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2 Recent Decisions Apply Common Law Test for Successor Liability to FLSA Claims and Hold Successor Companies Liable
As previously discussed here, the law regarding successor liability in the context of FLSA claims continues to develop. In two recent decisions, the Seventh Circuit and a District Court from within the Sixth Circuit joined the growing majority of courts on the issue and held that the common law test, applicable to other types of employment law claims, also applies to determine whether a successor corporation is liable for the FLSA violations of its predecessor. Although the cases are fact-specific, they provide some insight into what factors courts will examine to decide whether it is equitable to hold a successor company liable.
M.D.Tenn.: DirecTV Has “Successor Liability” Where Sham Foreclosure Sale
Thompson v. Bruister and Associates, Inc.
In the first case, the court held that DirecTV was liable for the FLSA violations of its predecessor, a company exclusively engaged in the business of performing installations for DirecTV pursuant to sub-contracts with DirecTV, due to the circumstances under which DirecTV “purchased” the prior company. Significantly, following its default on its loan agreement with its bank, BAI had no place to turn for funding. As a result, DirecTV agreed to advance BAI funds to cover payroll and other operating expenses, because it was in DirecTV’s interest to keep its installer running. Shortly thereafter, the companies began discussing a deal whereby DirecTV would purchase BAI outright. However, after performing due diligence of the company via an extensive document review, DirecTV decided not to purchase BAI because it was “so far under water,” and had a “whole book of litigation.” Instead, DirecTV began reviewing other alternatives to acquiring the assets of BAI. Ultimately, representatives of BAI, DirecTV, and BAI’s bank met and tentatively arrived at a preliminary three-way agreement. Under the agreement, BAI would pay MB Financial $4 million; DirecTV would purchase the remaining loan obligations from MB Financial for $4.7 million, and, in exchange, MB Financial would assign DirecTV all of its rights as a secured creditor under the loan agreement. By this time, DirectTV had already advanced $5.5 million to BAI for payroll and other expenses. Ultimately the parties executed a formal agreement and DirecTV acquired BAI’s loan obligations. Thereafter, DirecTV scheduled a foreclosure sale for August 11, 2008. The purpose of the sale was to extinguish claims to BAI’s collateral. A $1 million figure was set as the minimum price for the collateral. No HSPs were invited to the sale, and no other parties bid at the sale. DirecTV purchased the collateral and, while no money exchanged hands, one million dollars was credited against the money BAI owed DirecTV. As of the time of the foreclosure sale, BAI was insolvent, and it remaned insolvent.
Following the foreclosure sale, DirecTV, Inc. conducted business out of BAI’s locations. Further, the team working on the BAI transition post-foreclosure included personnel from DirectTV and its subsidiary. Additionally DirecTV took over BAI’s facilities, including its warehouses, corporate offices, call centers, and storage units, and DirectTV operated out of those facilities. BAI provided DirecTV with the names and addresses of all its employees (as provided for under the HSPs), and the companies worked together to ensure a “smooth” and “seamless” transition for employees who were terminated by BAI and subsequently hired by DirecTV. Before the foreclosure sale, DirecTV sent notices of the impending change to all BAI employees (except those at Gadsden), including: (1) a new hire packet with employment application and payroll forms; (2) frequently asked questions about the transition; (3) an offer letter; and (4) retention bonus information. Additionally, DirectTV set up a live hotline to field BAI employees’ questions, and, during the first week of August 2008, sent human resources employees to each of the 15 primary BAI sites to conduct orientation sessions, respond to questions, help individuals complete forms, conduct new hire orientations, and oversee drug and background testing. Similarly, of the former 1,100 or so employees of BAI, 180 Connect hired 1,005 of them, including a number of management and upper level management employees, and more than 80 of the Plaintiffs in this action. BAI’s principle was hired as a consultant by DirectTV and paid $861,516.16 to serve as a consultant to help with the transition for the first year, working out the same office that he had used while serving as President of BAI. Most of BAI’s installers that were hired by DirecTV continued doing substantially the same jobs. DirecTV did not make any broad changes to jobs and functions, job titles, job responsibilities, or the technicians’ supervisors, and BAI’s hourly scale and current pay status and rates for the employees remained in place. DirecTV also honored vacation time and other benefits employees had accrued during their employment with BAI, and used former BAI employees’ hire dates with BAI as their effective hire date with DirecTV for tenure and benefits purposes.
