This month, the Third Circuit became the latest court of appeals (following the Seventh and Ninth Circuits) holding that the federal common law standard should be applied when determining whether a successor may be liable for FLSA violations allegedly committed by its predecessor. So what does this mean for employers? We expect the ruling likely will make it easier for plaintiffs to assert FLSA claims against employers and to hold them liable for violations by their predecessor.
The plaintiff in Thompson v. Real Estate Mortgage Network (3d Cir. Apr. 3, 2014) was employed by Security Atlantic Mortgage Company until she and her colleagues were asked by their supervisors to complete new job applications to work for Real Estate Mortgage Network. Her employment was then transferred to REMN, she was put on the REMN payroll, and Security Atlantic subsequently went out of business. Plaintiff brought FLSA claims on behalf of herself and a collective of employees, alleging, among other things, that REMN was liable for FLSA overtime violations committed by Security Atlantic on a theory of successor liability. The case came before the Third Circuit on appeal from the district court’s grant of defendants’ motion to dismiss.
The Third Circuit reversed and, among other things, held that the that the appropriate standard to apply for purposes of determining successor liability under the FLSA is the more lenient federal common law standard as opposed to New Jersey’s more strict standard. This is an important holding because the federal common law standard applies “a lower bar to relief than most state jurisprudence” by permitting successor liability to be imposed “to protect important employment-related policies.”
Absent fraud or an express agreement to assume liabilities, most jurisdictions, including New Jersey, will impose successor liability to FLSA claims only where there is a substantial continuity of operations between the predecessor and successor–in other words, where the successor is basically continuing the predecessors business operations with some or all of the same employees.
By saying the federal common law standard applies, however, the Third Circuit is requiring courts within the jurisdiction to look not only at whether there are (1) continuity of operations and workforce between the successor and predecessor entities, but also whether (2) the successor has notice of its predecessor’s legal obligations, and (3) whether the predecessor has the ability to provide adequate relief. While it remains to be seen how this ruling will be interpreted and applied going forward, it is possible that it may demarcate a significant expansion in successor liability for FLSA claims to situations where a successor entity simply had knowledge of its predecessor’s FLSA violations or where a predecessor entity is judgment proof.
We are tracking developments in this area of the law and will keep you updated.