The Seventh Circuit Court of Appeals recently held, in Teed v. Thomas & Betts Power Solutions, LLC, that a purchaser of the assets of a business subject to claims by employees under the Fair Labor Standards Act (“FLSA”) was subject to successor liability for those claims, even though the purchaser expressly disclaimed liability for the claims under the terms of the asset sale. 711 F. 3d 763 (7th Cir. 2013). The Teed decision is important to business owners who are considering an asset sale or purchase because any transfer of FLSA liability, like other potential labor relations and employment liabilities arising under federal law, is likely to have a significant impact on the successor’s assets. Teed advises purchasers to conduct an audit of potential and existing employee claims against the seller and to adjust asset purchase offers accordingly.

In Teed, the plaintiff employees filed two collective actions against their employer and its parent company for overtime pay under the FLSA. The assets of the employer were sold after the parent company defaulted on a loan guaranteed by the employer. Thomas & Betts Power Solutions, LLC (the “Buyer”) purchased the assets of the employer at an auction for approximately $22 million. As a condition on the transfer of assets, the Buyer required the transfer to be “free and clear of all Liabilities” that the Buyer had not expressly assumed. Another condition expressly indicated that the Buyer would not assume any of the liabilities the employer may incur in the ongoing FLSA litigation. After the asset sale, the Buyer continued to operate the business in a manner similar to the former employer and offered employment to most of the former employer’s employees. The plaintiff employees brought a motion to substitute the Buyer as the defendant in the lawsuits, a motion that was granted by the Wisconsin District Court. The Buyer appealed the decision to the Seventh Circuit Court of Appeals.

In holding the Buyer assumed the employer’s FLSA liability under successor liability theory, the federal appellate court analyzed the facts under a pro-employee analysis required by federal common law. The Court noted that if Wisconsin state law governed the issue, the Buyer would not face successor liability since Wisconsin law, like Minnesota law, limits successor liability to sales where the buyer expressly or implicitly assumes the liability. However, since successor liability under the FLSA must be examined under federal, not state, law, the Court examined the following five factors under the applicable federal test: (1) whether the Buyer had notice of the pending lawsuit; (2) whether the former employer or parent company could provide the relief sought in the lawsuit before the sale; (3) whether the former employer or parent company could provide relief after the sale; (4) whether the Buyer could provide the relief sought in the lawsuit; and (5) whether there is a continuity of operations and work force between the former employer and the Buyer (as reflected in the hiring of the predecessor’s employees). The Court answered parts 1, 4, and 5 of the test in the affirmative and parts 2 and 3 in the negative.

After applying the above test, the Court held “successor liability is appropriate in suits to enforce federal labor or employment laws – even when the successor disclaimed liability when it acquired the assets in question – unless there are good reasons to withhold such liability.” In this particular case, the Court found there was no good reason to withhold successor liability, such as a lack of notice of the FLSA claim to the Buyer. 

In finding the Buyer liable for the FLSA claims, the Court stated that in the absence of successor liability, an employer could circumvent liability, or make relief more difficult to obtain, by selling its assets without including an assumption of liabilities. Such an act would contravene the public policy of federal employment statutes seeking to protect employees from employer misconduct. The Court further indicated that successors may be properly compensated for assuming liabilities by simply reducing the asset purchase price by the amount of the liabilities. In this particular case, although the purchase price was not reduced by the amount of the FLSA liability, the Court found the $500,000 settlement was relatively insignificant compared to the $22 million purchase price. 

Teed is certain to impact asset sales between businesses, and purchasers are strongly advised to fully analyze potential liabilities for claims not only under the FLSA, but also other state and federal employment and labor laws, when determining the value of a business’s assets. This is particularly important when the previous owner may not be able to cover the damage award, a fact that weighed strongly in favor of finding successor liability against the Buyer in Teed. Courts will continue to apply a pro-employee analysis when determining claims under federal employment and labor statutes and employers should consider the possible impact of all potential claims when considering an asset sale or purchase.