September 18, 2019

September 17, 2019

Subscribe to Latest Legal News and Analysis

September 16, 2019

Subscribe to Latest Legal News and Analysis

Third Circuit Embraces "Lower Bar" for Successor Liability under the FLSA (Fair Labor Standards Act)

In Thompson v. Real Estate Mortgage Network, No. 12-3828, 2014 WL 1317137 (3d Cir. Apr. 3, 2014), the Third Circuit adopted a standard of successor liability that will lower the bar for whether an employer can be held accountable under the Fair Labor Standards Act ("FLSA") for the wage and hour violations of its predecessor. This alert discusses the implications of the decision for employers that acquire or merge with another business.

Background  

Patricia Thompson and her colleagues worked for Security Atlantic Mortgage Company ("Security Atlantic"). During the course of their employment, they were asked by their supervisors to fill out new job applications to work for Real Estate Mortgage Network ("REMN"). Upon completion of this request, Thompson's paychecks were issued by REMN instead of the now "defunct" Security Atlantic. Despite this "transfer,"[1] Thompson and her colleagues continued to work at the same location, perform the same job responsibilities, and retain the same supervisors, rate of pay, and work email addresses.

Thompson subsequently filed a lawsuit in the District of New Jersey against Security Atlantic and REMN (and individuals of these entities) for wage and hour violations under the FLSA and the New Jersey Wage and Hour Law. Among her allegations, Thompson claimed that REMN was liable for the violations of Security Atlantic under theories of joint liability and successor liability. REMN moved to dismiss Thompson's complaint on the pleadings and the lower court granted the motion. The Third Circuit reversed, finding, among other things, that REMN could be held liable under the FLSA as both a joint employer[2] and successor of Security Atlantic.

Holding

To determine whether REMN could qualify as the successor of Security Atlantic under the FLSA, the Third Circuit embraced for the first time the federal common law standard for successor liability as articulated by the Seventh and Ninth Circuits. Under the federal standard, which is less stringent than its state law counterpart,[3] an employer may be liable for the conduct of its predecessors "when necessary to protect important employment-related policies." To make this assessment, courts must consider the: (1) "continuity in operations and work force of the successor and predecessor employers"; (2) "notice to the successor-employer of its predecessor's legal obligation"; and (3) "ability of the predecessor to provide adequate relief directly."

Applying the three-factor test, the Third Circuit first stressed that, on the face of the complaint, "essentially all facets of the business at issue, including operations, staffing, office space, email addresses, employment conditions, and work in progress, remained the same" following the transfer. Second, although it was "unclear" from the allegations whether REMN had knowledge of Security Atlantic's purported wage and hour violations prior to the transfer, the court maintained that such "detailed proof" was not necessary at this stage in the litigation. And, third, the court emphasized that Security Atlantic was "defunct" and "likely incapable of satisfying any award of damages." Concluding that REMN could qualify as a successor employer under the FLSA,  the Third Circuit vacated the lower court dismissal.

Takeaway

Given that the Third Circuit has adopted a lower standard of successor liability for claims under the FLSA, before acquiring or merging with another business, employers should make careful assessment of potential wage and hour violations a routine part of the pre-transaction due diligence process.


[1] The Third Circuit opinion does little to elaborate on the specifics of the transfer.

[2] Applying the so-called "Enterprise test" the Third Circuit refused to dismiss Thompson's claims against REMN on the grounds that it could qualify as a "joint employer" with Security Atlantic, though the court noted that a "full factual record" may demonstrate otherwise.

[3] To no avail, REMN argued that the Third Circuit should have applied the more rigorous New Jersey state law standard, which holds that successor corporations are legally distinct from their predecessors and do not assume any of the debts or liabilities of the prior entity, except where: "(1) the purchasing corporation expressly or impliedly agreed to assume such debts and liabilities; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently in order to escape responsibility for such debts and liabilities." Ramirez v. Amsted Indus., Inc., 431 A.2d 811, 815 (N.J. 1981).

© 2019 Proskauer Rose LLP.

TRENDING LEGAL ANALYSIS


About this Author

Lawrence R Sandak, Proskauer Rose Law Firm, Labor Employment Attorney
Partner

Lawrence R. Sandak, a Partner in the Labor & Employment Law Department, is head of the firm’s Newark office and co-head of the firm's Law Firm Practice Group. With more than 30 years of employment law experience, Larry gives practical, cost-effective advice to clients on a broad range of issues.

As a trial lawyer and litigator, Larry defends employers accused of discrimination, retaliation, sexual harassment, breach of contract, and wage and hour violations. According toChambers USA, Larry’s “trial history attracts acclaim” and he is...

973-274-3256
John P Barry, Proskauer Law Firm, Labor Employment Attorney
Partner

John P. Barry is a Partner in the Labor & Employment Law Department and co-head of the Non-Compete & Trade Secret Group, resident in the Newark office.

973-274-6081
Joseph C O'Keefe, Proskauer Rose Law Firm, Labor Employment Attorney
Partner

Joseph C. O'Keefe is a Partner in the Labor & Employment Law Department. He worked for five years in the firm's New York office and now practices in the Newark office.

973-274-3290
Robert Schwartz, Proskauer Rose Law Firm, Labor Employment Attorney
Associate

Robert S. Schwartz is an Associate in Proskauer’s Labor & Employment Law Department. His practice focuses on the representation of employers in all areas of employment relations. Robert represents clients in state and federal court employment litigation and administrative proceedings, including claims of unlawful discrimination, harassment, breach of contract, wage and hour violations and tort claims. He also has experience representing clients in disputes arising from collective bargaining relationships and in advising clients on compliance with applicable labor laws. In addition,...

973-274-3230
Daniel L Saperstein, Proskauer Law Firm, Labor Employment Attorney
Associate

Daniel L. Saperstein is an Associate in the Labor & Employment Law Department, resident in the Newark office. He is a member of the Employment Litigation & Arbitration, Labor-Management Relations, Employment Law Counseling & Training, International Labor & Employment, and Whistleblower & Retaliation Groups, as well as the Dodd-Frank Task Force.

973-274-3272