula. Instead, any damages for unpaid overtime wages would be calculated on a weekly basis.