FLSA Actions

An Illustrative Hypothetical

Imagine that a group of employees brings a lawsuit against their employer, 123 Corporation, for failing to properly pay overtime wages as is required under the FLSA. The parties are embroiled in litigation when 123 Corporation takes a turn for the worse.

A competitor, ABC Corp., sees an opportunity. As in-house counsel for ABC Corp., your employer asks you whether the company can purchase 123 Corporation's assets without exposing itself to the potential liability associated with the employees' claims arising under FLSA. “No problem,” you think to yourself. “Most states limit successor liability to sales in which a buyer expressly (or implicitly) assumes the selling company's liabilities.” You rattle off an e-mail recommending that your employer include language that ABC Corp. will assume 123 Corporation's assets “free and clear of all liabilities” and incorporate a condition that ABC Corp. will not assume any of the liabilities associated with 123's pending FLSA litigation.

Prior to March 2013, your analysis may have been correct. However, in a major win for employees, the United States Court of Appeals for the Seventh Circuit decided the case of Teed v. Thomas & Betts Power Solutions, LLC, and reaffirmed that where a liability is based on a violation of a federal statute relating to labor relations or employment ' here, in the context of the FLSA ' the more plaintiff-friendly common law standard of successor liability is to be applied.

A Primer on Successor Liability in Asset Sales

Before discussing the specifics of the Teed v. Thomas & Betts Power Solutions, LLC decision, it is important to understand the basics of successor liability, specifically for asset sales. There are various means by which one company can merge with or acquire the assets of another. In one instance, an acquiring company may seek to purchase a seller's stock or, in another, desire to merge with another company.

Asset sales are a particular type of transaction in which the purchaser picks and chooses those assets and liabilities that it wishes to purchase or assume. Generally speaking, a purchaser is presumed not to acquire the liabilities of the predecessor as a part of the transaction unless doing so is clearly articulated in the purchase arrangement. The rationale for the rule is clear. By allowing an acquiring company to identify only those liabilities that it will assume as part of a deal, the acquiring company can reduce the price offered to the seller. This has, historically, made asset sales an attractive option for an acquiring company insofar as it could limit its exposure to unwanted liabilities by incorporating “disclaiming language” into an agreement.

A Factual Overview of Teed

The facts giving rise to the litigation in Teed mirror those set forth in the above hypothetical. In 2006, S.R. Bray Corporation (Bray) acquired the stock of JT Packard & Associates (Packard). After the acquisition, Bray allowed Packard to retain the “JT Packard & Associates” name and to continue functioning as Bray's subsidiary and a stand-alone entity.

Approximately two years after the acquisition, 29 of Packard's employees filed a lawsuit against both Packard and Bray, alleging that Packard violated the FLSA by failing to provide overtime pay as is required under the Act. Only months later on May 28, 2008, Bray, Packard's parent company, defaulted on a $60 million loan obtained from the Canadian Imperial Bank of Commerce. Packard, the subsidiary, had guaranteed the loan. In an effort to pay off as much of the $60 million debt as possible, Bray assigned its assets ' namely, its stock in Packard ' to an affiliate bank which, in turn, auctioned them off.

Thomas & Betts Power Solutions, LLC (Thomas & Betts) was the high bidder and paid approximately $22 million for Packard's assets. As a condition of the transfer, the parties agreed that the transfer would be “free and clear of all Liabilities” that the buyer (Thomas & Betts) had not assumed. Moreover, the agreement specified that Thomas & Betts would not assume any of Packard's potential liabilities arising from the ongoing FLSA litigation with its employees.

In August 2010, the plaintiffs filed a Motion to Substitute Party under Rule 25 of the Federal Rules of Civil Procedure, seeking to have the District court include Thomas & Betts, the now owner of the business, as a defendant. Applying the federal successor liability doctrine to the FLSA, the District Court found that Thomas & Betts was, indeed, a successor and issued a substitution order.

Thomas & Betts appealed to the Seventh Circuit Court of Appeals, arguing that the District Court's decision to grant Teed's substitution motion (and consequently to allow Thomas & Betts to be named defendants) was contrary to Wisconsin's state law governing successor liability. Specifically, Thomas & Betts argued that because the agreement expressly provided that the company was to be “free and clear of all liabilities” and explicitly disclaimed any liability associated with the pending FLSA litigation, Thomas & Betts ' as the acquiring company ' should not be held liable for Packard's alleged FLSA violations.

