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Employment Blog

Perfectly Clear Successor - Be Careful

Authored by Dean R. Dietrich
Posted on April 30, 2014
Filed under Employment

Two recent events have refocused a concern about becoming a successor owner of a company in a setting where the company is being acquired/purchased. Situations arise on a regular basis where a company will purchase another business with the intention of operating the business as it has been previously operated and simply becoming the new owner of that business. In those settings, the new owner may be at risk of liability for the acts of the prior company such that the acquiring company needs to be very careful of assuming liability for such actions.

The National Labor Relations Board (NLRB) recently announced its 2014 initiatives which highlight the legal issues the NLRB will be addressing and requiring oversight from the General Counsel Office. One of the areas involves "perfectly clear successors" which are situations where a successor company intends to retain all of the employees that are in a bargaining unit with a labor agreement with the purchased company. In most circumstances, the new owner has the right to set the wages and conditions of employment for the newly acquired company and then negotiate with the union over any changes to those wages and conditions of employment. The NLRB will be closely examining circumstances where a new company is deemed to be a "perfectly clear successor" and therefore required to adopt and follow the provisions of the labor agreement that previously existed with the purchased company. This could place the acquiring company at a great disadvantage if they are fully obligated to assume the terms and conditions of an existing labor agreement rather than having the right to re-negotiate over those terms and conditions.

A recent decision from the Third Circuit Court of Appeals created the same risk for a successor company. The successor company was held liable for remedying Fair Labor Standards Act (FLSA) violations that had been committed by the purchaser company. The Court of Appeals held that the new company would be obligated to assume responsibility for FLSA violations under the federal common law standard holding that liability would be imposed on the successor company if (1) continuity of operations and workforce of the purchased and successor companies were the same; (2) notice was given to the successor company of the legal obligations of the purchased company; and (3) the extent of the ability of the purchased company to provide adequate relief for the alleged violations. Under this standard, it was easy for the Court to require the successor company to be responsible for the overtime violations that occurred during the time of ownership by the purchased company. Again, the new owner became responsible for the obligations of the purchased company.

Similar liability can arise in other types of claims such as discrimination claims or ERISA claims. Acquiring a new business may be a positive thing but the acquiring company must be careful to ensure it is not assuming responsibility for violations that were made by the purchased company prior to the acquisition.