Tuesday, April 29, 2014

3d Cir. Recognizes FLSA Successor-in-Interest Liability

Earlier this month, the Third Circuit issued a precedential opinion in Thompson v. Real Estate Mortgage Network.

The facts of this case are a little murky - but the gist of the matter is that Plaintiff worked for one company, Security Atlantic. HUD launches an investigation into Security Atlantic, and all of a sudden Plaintiff and her colleagues have to fill out applications for a new company, REMN. Now, she and her colleagues work for REMN. And, Security Atlantic is "defunct."

The issue is whether Plaintiff can impose FLSA liability from her time at Security Atlantic onto its successor, REMN. The Court adopted the federal common law standard for analyzing successor liability, using the following factors:
(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. Brzozowski v. Corr. Physician Servs., Inc., 360 F.3d 173, 178 (3d Cir. 2004).
Frankly, the Court didn't engage in much analysis. Instead, they relied heavily on the economic genius of Richard Posner (somewhere my Mason Law profs are popping champagne at the sight of Posner and economic analysis in a precedential Third Circuit opinion, while discussing how much better the opinion could have been if only the Court had used the Coase theorem and counter-economic analysis from Judge Easterbrook . . . sorry, a little inside-Mason Law humor):
[T]he imposition of successor liability will often be necessary to achieve the statutory goals because the workers will often be unable to head off a corporate sale by their employer aimed at extinguishing the employer's liability to them. This logic extends to suits to enforce the Fair Labor Standards Act. “The FLSA was passed to protect workers' standards of living through the regulation of working conditions. 29 U.S.C. § 202. That fundamental purpose is as fully deserving of protection as the labor peace, anti-discrimination, and worker security policies underlying the NLRA, Title VII, 42 U.S.C. § 1981, ERISA, and MPPAA.” Steinbach v. Hubbard, 51 F.3d 843, 845 (9th Cir. 1995). In the absence of successor liability, a violator of the Act could escape liability, or at least make relief much more difficult to obtain, by selling its assets without an assumption of liabilities by the buyer (for such an assumption would reduce the purchase price by imposing a cost on the buyer) and then dissolving. And although it can be argued that imposing successor liability in such a case impedes the operation of the market in companies by increasing the cost to the buyer of a company that may have violated the FLSA, it's not a strong argument. The successor will have been compensated for bearing the liabilities by paying less for the assets it's buying; it will have paid less because the net value of the assets will have been diminished by the associated liabilities. 
Teed v. Thomas & Betts Power Solutions, 711 F.3d 763, 765–77 (7th Cir. 2013).
Read the full opinion for even more Posner-tastic analysis.

Bottom line: The allegations in this case were sufficient to survive a motion to dismiss. Moving forward, it's buyer beware because a successor in interest just might be liable for FLSA claims of the predecessor.