Moreover, Thomas & Betts argued that it was not “an employer” as defined by the FLSA and, as such, it could not be held responsible for the violations of its predecessor, Packer.

The Seventh Circuit Applies the Federal Standard

As discussed above, a purchaser is assumed not to acquire the liabilities of the predecessor as a part of the transaction unless doing so is clearly articulated in the purchase arrangement. The court acknowledged this general rule and also that the agreement in question explicitly sought to exculpate Thomas & Betts from any liability from the pending FLSA litigation. Why, then, did the court find that Thomas & Betts should be held liable for Packer's failure to properly pay its employees for overtime?

First, the Court of Appeals had to decide whether federal or state standards governing successor liability should apply to liabilities based on violations of the FLSA. The court opined, “[T]hat when liability is based on a violation of a federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied that is more favorable to plaintiffs than most state-law standards to which the court might otherwise look.” 711 F.3d at 764. The court went on to identify other employment-related acts in which various Courts of Appeals and, indeed, the Supreme Court applied the federal common law standard of successor liability. Such acts include:

• The Labor Management Relations Act in John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543 (1964);
• The National Labor Relations Act in Golden State Bottling Co. v. NLRB, 414 U.S. 168 (1973);
• Title VII in Wheeler v. Snyder Buick, Inc., 794 F.2d 1228 (7th Cir.1986);
• The Employee Retirement Income Security Act in Upholsterers' Int'l Union Pension Fund v. Artistic Furniture, 920 F.2d 1323 (7th Cir.1990);
• The Age Discrimination in Employment Act in EEOC v. G-K-G, Inc., 39 F.3d 740 (7th Cir.1994); and
• The Family Medical Leave Act in Sullivan v. Dollar Tree Stores, Inc., 623 F.3d 770 (9th Cir.2010).

The court concluded that “there is an interest in legal predictability that is served by applying the same standard of successor liability either to all federal statutes that protect employees or to none ' and 'none' is not an attractive option at our level of the judiciary, given all the cases we cited earlier.” 711 F.3d at 767. Applying this logic, the court dispensed with Thomas & Betts's argument that it is not an “employer” under the Act. Such an argument would be equally true in cases involving other federal acts, and as noted above, courts do impose successor liability in such cases.

The court went on to suggest 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 ' unless there are good reasons to withhold such liability.” 711 F.3d at 766. The court analyzed the following factors in order to determine whether successor liability was appropriate in the case of Thomas & Betts:

• Notice: First the court found that Thomas & Betts “unquestionably” had notice of the pending lawsuit when it purchased Packard.
• Pre-Sale Relief: The court noted that because Packard and Bray would have been unable to provide the relief sought in the lawsuit before the sale (due to their insolvency resulting from the loan default), the predecessors would not have been able to provide the plaintiffs the relief being sought. The court stated that successor liability could be described as a “windfall” to the plaintiffs and chalked this factors up to Thomas & Betts and against successor liability.
• Post-Sale Relief: The court found that because Packard (as a predecessor) would be unable to provide any relief to the plaintiffs after the sale, the plaintiff's claims would be worthless without successor liability. As such, the court found that this factor favored imposing liability upon Thomas & Betts.
• Successor's Ability to Provide Relief: The court found that Thomas & Betts, as a predecessor, was financially able to provide relief.
• Continuity of Operations: The court stated that “nothing really has changed” insofar as the company's post-sale operations were concerned. This supported a finding of successor liability.

The court continued with a lengthy discussion regarding Packard's pre-sale financial situation. The court addressed various arguments and hypotheticals set forth by Thomas & Betts: that had the company been sold piecemeal, there would be no successor liability and, as such, an award to the plaintiffs would be a windfall; that allowing such claims to survive would upset a trustee's decision to sell assets piecemeal or as a going concern; and that allowing successor liability would lead to a “flurry of lawsuits” from opportunistic workers seeking to find a solvent defendant for frivolous lawsuits.

