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Employment Blog

Court Decision Leaves Bad Taste in Mouth of Restaurant Company: Found Liable for Predecessor Company’s Workplace Retaliation

Authored by Ruder Ware Attorneys
Posted on February 18, 2015
Filed under Employment

We’ve all heard of the concept of “paying for the sins of our ancestors.” Well, in that same vein, the federal Seventh Circuit Court of Appeals [which presides over Wisconsin employers] recently concluded that a Wisconsin restaurant company is liable for its predecessor’s past act of workplace reprisal, in response to an employee’s complaint concerning race-based workplace discrimination. The case is available here Equal Employment Opportunity Commission v. Northern Star Hospitality, Inc. d/b/a Sparx Restaurant No. 14-1660 (7th Cir., Jan. 29, 2015).

The case involves an African-American cook/kitchen manager (“Miller”) at Sparx restaurant, who allegedly was fired in retaliation for opposing a racist episode in the workplace, which involved a defaced dollar bill depicting certain racially-charged symbols. Two supervisory-level employees took responsibility for posting the offensive display [according to court records, although a terminable offense, neither employee was fired, and only one was disciplined].

After Miller complained, the two supervisory-level employees began to criticize Miller’s job performance—although Miller previously had received no such criticism during his tenure. Two years later, Sparx folded, and another restaurant—Denny’s—opened in its stead. Significantly, Sparx, Denny’s, and a third company that owned the restaurant property, were owned by the same individual [who, according to the opinion, happens to be the sole shareholder, officer and director of both Sparx and Denny’s]. 

According to the Court, Denny’s will be held liable for Sparx’s race-based retaliation—predicated upon a “successor liability” theory. In the Court’s words, “[w]ithout it [successor liability], the victim of the illegal employment practice is helpless to protect his rights against an employer’s change in the business.” According to the Court, “[w]here the successor has notice of a predecessor’s liability, there is a presumption in favor of finding successor liability.” There is a five-factor test for successor liability in the employment-law context:

1.  Whether the successor [here, Denny’s] had notice of the pending lawsuit.
2.  Whether the predecessor [here, Sparx] could have provided the relief sought before the sale or dissolution.
3.  Whether the predecessor could have provided relief after the sale or dissolution.
4.  Whether the successor can provide the relief sought.
5.  Whether there is continuity between the operations and workforce of the predecessor and successor.

The Court ultimately concluded that these factors, considered together, militated in favor of successor liability in this case. 

This case is a valuable, cautionary tale for companies within the restaurant industry considering a corporate reorganization, or acquisition of another restaurant entity. Companies are encouraged to place “successor liability” on the due diligence checklist—another important consideration in the transactional context.