More Than You Bargained For: Asset Purchase Did Not Shield Purchaser From Predecessor's FLSA Liability

More Than You Bargained For: Asset Purchase Did Not Shield Purchaser From Predecessor's FLSA Liability

On March 26, 2013, the Seventh Circuit Court of Appeals held in Teed et al., v. Thomas & Betts Power Solutions that a corporation that purchased another corporation's assets at a receiver's auction was required to satisfy a $500,000 settlement reached between the predecessor company and its employees for wage violations.

Generally, absent some exceptions, when a business purchases the assets of another, the purchaser does not also have to satisfy the other company's liabilities. That is supposed to be the point of structuring the transaction as an asset purchase in the first place. When there is liability based on a violation of a federal statute relating to labor relations, however, "a federal common law standard of successor liability is applied," even when the terms in the purchase said it was "free and clear of all liabilities." That language is not a defense in the face of federal law, which applies when the successor (purchaser) had notice of the pending claim, when the predecessor is unable to provide relief but the successor is able to, and when there is continuity between the operations and work force of the predecessor and successor.

The court reasoned that the imposition of successor liability is appropriate to enforce federal labor or employment laws and to achieve federal statutory goals, because workers are often unable to "head off a corporate sell by their employer aimed at extinguishing the employer's liability to them."

Asset purchases and sales in receivership don't come up every day, but businesses contemplating transactions like this should go into the transaction with eyes wide open.

If you feel like you can't live without reading this case (which happily follows the rule that the more complex the case, the simpler the writing should be), follow this link  [an enhanced version of this opinion is available to lexis.com subscribers]. At a minimum, send it along to any transactional lawyers if you are contemplating an asset purchase.

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Electronic Alerts are written by Barran Liebman attorneys for their clients and friends. Alerts are not intended as legal advice, but as employment law, labor law, and employee benefits announcements. Copyright © 2013 by Barran Liebman LLP.

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