In finding against Thomas & Betts, the court concluded, “With these chimeras set to one side, there is no good reason to reject successor liability in this case ' the default rule in suits to enforce federal labor or employment laws.” 711 F.3d at 769. The Court of Appeals found for Teed and the plaintiffs were entitled to the $500,000 settlement to which the parties had agreed pending the outcome of the appeal.

Fallout and Lessons Learned

The extent to which the Seventh Circuit's holding in Teed will be adopted by other Circuits remains unclear. At least one decision from the Southern District of Florida embraces the court's rationale in Teed. See Cuervo v. Airport Servs., Inc., 12-20608-CIV, 2013 WL 6170661 (S.D. Fla. Nov. 22, 2013) (finding a cause of action in the Eleventh Circuit for successor liability under the FLSA). Regardless, the Teed decision is important for parties (and attorneys) on both sides of the aisle.

First, an acquiring company needs to be cognizant of any pending FLSA litigation being faced by a seller. Incorporating disclaiming language into an agreement is simply not enough to avoid liability. A company must perform a full analysis of the factors implicated by the federal standard for determining successor liability. More to the point, any anticipated exposure resulting from pending FLSA litigation should be incorporated into an offer price.

From the employee's perspective, the decision in Teed gives hope to plaintiffs that defendants in FLSA actions cannot escape liability simply by selling off their assets. The violating company will pay for its infractions through a decreased sale price and a plaintiff, if successful in proving his case, will receive compensation for the predecessor's FLSA violations.

Tom Harrington and R. Scott Oswald are principals of The Employment Law Group, P.C., a law firm that represents employees who claim wrongdoing by their employers, including violations of the Fair Labor Standards Act. Based in Washington, DC, the firm takes cases nationwide.

In March 2013, the Seventh Circuit Court of Appeals, in an opinion written by Judge Richard A. Posner, decided the case of Teed v. Thomas & Betts Power Solutions, LLC , 711 F.3d 763, 764 (7th Cir. 2013). In a win for employees, the court held that the more plaintiff-friendly federal common law test is appropriate in determining whether an acquiring company assumes the liabilities associated with pending litigation under the Fair Labor Standards Act (FLSA).

The implications of the ruling are clear: Where one company seeks to acquire the assets of another, a simple disclaimer of liability will not be sufficient. Due diligence requires that the successor company closely examine any pending employment-related litigation of the seller and determine how a particular sale implicates the successor liability test under the federal common law.

In addition, and as is relevant to plaintiffs bringing claims under the FLSA, a company cannot escape liability simply by selling off its assets. The violator will pay for its infractions through a reduced sale price and a plaintiff, if successful in proving his cases, will receive compensation for the violations.

An Illustrative Hypothetical

Imagine that a group of employees brings a lawsuit against their employer, 123 Corporation, for failing to properly pay overtime wages as is required under the FLSA. The parties are embroiled in litigation when 123 Corporation takes a turn for the worse.

A competitor, ABC Corp., sees an opportunity. As in-house counsel for ABC Corp., your employer asks you whether the company can purchase 123 Corporation's assets without exposing itself to the potential liability associated with the employees' claims arising under FLSA. “No problem,” you think to yourself. “Most states limit successor liability to sales in which a buyer expressly (or implicitly) assumes the selling company's liabilities.” You rattle off an e-mail recommending that your employer include language that ABC Corp. will assume 123 Corporation's assets “free and clear of all liabilities” and incorporate a condition that ABC Corp. will not assume any of the liabilities associated with 123's pending FLSA litigation.

Prior to March 2013, your analysis may have been correct. However, in a major win for employees, the United States Court of Appeals for the Seventh Circuit decided the case of Teed v. Thomas & Betts Power Solutions, LLC, and reaffirmed that where a liability is based on a violation of a federal statute relating to labor relations or employment ' here, in the context of the FLSA ' the more plaintiff-friendly common law standard of successor liability is to be applied.

A Primer on Successor Liability in Asset Sales

Before discussing the specifics of the Teed v. Thomas & Betts Power Solutions, LLC decision, it is important to understand the basics of successor liability, specifically for asset sales. There are various means by which one company can merge with or acquire the assets of another. In one instance, an acquiring company may seek to purchase a seller's stock or, in another, desire to merge with another company.

