My Employer Was Taken Over By Another Company… Can the New Company Be Liable for Wage Violations?

It happens all the time. A new management company comes in to run a hotel, a restaurant is sold to a new owner or two businesses merge into one. These changes in ownership and management are common occurrences in the business community but they can have an impact on employees who may be victims of wage violations. Although the Fair Labor Standards Act (FLSA) does not specifically provide for successor liability, courts have developed a common law successorship doctrine that applies in FLSA cases. So what does that mean for employees?

Suppose that you work for a company which automatically deducts 30 minutes from your paycheck everyday for lunch but you are not allowed to leave the premises during those 30 minutes. This is a violation of wage laws – if your lunch is unpaid, it must be free from interruption and you must be able to leave the premises. Your current employer would be liable for this violation. But suppose that during your employment the business that owns the company dissolves and a new owner takes over. Could that new employer be liable for the violations that occurred under the ownership and management of the dissolved business?

The answer, as is the case with most legal questions, is that it depends. In order for a successor company to be liable for the actions of its predecessor, three conditions must be met:

(1) There is substantial continuity of business operations.

This requirement is called the “bona fide successor” requirement. Essentially, this means that the new business must retain some common aspects of the prior business. If a new owner buys a restaurant, keeps two out of 100 employees and turns the business into a beauty salon, that is probably not considered “substantial continuity of business operations.” However, if a new owner buys a restaurant, keeps the majority of employees, changes the name of the restaurant but keeps everything else the same, that may suggest that the new employer is a “bona fide successor.” Other factors to consider in determining whether a new business is a “bona fide” successor include:

(a) Whether the new employer operates at the same location;

(b) Whether the same or substantially similar workforce remains employed;

(c) Whether the same jobs exists under the same working conditions;

(d) Whether the same supervisors remain employed;

(e) Whether the same machinery, equipment and methods of production are used;

(f) Whether same product is manufactured or the same service is offered.

Not all of the above factors must be present in order for the new business to be considered a bona fide successor.

(2) The subsequent employer had notice of the potential liability.

Courts refer to this as the “notice” requirement. In other words, the new business must have had notice, or actual knowledge, of the old company’s wage violations. For example, suppose the president of the new company had been the vice president of the old company and had helped establish the 30 minute lunch deduction policy, even though he knew it was in violation of the FLSA. A court would probably consider this sufficient “notice” for the new company because a person in a position of leadership and management knew of the FLSA violations before the new company took over.

(3) The predecessor employer is unable to provide full relief.

The third element of successor liability relates to whether or not the prior company can provide relief to individuals who were victims of wage violations. In our previous example, the old company had dissolved so there would likely be a question as to whether or not that company could provide full relief. In that case, successor liability may be an option. However, if the old company continued to exist, operate and had funds available to pay full back wages and damages, the new employer would not have to make payments, assuming they were not engaged in similar violations.

The question of successor liability arises when the employer who committed the violations is no longer in the picture or no longer financially viable. Cases of successor employer liability are case and fact specific. In cases where the violating employer continues to exist, claims must be filed against that employer. In cases where the prior employer can’t provide relief, successor liability may be an option.

If you have questions about wage and hour violations, contact an attorney at Hawks Quindel, S.C. for a free consultation.

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Summer Murshid