Recently, my colleague Lindsey Marcus guest authored a post on yet another successor liability case, this time out of the Third Circuit. Her post reminded me of another case in the Seventh Circuit from 2013, and a larger point from the mergers and acquisitions part of my practice and my days doing M&A in the tech world: labor and employment issues are too often overlooked in purchase agreements. As the buyer found out the hard way in the case Lindsey detailed, often lost in all the talk about asset valuations, tax implications, and structuring the financing are serious wage and hour issues that must be addressed at the negotiating table, too. In order to avoid costly lawsuits or DOL enforcement actions, FLSA and state wage and hour due diligence should be a substantial part of the overall due diligence process in any deal involving a company with employees, regardless of whether those employees will be employed by the buyer.
To give you another example, in 2013, the Seventh Circuit stuck an asset purchaser with the bill for a $500,000 FLSA settlement associated with its bankrupt Wisconsin predecessor. The asset purchaser had to pay up because it had notice of the FLSA lawsuit prior to the asset purchase, it hired 247 out of the predecessor’s 295 employees, and continued to run the business in substantially the same manner as the predecessor company: same name, same location, almost all of the same employees. Importantly for those of you in acquisition mode, the fact that the asset purchaser had specifically disclaimed liability for the FLSA lawsuit in the asset purchase agreement was not enough to preclude successor liability. According to the Seventh Circuit, allowing an asset purchaser to contractually disclaim liability would frustrate the “statutory goals” of the FLSA, and “a violator of the [FLSA] could escape liability or at least make relief much more difficult to obtain.”
Had the buyer identified the scope of the FLSA problems pre-closing, it may have been able to avoid or minimize its ultimate liability. At the very least, the buyer would have been able to reassess the true value of the acquisition and determine whether it made sense to move forward or to negotiate a lower purchase price in light of the substantial wage-and-hour risks involved.