Asset sales are a particular type of transaction in which the purchaser picks and chooses those assets and liabilities that it wishes to purchase or assume. Generally speaking, a purchaser is presumed not to acquire the liabilities of the predecessor as a part of the transaction unless doing so is clearly articulated in the purchase arrangement. The rationale for the rule is clear. By allowing an acquiring company to identify only those liabilities that it will assume as part of a deal, the acquiring company can reduce the price offered to the seller. This has, historically, made asset sales an attractive option for an acquiring company insofar as it could limit its exposure to unwanted liabilities by incorporating “disclaiming language” into an agreement.

A Factual Overview of Teed

The facts giving rise to the litigation in Teed mirror those set forth in the above hypothetical. In 2006, S.R. Bray Corporation (Bray) acquired the stock of JT Packard & Associates (Packard). After the acquisition, Bray allowed Packard to retain the “JT Packard & Associates” name and to continue functioning as Bray's subsidiary and a stand-alone entity.

Approximately two years after the acquisition, 29 of Packard's employees filed a lawsuit against both Packard and Bray, alleging that Packard violated the FLSA by failing to provide overtime pay as is required under the Act. Only months later on May 28, 2008, Bray, Packard's parent company, defaulted on a $60 million loan obtained from the Canadian Imperial Bank of Commerce. Packard, the subsidiary, had guaranteed the loan. In an effort to pay off as much of the $60 million debt as possible, Bray assigned its assets ' namely, its stock in Packard ' to an affiliate bank which, in turn, auctioned them off.

Thomas & Betts Power Solutions, LLC (Thomas & Betts) was the high bidder and paid approximately $22 million for Packard's assets. As a condition of the transfer, the parties agreed that the transfer would be “free and clear of all Liabilities” that the buyer (Thomas & Betts) had not assumed. Moreover, the agreement specified that Thomas & Betts would not assume any of Packard's potential liabilities arising from the ongoing FLSA litigation with its employees.

In August 2010, the plaintiffs filed a Motion to Substitute Party under Rule 25 of the Federal Rules of Civil Procedure, seeking to have the District court include Thomas & Betts, the now owner of the business, as a defendant. Applying the federal successor liability doctrine to the FLSA, the District Court found that Thomas & Betts was, indeed, a successor and issued a substitution order.

Thomas & Betts appealed to the Seventh Circuit Court of Appeals, arguing that the District Court's decision to grant Teed's substitution motion (and consequently to allow Thomas & Betts to be named defendants) was contrary to Wisconsin's state law governing successor liability. Specifically, Thomas & Betts argued that because the agreement expressly provided that the company was to be “free and clear of all liabilities” and explicitly disclaimed any liability associated with the pending FLSA litigation, Thomas & Betts ' as the acquiring company ' should not be held liable for Packard's alleged FLSA violations.

Moreover, Thomas & Betts argued that it was not “an employer” as defined by the FLSA and, as such, it could not be held responsible for the violations of its predecessor, Packer.

The Seventh Circuit Applies the Federal Standard

As discussed above, a purchaser is assumed not to acquire the liabilities of the predecessor as a part of the transaction unless doing so is clearly articulated in the purchase arrangement. The court acknowledged this general rule and also that the agreement in question explicitly sought to exculpate Thomas & Betts from any liability from the pending FLSA litigation. Why, then, did the court find that Thomas & Betts should be held liable for Packer's failure to properly pay its employees for overtime?

First, the Court of Appeals had to decide whether federal or state standards governing successor liability should apply to liabilities based on violations of the FLSA. The court opined, “[T]hat when liability is based on a violation of a federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied that is more favorable to plaintiffs than most state-law standards to which the court might otherwise look.” 711 F.3d at 764. The court went on to identify other employment-related acts in which various Courts of Appeals and, indeed, the Supreme Court applied the federal common law standard of successor liability. Such acts include:

• The Labor Management Relations Act in John Wiley & Sons, Inc. v. Livingston , 376 U.S. 543 (1964);
• The National Labor Relations Act in Golden State Bottling Co. v. NLRB , 414 U.S. 168 (1973);
• Title VII in Wheeler v. Snyder Buick, Inc. , 794 F.2d 1228 (7th Cir.1986);
• The Employee Retirement Income Security Act in Upholsterers' Int'l Union Pension Fund v. Artistic Furniture , 920 F.2d 1323 (7th Cir.1990);
• The Age Discrimination in Employment Act in EEOC v. G-K-G, Inc. , 39 F.3d 740 (7th Cir.1994); and
• The Family Medical Leave Act in Sullivan v. Dollar Tree Stores, Inc. , 623 F.3d 770 (9th Cir.2010).

