Federal Common Law Standard for Successor Liability Applies to FLSA Claims: Third Circuit | Practical Law

Federal Common Law Standard for Successor Liability Applies to FLSA Claims: Third Circuit | Practical Law

In Thompson v. Real Estate Mortgage Network, the US Court of Appeals for the Third Circuit vacated the district court's dismissal of the plaintiff's Fair Labor Standards Act (FLSA) and NJ Wage and Hour Law claims for failure to state a claim. In a precedential decision, the Third Circuit joined the US Courts of Appeals for the Seventh and Ninth Circuits and applied the federal common law standard to evaluate whether the plaintiff sufficiently pleaded an FLSA successor liability claim against the company that purchased her now defunct employer. The court also held that the plaintiff sufficiently pled a claim that the purchasing company was liable under the FLSA as a joint employer. 

Federal Common Law Standard for Successor Liability Applies to FLSA Claims: Third Circuit

by Practical Law Labor & Employment
Published on 08 Apr 2014 • USA (National/Federal)
In Thompson v. Real Estate Mortgage Network, the US Court of Appeals for the Third Circuit vacated the district court's dismissal of the plaintiff's Fair Labor Standards Act (FLSA) and NJ Wage and Hour Law claims for failure to state a claim. In a precedential decision, the Third Circuit joined the US Courts of Appeals for the Seventh and Ninth Circuits and applied the federal common law standard to evaluate whether the plaintiff sufficiently pleaded an FLSA successor liability claim against the company that purchased her now defunct employer. The court also held that the plaintiff sufficiently pled a claim that the purchasing company was liable under the FLSA as a joint employer.
On April 3, 2014, in Thompson v. Real Estate Mortgage Network, the US Court of Appeals for the Third Circuit vacated the district court's dismissal of the plaintiff's Fair Labor Standards Act (FLSA) and NJ Wage and Hour Law claims for failure to state a claim. In a precedential decision, the Third Circuit joined the US Courts of Appeals for the Seventh and Ninth Circuits and applied the federal common law standard to evaluate whether the plaintiff sufficiently pleaded an FLSA successor liability claim against the company that purchased her now defunct employer. The court also held that the plaintiff sufficiently pled a claim that the purchasing company was liable under the FLSA as a joint employer. (No. 12–3828, (3d Cir. Apr. 3, 2014).)

Background

The plaintiff was hired as a mortgage underwriter in June 2009 for Security Atlantic Mortgage Company. In February 2010, Security Atlantic asked the plaintiff and several of her colleagues to fill out new job applications to work for Real Estate Mortgage Network (REMN) in response to an investigation into Security Atlantic's mortgage practices. Plaintiff's employment remained the same, except REMN now issued her paychecks instead of Security Atlantic.
After quitting her job at REMN, the plaintiff filed a complaint in New Jersey federal district court against Security Atlantic, REMN and her former supervisors at Security Atlantic, who later became officers at REMN, alleging that:
  • The defendants violated the FLSA by:
    • failing to pay her overtime compensation; and
    • improperly classifying her as an exempt employee.
  • REMN is liable for Security Atlantic's statutory violations under the theory of joint liability.
  • Alternatively, REMN is liable for Security Atlantic's statutory violations as its successor in interest.
  • Her supervisors are personally liable for violations of the FLSA and the NJ Wage and Hour Law due to their former positions at Security Atlantic.
The district court dismissed the plaintiff's complaint in its entirety without prejudice under FRCP 12(b)(6) for failure to state a claim. The plaintiff appealed to the Third Circuit.