As a result of the foreclosure sale, DirecTV acquired an interest in the collateral listed in Section 6.1 of the Loan and Security Agreement, including all of BAI’s property, such as accounts, inventory, goods (furniture and fixtures), software, securities, chattel paper, and insurance policies and proceeds. DirecTV was provided access to historical information on personal computers and servers used in BAI’s business, and migrated former BAI computers into its network. DirecTV also assumed BAI’s data and voice circuits and internet domains, and continued to use all circuit that were in place and working. After DirecTV formed a new internet domain for DirecTV Homes services, DTVHS.com, the former BAI locations were transferred to that new domain name.
By separate contract effective August 11, 2008, DirecTV assumed the leases for all field service personnel fleet vehicles, and continued to use the same installation equipment, including the tools and equipment stored on the trucks, set-top boxes, satellite dishes, and other equipment, as well as vehicles acquired from BAI following the foreclosure. BAI also assigned DirecTV various service contracts, including a contract with Total Design Solutions for inventory and personnel services, a contract with ONTOP Systems, Inc. for a Summit financial application, and a contract with Prime Alert for security monitoring. BAI also assigned to DirecTV its rights under all insurance policies for which DirecTV was named as an additional insured in accordance with the terms of the Home Service Provider Agreements.
Significantly, following the foreclosure sale, there was no interruption of the installation and repair services to DirecTV customers. As before, work was assigned to the technicians through the Siebel system, which DirecTV used to process customer accounts and assign work. DirecTV was also provided with access to BAI’s historical customer information.
After discussing the history and reasoning for successor liability in employment law cases, the court laid out the factors:
“[T]he appropriateness of successor liability depends on whether the imposition of such liability would be equitable.” Cobb v. Contract Transp., Inc., 452 F.3d 543, 553–54 (6th Cir.2006). “Courts that have considered the successorship question in a labor context have found a multiplicity of factors to be relevant. These include: 1) whether the successor company had notice of the charge, 2) the ability of the predecessor to provide relief, 3) whether there has been a substantial continuity of business operations, 4) whether the new employer uses the same plant, 5) whether he uses the same or substantially the same work force, 6) whether he uses the same or substantially the same supervisory personnel, 7) whether the same jobs exist under substantially the same working conditions, 8) whether he uses the same machinery, equipment and methods of production and 9) whether he produces the same product.” MacMillan, 503 F.2d at 1094.
Applying these factors, the court concluded, “[c]onsidering those factors, as well as the overall equities, the Court is persuaded by the evidence which has been presented that DirectTV, as a matter of law, is liable as a successor employer to BAI.”
Click Thompson v. Bruister and Associates, Inc. to read the entire Memorandum opinion on the parties’ cross-motions for summary judgment.
7th Cir.: Common Law Successor Liability Test Applicable; Successor Company Liable
Teed v. Thomas & Betts Power Solutions, L.L.C.
Perhaps of more significance, the 7th Circuit, only the second circuit court to take up the issue recently held the common law test for successor liability to FLSA claims as well. In this case, the court summarized the salient facts as follows:
Packard provided, and continues under its new ownership by Thomas & Betts to provide, maintenance and emergency technical services for equipment designed to protect computers and other electrical devices from being damaged by power outages. All of Packard’s stock was acquired in 2006 by Bray, though Packard retained its name and corporate identity and continued operating as a stand-alone entity. The workers’ FLSA suit was filed two years later.
Several months after it was filed, Bray defaulted on a $60 million secured loan that it had obtained from the Canadian Imperial Bank of Commerce and that Packard, Bray’s subsidiary, had guaranteed. To pay as much of the debt to the bank as it could, Bray assigned its assets—including its stock in Packard, which was its principal asset—to an affiliate of the bank. The assets were placed in a receivership under Wisconsin law and auctioned off, with the proceeds going to the bank. Thomas & Betts was the high bidder at the auction, paying approximately $22 million for Packard’s assets. One condition specified in the transfer of the assets to Thomas & Betts pursuant to the auction was that the transfer be “free and clear of all Liabilities” that the buyer had not assumed, and a related but more specific condition was that Thomas & Betts would not assume any of the liabilities that Packard might incur in the FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard much as Bray had done (and under the same name, as we noted), and indeed offered employment to most of Packard’s employees.
Noting that Wisconsin state law, if applicable, would serve to bar successor liability in the case, the court examined the equity of applying successor liability under federal common law instead. Holding the federal common law test applicable, the court reasoned:
The idea behind having a distinct federal standard applicable to federal labor and employment statutes is that these statutes are intended either to foster labor peace, as in the National Labor Relations Act, or to protect workers’ rights, as in Title VII, and that in either type of case the 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 *767 because the net value of the assets will have been diminished by the associated liabilities.
