The U.S. Court of Appeals for the Third Circuit has concluded that a successor employer could be held liable for Fair Labor Standards Act (FLSA) violations committed by a predecessor company.

The complaint in this matter, titled Thompson v. Real Estate Mortgage Network, was filed in 2011 by a mortgage underwriter who asserted that her former employer violated the FLSA and New Jersey state law by misclassifying her as exempt from the overtime wage requirements. The plaintiff was hired in June 2009 as a mortgage underwriter for Security Atlantic Mortgage Company (Security Atlantic). Soon after joining Security Atlantic, the plaintiff attended a training class taught by a representative from a different mortgage company called Real Estate Mortgage Network (REMN). The employee who conducted the training represented that REMN was the sister company of Security Atlantic.

In February 2010, allegedly in response to an investigation from the U.S. Department of Housing and Urban Development, Security Atlantic asked the plaintiff and her colleagues to complete a job application to work for REMN. The plaintiff completed the application. Going forward, the plaintiff’s paychecks were issued by REMN rather than Security Atlantic. The plaintiff’s rate of pay, supervisors and contact information all remained unchanged after she began working for REMN. The plaintiff resigned from REMN in August 2010. She later filed a lawsuit alleging violations of the FLSA and the New Jersey Wage and Hour Law against Security Atlantic, REMN and two individual officers of REMN. The District Court dismissed the case. On April 3, the Third Circuit reversed and remanded for further proceedings.

On appeal, the plaintiff sought to hold REMN liable for Security Atlantic’s FLSA violations under two distinct theories: joint employer liability and successor liability. On the plaintiff’s joint employer argument, the Third Circuit concluded that the plaintiff alleged sufficient facts to survive a motion to dismiss. Under the FLSA, multiple entities can be responsible for an individual employee’s wages if both entities exercise significant control over the employee.

In a precedential ruling, the Third Circuit went further to conclude that REMN could be liable to the plaintiff not only on the joint employer theory, but also on the theory that REMN, as a successor in interest to Security Atlantic, assumed liability for Security Atlantic’s FLSA violations. In so holding, the Third Circuit rejected the defendant’s argument, based on New Jersey state law, that a successor corporation is legally distinct from its predecessors and does not assume any debts or liabilities of its predecessors, with limited exceptions. The Third Circuit adopted the federal common law standard for successor liability, which presents a lower threshold for imposing liability on successor corporations. This federal common law standard for successor liability has been applied to claims brought under other federal statutes, including the Labor Management Relations Act, the National Labor Relations Act, Title VII and ERISA.

The Third Circuit’s decision to extend the federal common law standard of successor liability to FLSA claims is consistent with the law in other circuits. The Third Circuit adopted the reasoning promoted by the Seventh Circuit in the 2013 case Teed v. Thomas & Betts Power Solutions. In that case, the Seventh Circuit explained, "In the absence of successor liability, a violator of the [FLSA] could escape liability, or at least make relief much more difficult to obtain, by selling its assets without an assumption of liabilities by the buyer (for such an assumption would reduce the purchase price by imposing a cost on the buyer) and then dissolving."

In light of this Third Circuit precedent, employers may be liable for wage and hour violations committed by any predecessor entities. As a result, employers are advised to carefully investigate any potential wage and hour violations involving a predecessor company before completing any asset purchase agreement or other type of merger.