The court concluded that “there is an interest in legal predictability that is served by applying the same standard of successor liability either to all federal statutes that protect employees or to none ' and 'none' is not an attractive option at our level of the judiciary, given all the cases we cited earlier.” 711 F.3d at 767. Applying this logic, the court dispensed with Thomas & Betts's argument that it is not an “employer” under the Act. Such an argument would be equally true in cases involving other federal acts, and as noted above, courts do impose successor liability in such cases.

The court went on to suggest 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 ' unless there are good reasons to withhold such liability.” 711 F.3d at 766. The court analyzed the following factors in order to determine whether successor liability was appropriate in the case of Thomas & Betts:

• Notice: First the court found that Thomas & Betts “unquestionably” had notice of the pending lawsuit when it purchased Packard.
• Pre-Sale Relief: The court noted that because Packard and Bray would have been unable to provide the relief sought in the lawsuit before the sale (due to their insolvency resulting from the loan default), the predecessors would not have been able to provide the plaintiffs the relief being sought. The court stated that successor liability could be described as a “windfall” to the plaintiffs and chalked this factors up to Thomas & Betts and against successor liability.
• Post-Sale Relief: The court found that because Packard (as a predecessor) would be unable to provide any relief to the plaintiffs after the sale, the plaintiff's claims would be worthless without successor liability. As such, the court found that this factor favored imposing liability upon Thomas & Betts.
• Successor's Ability to Provide Relief: The court found that Thomas & Betts, as a predecessor, was financially able to provide relief.
• Continuity of Operations: The court stated that “nothing really has changed” insofar as the company's post-sale operations were concerned. This supported a finding of successor liability.

The court continued with a lengthy discussion regarding Packard's pre-sale financial situation. The court addressed various arguments and hypotheticals set forth by Thomas & Betts: that had the company been sold piecemeal, there would be no successor liability and, as such, an award to the plaintiffs would be a windfall; that allowing such claims to survive would upset a trustee's decision to sell assets piecemeal or as a going concern; and that allowing successor liability would lead to a “flurry of lawsuits” from opportunistic workers seeking to find a solvent defendant for frivolous lawsuits.

In finding against Thomas & Betts, the court concluded, “With these chimeras set to one side, there is no good reason to reject successor liability in this case ' the default rule in suits to enforce federal labor or employment laws.” 711 F.3d at 769. The Court of Appeals found for Teed and the plaintiffs were entitled to the $500,000 settlement to which the parties had agreed pending the outcome of the appeal.

Fallout and Lessons Learned

The extent to which the Seventh Circuit's holding in Teed will be adopted by other Circuits remains unclear. At least one decision from the Southern District of Florida embraces the court's rationale in Teed. See Cuervo v. Airport Servs., Inc., 12-20608-CIV, 2013 WL 6170661 (S.D. Fla. Nov. 22, 2013) (finding a cause of action in the Eleventh Circuit for successor liability under the FLSA). Regardless, the Teed decision is important for parties (and attorneys) on both sides of the aisle.

First, an acquiring company needs to be cognizant of any pending FLSA litigation being faced by a seller. Incorporating disclaiming language into an agreement is simply not enough to avoid liability. A company must perform a full analysis of the factors implicated by the federal standard for determining successor liability. More to the point, any anticipated exposure resulting from pending FLSA litigation should be incorporated into an offer price.

From the employee's perspective, the decision in Teed gives hope to plaintiffs that defendants in FLSA actions cannot escape liability simply by selling off their assets. The violating company will pay for its infractions through a decreased sale price and a plaintiff, if successful in proving his case, will receive compensation for the predecessor's FLSA violations.

Tom Harrington and R. Scott Oswald are principals of The Employment Law Group, P.C., a law firm that represents employees who claim wrongdoing by their employers, including violations of the Fair Labor Standards Act. Based in Washington, DC, the firm takes cases nationwide.