There are better arguments against having a federal standard for labor and employment cases, besides the general objections to multifactor tests that we noted earlier: applying a judge-made standard amounts to judicial amendment of the statutes to which it’s applied by adding a remedy that Congress has not authorized; implied remedies (that is, remedies added by judges to the remedies specified in statutes) have become disfavored; and borrowing state common law, especially a common law principle uniform across the states, to fill gaps in federal statutes is an attractive alternative to creating federal common law, an alternative the Supreme Court adopted for example in United States v. Bestfoods, 524 U.S. 51, 62–64, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998), in regard to the liability of a corporation under the Superfund law for a subsidiary’s violations. But Thomas & Betts does not ask us to jettison the federal standard; it just asks us not to “extend” it to the Fair Labor Standards Act. Yet none of the concerns that we’ve just listed regarding the filling of holes in a federal statute with federal rather than state common law looms larger with respect to the Fair Labor Standards Act than with respect to any other federal labor or employment statute. The issue is not extension but exclusion.
Addressing and rejecting the defendants’ suggestion that enforcing successor liability against the purchaser of an insolvent company would discourage the insolvent company from selling itself (or the successor from making such a purchase), the court explained:
there is no good reason to reject successor liability in this case—the default rule in suits to enforce federal labor or employment laws. (For remember that the successor’s disclaimer of liability is not a good reason in such a case.) Packard was a profitable company. It went on the auction block not because it was insolvent but because it was the guarantor of its parent’s bank loan and the parent defaulted. Had Packard been sold before Bray got into trouble, imposition of successor liability would have been unexceptionable; Bray could have found a buyer for Packard willing to pay a good price even if the buyer had to assume the company’s FLSA liabilities. Those liabilities were modest, after all. Remember that the parties have agreed to settle the workers’ suit (should we affirm the district court) for only about $500,000, though doubtless there was initial uncertainty as to what the amount of a judgment or settlement would be; in addition, Thomas & Betts incurred attorneys’ fees to defend against the suit. Nevertheless had Packard been sold before Bray got into trouble, imposition of successor liability would have been unexceptionable, and we have not been given an adequate reason why its having been sold afterward should change the result.
Click Teed v. Thomas & Betts Power Solutions, L.L.C. to read the court’s entire Decision.
S.D.N.Y.: Where Successor Liability Alleged, “Successor in Interest” Need Not Meet the $500,000 Threshold As Long as the Previous Employer Did
Alvarez v. 40 Mulberry Restaurant, Inc.
This case was before the court on the defendant’s motion for summary judgment. Plaintiff alleged that the defendant at issue was a “successor in interest” to his actual employers, whom he actively worked for and whose failure to pay him pursuant to the FLSA gave rise to his claims. The defendant alleged to be the “successor in interest” such that it had derivative liability (of plaintiff’s actual employers), asserted that the case was due to be dismissed against it, because plaintiff could not show that it grossed $500,000.00 or more in annual sales during the periods relevant to the claim. Explaining that this was an incorrect reading of the law, the court reasoned that the successor employer was covered, so long as the plaintiff’s actual employers were subject to enterprise coverage under the FLSA. However, because neither the plaintiff, nor the defendants addressed the issue of whether the plaintiffs actual employers were covered enterprises, the court remanded the case for further discovery on this issue.
Discussing the issue, the court explained:
Defendants 40 Mulberry and Chin claim that, because it has not been established that AR Restaurant has ever grossed $500,000 or more in annual sales, Alvarez’s FLSA claim must be dismissed. That is incorrect.
The FLSA covers only those workers employed by an “enterprise” that is “engaged in commerce.” 29 U.S.C. § 207. “An entity constitutes an enterprise where ‘the related activities performed (either through unified operation or common control) by any person or persons [are] for a common business purpose.’ ” Rodriguez v. Almighty Cleaning, 784 F.Supp.2d 114, 121 (E.D.N.Y.2011) (quoting 29 U.S.C. § 203(r)). An enterprise is “engaged in commerce or in the production of goods for commerce” if, inter alia, it: (1) “has employees engaged in commerce or in the production of goods for commerce;” or “has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person;” and (2) its “annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated).” 29 U.S.C. § 203(s)(1)(A)(i)-(ii).
