Seventh Circuit Holds Successor Liable for FLSA Overtime Claims

May 13, 2013

Joshua L. Cannon

In many instances, whether an acquisitive transaction takes the form of an asset purchase or a stock sale is based on the acquirer’s desire to avoid certain liabilities of the target business.  Under Wisconsin law, an acquirer’s purchase of assets, and express disclaimer of specific liabilities, is normally sufficient to preclude the acquirer from being liable for those liabilities.  However, courts have developed a limited number of exceptions to this general rule pursuant to which they will hold asset purchasers liable for the disclaimed debts of the businesses which they acquire.  These exceptions are commonly referred to as successorship liability.

A recent decision by the Seventh Circuit Court of Appeals clarifies how successorship liability applies to federal labor and employment claims.  In Teed v. Thomas & Betts Power Solutions, LLC, the court held an asset purchaser liable for the target’s liability for overtime pay under the federal Fair Labor Standards Act (“FLSA”).  The court so held even though the acquirer conditioned the transaction on the purchased assets being “free and clear” of certain liabilities, and more specifically, any liabilities resulting from the target’s FLSA litigation.  To reach this result, the court applied a federal common law standard of successorship liability, which is generally more expansive in terms of finding successorship liability than many states’ laws (including those of Wisconsin).

All is not lost for asset purchasers seeking to avoid successorship liability for federal labor and employment law violations by targets.  While the court suggested 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,” the court also recognized that there could be “good reasons to withhold such liability.”  One such reason is if the acquirer did not have notice of the potential liability.  Another reason is if there is a lack in the “continuity between the operations and work force.”  That is, if the acquirer does not use substantially all of the target’s assets for substantially the same purpose and does not hire substantially all of the target’s work force, then successorship liability may not be appropriate.

This case highlights that the application of federal law to what may be perceived as state law issues can frustrate the expected results of an acquisition.  These issues, particularly when federal lawsuits are involved, should be thoroughly vetted during the due diligence process.

The information contained herein is not intended as and should not be construed as legal advice.  Please consult with legal counsel before taking any action based on this information.