Oct 16, 2013
If you are purchasing a business and discover that the seller has unresolved Fair Labor Standard Act (FLSA) claims, proceed with caution. In its decision earlier this year in Teed v. Thomas & Betts Power Solutions, LLC, the U.S. Court of Appeals for the Seventh Circuit extended the federal common law successor liability doctrine to a purchaser of assets despite the fact that the underlying acquisition documents expressly provided that the purchaser (Thomas & Betts) was acquiring the assets on the condition that the assets were being acquired “free and clear of all liabilities” including any liabilities associated with seller’s, pre-sale, violation of the FLSA.
In finding that the federal common law doctrine of successor liability is applicable to FLSA liabilities, the 7th Circuit discussed and considered the following five factors:
1) Whether the buyer had notice of the FLSA claim;
2) Whether the seller would have been able to satisfy the claim before the sale;
3) Whether the seller could have satisfied the claim after the sale;
4) Whether the buyer can satisfy the claim; and
5) Whether there is continuity between the operations and work force of the seller and buyer.
The fact that the purchaser had notice of the FLSA liabilities, that the assets were purchased out of receivership and the seller had no ability to satisfy the FSLA liabilities, that the purchaser was able to satisfy the liability, and that after the acquisition the purchaser offered employment to most of seller’s employees and continued the operations of seller, all pointed to a finding of successor liability in this case.
One of the most concerning aspects of the 7th Circuit’s decision is that it supplants the general rule that in a transaction structured as a purchase of assets, the buyer and seller can agree between themselves which, if any, liabilities of the seller the buyer will assume. The decision also demonstrates that a buyer who by all accounts was careful to structure its acquisition of the assets so as to avoid assuming the FLSA liability, can be judicially saddled, post closing, with a liability that it contractually agreed not to assume.
The court’s decision significantly changes the landscape as it relates to structuring transactions and serves as a reminder of the importance of a purchaser to not only properly conduct its employment claim related due diligence, but of also evaluating the results of its due diligence review and making any required adjustments to the purchase price and/or the structure of the transaction to minimize the risks and economic impact of any potential successor liability.
If you have any questions about this or any other corporate transactional matters, please do not hesitate to contact J. Timothy Gorman at firstname.lastname@example.org.