Defendants argue that, because the summary judgment record would not permit a fact finder to conclude that AR Restaurant has ever grossed $500,000 or more in annual sales, Alvarez cannot sue 40 Mulberry and Chin under the FLSA. But that does not logically follow. It is correct that, on the record before the Court, AR Restaurant’s financial condition would prevent an employee from suing under the FLSA based on work done at AR Restaurant. But Alvarez is not seeking to impose liability on 40 Mulberry and Chin based on AR Restaurant’s activities. Instead, he is claiming that, during his employment at the former Asia Roma, which ended in July 2010, the former Asia Roma (1) had $500,000 or more in annual sales; and (2) violated the FLSA’s substantive obligations as to overtime and other pay. He further alleges that defendants 40 Mulberry and Chin are responsible for those violations as successors in interest. Assuming arguendo that Asia Roma had $500,000 in annual revenues required by the FLSA in, say, 2009, the fact that AR Restaurant has not had such revenues would not shield defendants, if properly held to be responsible for Asia Roma’s conduct, from liability for FLSA violations during 2009. The financial condition of AR Restaurant is thus not determinative. The relevant question is, instead, whether Asia Roma was a qualifying “enterprise engaged in commerce” when it employed Alvarez, and whether 40 Mulberry and Chin are answerable for Asia Roma’s liabilities.
It does not appear that the parties have focused their discovery efforts on the critical question of whether Asia Roma had the requisite sales during Alvarez’s employment. However, this question is potentially dispositive, and the Court believes it must be addressed promptly.
The Court, accordingly, grants the parties one month to conduct further discovery—by means including, but not limited to, subpoenas to Asia Roma, Chan, Lee, or any other relevant party, person, or entity—on the question of whether Asia Roma constituted an “enterprise engaged in commerce” during the period of Alvarez’s employment. After the close of discovery, the Court will afford the defendants two weeks to move for summary judgment on the issue of whether Asia Roma was an “enterprise engaged in commerce” during the years it employed Alvarez. If summary judgment is granted for the defendants on that ground, such that Alvarez’s FLSA claims cannot go forward, the Court expects to dismiss, without prejudice, his state law claims. If, on the other hand, the FLSA sales threshold is met by competent evidence for all or some of these years, discovery may then go forward on the remaining issues in the case.
The court also denied the defendants’ motion for summary judgment to the extent they sought a finding that the subsequent business was not a successor in interest, reasoning that under the relevant tests (the traditional common law test OR the “substantial continuity test”) a finder of fact could certainly find that the subsequent business was a successor in interest to plaintiff’s actual employers.
Click Alvarez v. 40 Mulberry Restaurant, Inc. to read the entire Opinion & Order.
When an employee is employed by a company, as long as that company is an enterprise covered by the FLSA, it is subject to the wage and hour requirements of the FLSA. But what about when the company alleged to have violated the FLSA changes hands before its employees have initiated a lawsuit or claim for their unpaid wages. Does the successor company, who acquires the assets of the alleged violator have successor liability under the FLSA? Two recent decisions discuss this very issue. However, given the factually intensive nature of the inquiry, as discussed below, both courts denied the respective defendants’ motions based on issues of fact.
Paschal v. Child Development Inc.
In the first case, Paschal v. Child Development, Inc., the plaintiffs’ subsequent employer (“CDIHS”) sought judgment as a matter of law at the pleading stage of the case, asserting that it could not be plaintiffs’ employer under the FLSA, because it was not in existence when the plaintiffs’ claims arose. In denying the subsequent employer’s motion as premature, the court explained the parameters for successor liability in FLSA cases.
The court explained that the test for liability of a successor company under the FLSA requires the examination of several elements:
The doctrine of successor liability has [ ] been recognized to apply to FLSA violations.” The question of successor liability is difficult based on the “myriad [of] factual circumstances and legal contexts in which it can arise;” therefore, the court must give emphasis on the facts of each case as it arises. A finding of successorship involves two essential inquiries: (1) whether there is continuity of the business; and (2) did the successor know of the violations at the time it took over the business. A court may also consider whether: (a) the same plant is being used; (b) the employees are the same; (c) the same jobs exist; (d) the supervisors are the same; (e) the same equipment and methods of production are being used; and (f) the same services are being offered.
In their Reply, CDIHS argues that Plaintiffs failed to plead any facts that put them in the category of being a successor in interest. Specifically, they argue that “[t]he business was not transferred, nor were employees or property transferred. There was no purchase of the business in any sense.” However, Defendants fail to address the two essential questions of whether they had notice of the violations and whether there was continuity of the business… Plaintiffs argue that “[s]ubstantial continuity of operations between CDI and CDIHS is a given.” They point to CDIHS’s website that indicates all of the efforts on CDIHS’s behalf to maintain the continuity of program. They also argue that based on CDIHS’s intervention, they were “aware of CDI’s potential liability for FLSA and ERISA violations.”
Ultimately, the court denied CDIHS’ motion as premature.
Click Paschal v. Child Development Inc. to read the entire Order Denying Motion to Dismiss.
