Because M&A Due Diligence Was Not Already Complicated Enough…

21 April 2014 Labor & Employment Law Perspectives Blog

A recent federal appeals court decision suggests that businesses looking at potential acquisitions or mergers have yet another, relatively new concern to their due diligence list when examining the target business: an increased potential for claims alleging federal wage-and-hour law violations under a successor employer theory. In the case, the United State Court of Appeals for the Third Circuit concluded that the federal common law standard for successor liability – a much easier standard for plaintiffs to meet than state law successorship standards – applies to federal Fair Labor Standards Act wage-and-hour claims. This evolving successor liability standard means merger and acquisition considerations just received another layer of potential complexity.

Historically, the question of whether successor entities are liable for a predecessor entity’s violation of the FLSA has been governed by state law standards, which often require a formal assumption of liabilities or proof that the successor is a mere “continuation” of the predecessor company. Among other things, the FLSA provides employees with the ability to bring claims against their employers to recover damages where they have not been paid proper overtime compensation for over 40 hours in a workweek. In the recent decision, the former employee had worked for one entity for approximately 8 months, and then was asked to submit an application to a new entity, and thereafter, she received her paychecks from the new entity. However, after the change in formal employers, she continued to do the same work, at the same desk, for the same rate of pay, and under the direct supervision of the same individuals.

In her unpaid overtime lawsuit, the employee named both the original employing entity and the later entity as defendants, with the claim against the later entity also alleging successor liability for the overtime violations allegedly committed by the prior employer. The subsequent company claimed that New Jersey’s standard for successor liability barred the employee’s claim, but the appellate court disagreed, asserting that lower bar of the federal common law standard applied. Under that standard, successor liability is based only on the consideration of: “(1) continuity of 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.” Against that standard, appellate the court found that the employee’s allegations were sufficient to allow her to proceed with her successor liability claim.

With the recent decision, the Third Circuit now joins several other circuits of the Court of Appeals in determining that federal common law, and not state standards, govern successor liability under the FLSA. As a consequence of what appears to be an emerging trend, businesses interested in acquiring or merging with an existing company should carefully investigate a target’s wage and hour practices as part of their due diligence. We thus recommended that parties looking to acquire or merge with an existing business should engage counsel who, among other things, are knowledgeable about the requirements of the FLSA and successor liability standards under the federal common law and the laws of the jurisdictions in which the successor company will operate.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services

Insights

RCE PTA Carve-Out Resumes After Interference
18 September 2019
PharmaPatents
The Ninth Circuit Expected to Rule that Doctors Can Be Wrong in the Winter v. Gardens False Claims Act Case
18 September 2019
Legal News: Government Enforcement Defense & Investigations
Upcoming Webinar: Maximizing Solar Tax Credits - Navigating the Start of Construction Rules (Part 1)
17 September 2019
Renewable Energy Outlook
When Birds Finally Find a Nest
17 September 2019
Dashboard Insights
Lacktman, Ferrante Cited in mHealth Intelligence About Ryan Haight Act
19 September 2019
mHealth Intelligence
Tinnen Discusses How Viewpoint Diversity Helps Businesses Thrive
18 September 2019
InsideTrack
Vernaglia Comments on AHA v Azar Decision
18 September 2019
MedPage Today
Lach Comments on Launch of New Group
16 September 2019
BizTimes Milwaukee
MedTech Impact Expo & Conference
13-15 December 2019
Las Vegas, NV
Review of 2020 Medicare Changes for Telehealth
11 December 2019
Member Call
BRG Healthcare Leadership Conference
06 December 2019
Washington, D.C.
CTeL Telehealth Fall Summit 2019
04-06 December 2019
Washington, D.C.