By: John Yslas and Carolina Nunez

Seyfarth Synopsis: In acquiring a company, there is often a tendency to think an asset purchase (as opposed to a stock purchase) guarantees the purchaser will not inherit any liability (so-called “successor liability”).  This is not necessarily so with wage and hour liability, particularly if the purchaser merely continues to operate virtually the same business that was acquired. 

Under the FLSA, several courts have weighed the following factors in assessing successor liability: 1) the successor’s actual notice of the pending lawsuit, 2) the predecessor’s ability to provide the relief before the sale, 3) the predecessor’s ability to provide relief after the sale, 4) the successor’s capacity to produce the relief, and 5) whether there is a continuity between the operations of the predecessor and the successor.

Under state law, there is similar potential successor liability.  For instance, under New Jersey state law courts have tended to look at these factors in establishing continuity: continuity of ownership; continuity of management; continuity of personnel; continuity of physical location, assets and general business operations; cessation of the prior business shortly after the new entity is formed; and extent to which the successor intended to incorporate the predecessor into its system with as much the same structure and operation as possible.

And then, in August 2019, New Jersey passed an anti-wage theft law that is arguably even stricter, A-2903/S-1790, described as an Act “concerning enforcement, penalties, and procedures for law regarding failure to pay wages.”  The Act expands the definition of “employer” where the successor entity can be liable for the purported wage violations of and penalties imposed on its predecessor. Under the law, a rebuttable presumption that an employer has established a successor entity shall arise if the two share at least two of the following capacities or characteristics: (1) perform similar work within the same geographical area; (2) occupy the same premises; (3) have the same telephone or fax number; (4) have the same email address or Internet website; (5) employ substantially the same work force, administrative employees, or both; (6) utilize the same tools, facilities, or equipment; (7) employ or engage the services of any person or persons involved in the direction or control of the other; or (8) list substantially the same work experience.

Moreover, California law protects employees seeking recovery for nonpayment of wages, and seeking to enforce their judgments.  An employer cannot withhold wages willfully and strategically evade wage final judgments by creating a new business. California also enacted Labor Code sections 238 and 1434 in 2016 and 2017 respectively.  While the plain text of Labor Code 238 appears to only apply to final judgments, the factors to be considered mirror those of the FLSA, specifically, whether (1) the employees of the successor employer are engaged in substantially the same work in substantially the same working conditions under substantially the same supervisors or (2) whether the new entity has substantially the same production process or operations, produces substantially the same products or offers substantially the same services, and has substantially the same body of customers.

Additionally, California Labor Code 1434, with some exceptions, expressly states that a janitorial services provider is liable for wages and penalties when it meets “any” of the following criteria: (a) uses substantially the same workforce to offer substantially the same services as the predecessor employer; (b) shares in the ownership, management, control of the labor relations, or interrelations of business operations with the predecessor employer; (c) employs in a managerial capacity any person who directly or indirectly controlled the wages, hours, or working conditions of the affected employees of the predecessor employer; or (d) is an immediate family member of any owner, partner, officer, or director of the predecessor employer of any person who had a financial interest in the predecessor employer.  While section 1434 only applies to janitorial employers, it appears to be part of a trend that could expand to other entities.

So what to do? First, the purchaser should be aware of all pay practices that could result in liability, as well as all pending and threatened lawsuits.  Second, the purchaser should consider including in the asset purchase agreement:

  • Provisions accurately portraying the transaction as strictly an asset purchase, and making clear any facts that support arguing the post-acquisition business is not merely continuing (e.g., under new management, new email addresses, new location etc.);
  • Indemnification provisions that make clear the target will indemnify the purchaser for any wage and hour (and perhaps other forms of) liability that precedes the closing of the sale of the business;
  • Escrowing significant monies in a separate account for such indemnification. That way, the purchaser does not find itself in the unenviable position of chasing the seller for money.  Typically such provisions call for return of the monies to the seller in phases with the applicable statutes of limitation in mind (e.g., in California, four years for wage-and-hour claims); and
  • Including robust representations and warranties around wage-and-hour matters such that the purchaser can make a clear claim against the representations and warranties and recover against the escrow or indemnity.