Battino v. Cornelia Fifth Ave., LLC
In the second case, Battino v. Cornelia Fifth Ave., LLC, a different court applied a similar test to that discussed above. However, because the Battino case was before the court on the defendants’ motion for summary judgment (rather than a motion to dismiss at the pleading stage), it provides a greater insight into how courts apply the multi-factor test in ascertaining whether there is successor liability under the FLSA. In Battino, the court denied the subsequent employers’ motion for summary judgment holding that issues of fact precluded a finding in the defendants’ favor on this issue. As discussed here, the court primarily focused its inquiry on the second factor enunciated above, whether the successor knew of the violations at the time it took over the business.
Regarding the specific test applied by the Battino court, the court explained:
The substantial continuity test in the labor relations context looks to “whether the new company has acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessor’s business operations.” Fall River, 482 U.S. at 43 (citation and quotation marks omitted). Courts applying this test typically look at the nine factors enunciated by the Sixth Circuit in the Title VII discrimination context in EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086, 1094 (6th Cir.1974): (1) whether the successor company had notice of the charge or pending lawsuit prior to acquiring the business or assets of the predecessor; (2) the ability of the predecessor to provide relief; (3) whether there has been a substantial continuity of business operations; (4) whether the new employer uses the same plant; (5) whether he uses the same or substantially the same work force; (6) whether he uses the same or substantially the same supervisory personnel; (7) whether the same jobs exist under substantially the same working conditions; (8) whether he uses the same machinery, equipment, and methods of production; and (9) whether he produces the same product. Musikiwamba, 760 F.2d at 750 (paraphrasing MacMillan Bloedel ). “No one factor is controlling, and it is not necessary that each factor be met to find successor liability.” EEOC v. Barney Skanska Const. Co., 99 Civ.2001, 2000 WL 1617008, at *2 (S .D.N.Y. Oct. 27, 2000) (citation omitted).
In denying the defendants’ motion, the court held that there were issues of fact precluding same, because the successor company could not be said to be an “innocent purchaser,” inasmuch as one of its principals was also a principal in the prior company.
The court explained:
This is not a case of an “innocent purchaser” who “exercised due diligence and failed to uncover evidence” of any potential liability. Musikiwamba, 760 F.2d at 750, 752. Rather, SCFAL was fully aware of the potential liabilities to the unpaid employees and attempted to negotiate the APA accordingly. Thus, the Court is unable to conclude as a matter of law that Canizales cannot be liable as a successor to Cornelia Fifth because of a lack of notice of the claim to SCFAL.
Click Battino v. Cornelia Fifth Ave., LLC to read the entire Opinion and Order.
Chao v. Concrete Management Resources, L.L.C.
Plaintiff filed this wage and hour suit against defendants alleging violations of the overtime and recordkeeping provisions of the Fair Labor Standards Act (FLSA). In her complaint, plaintiff alleged that defendant Concrete Management Resources, L.L.C. (CMR) was formerly known as Concrete Masonry & Restoration, L.L.C. Defendant CMR moved to dismiss the complaint on the grounds that it was not a proper party to the action. Specifically, CMR contended that it has never operated as Concrete Masonry & Restoration, L.L.C. and that CMR is a separate legal entity from Concrete Masonry & Restoration, L.L.C. CMR contended that any FLSA violations were committed by Concrete Masonry & Restoration., L.L.C. and that CMR has no relationship with that entity.
The Court entered an Order permitting Plaintiff leave to file an Amended Complaint, asserting successor liability, stating, “[t]he court believes that the Tenth Circuit, if faced with the issue, would conclude that successor liability exists under the FLSA. Indeed, the Circuit had little difficulty extending the doctrine to the Title VII context-long before the Ninth Circuit’s decision in Steinbach. Trujillo, 694 F.2d at 224-25. In doing so, the Circuit emphasized that the “same policy considerations” supporting the application of the doctrine in the labor law context mandated the application of the doctrine to remedy violations of Title VII. Id. at 224. The Circuit also cautioned, however, that “successor liability is not automatic but should be determined on a case by case basis” through application of the ” MacMillan factors,” including whether the successor company had notice of the charge; the ability of the predecessor to provide relief; and whether there has been a substantial continuity in operations, work force, location, management, working conditions and methods of production. Id. at 225 & n. 3. The court, then, rejects defendant’s suggestion that plaintiff’s amendment is futile because the Tenth Circuit has not recognized the theory of successor liability under the FLSA.”
In so doing, the Court joined other Courts, namely the Ninth Circuit in expressly recognizing the existence of successor liability in an FLSA context.