Outcome

The Third Circuit vacated and remanded the district court's dismissal of the plaintiff's complaint.
Primary Liability. The Third Circuit vacated the district court's dismissal of the plaintiff's FLSA claims against Security Atlantic and REMN under the theory of primary liability because:
  • The district court failed to explain its reasoning for dismissing them.
  • The plaintiff's complaint put the companies on fair notice that the alleged violations occurred during her employment with them.
Joint liability. The Third Circuit vacated the district court's dismissal of the plaintiff's claim that Security Atlantic and REMN are jointly liable for her FLSA claims, holding that the plaintiff's pleadings sufficiently satisfied the circuit's Enterprise test (In re Enterprise Rent-A-Car Wage & Hour Emp't Prac. Litig., 683 F.3d 462 (3d Cir. 2012)). However, the court cautioned that the fully developed factual record may later preclude a finding that they are "joint employers." The court held that the district court's holding that the plaintiff's employment with Security Atlantic was separate and distinct from that with REMN may be correct if the court only considers the name of the payor on her paychecks, except the plaintiff also alleged that:
  • She was trained by an employee of REMN shortly after she was hired by Security Atlantic, indicating that REMN had some authority over her work and assignments even before officially hiring her in February 2010.
  • The employee of REMN who trained her described REMN as a "sister company" of Security Atlantic, which suggested corporate intermingling.
  • Although she and her co-workers were abruptly and seamlessly integrated into REMN's workforce, some of those employees continued to be paid by Security Atlantic, supporting a finding that the companies shared authority over hiring and firing practices.
  • The plaintiff's failure to cite Enterprise was inconsequential because the bases for her "joint employer" claims were well established on the record.
For more information on the Enterprise test see, Legal Update: Third Circuit Establishes Test for Joint Employer Status under the FLSA.
Successor liability. The Third Circuit held that the plaintiff sufficiently pleaded that REMN was liable for Security Atlantic's FLSA and NJ Wage and Hour Law violations as successors of Security Atlantic's interests. The Third Circuit held that the standard for successor liability under federal common law, which sets a lower evidentiary burden for plaintiffs than under NJ law, should apply, finding that:
  • The US Supreme Court created the federal common law standard in the context of a claim under the Labor Management Relations Act and extended its application to claims brought under other federal employment statutes, including the NLRA, Title VII and ERISA.
  • The Seventh and Ninth Circuits hold that the federal common law standard should apply to FLSA actions because:
    • without successor liability, employers that violate the statute could easily escape liability or make it much more difficult for workers to obtain relief by selling assets to a buyer without an assumption of liabilities and then dissolving; and
    • applying the same standard of successor liability to all labor and employment federal statutes achieves the court's interest in legal predictability.
    (See Legal Update: Successor Liability Applies in FLSA Actions, Even if Asset Purchaser Disclaims the Acquired Company's Liabilities: Seventh Circuit.)
  • The defendants failed to provide a compelling reason why the federal common law standard should not apply.
The court then held that, based on the pleadings, the plaintiff satisfied the federal common law standard to survive a motion to dismiss, finding that:
  • There was sufficient continuity in the operations and work force when REMN took over Security Atlantic, since essentially all aspects of employment remained the same.
  • Although the complaint did not clearly allege facts that show that REMN had knowledge of Security Atlantic's FLSA violations before the transfer, the plaintiff's claim should have survived a motion to dismiss because:
    • she alleged that Security Atlantic's payroll and scheduling was controlled by her supervisors who later became officers of REMN, and after the transfer, the same practices and operations continued under the same management; and
    • the plaintiff cannot be expected to have detailed proof to support this claim at this stage in the litigation.
  • Based on the defendants' representation that Security Atlantic is "defunct," Security Atlantic cannot provide adequate relief directly to the plaintiff.
The Third Circuit then analyzed the claims under the NJ Wage and Hour Law applying the NJ standard for successor liability because the court only had supplemental jurisdiction over them. Based on the same allegations that supported a FLSA successor liability claim, the court also vacated the district court's dismissal of the NJ claims. The plaintiff sufficiently satisfied the NJ standard permitting successor liability to flow to a purchasing corporation where a plaintiff shows that it is a mere continuation of the seller corporation.
Personal Liability. The court also vacated the district court's dismissal of the plaintiff's claims that her supervisors are personally liable, finding that she provided enough information about the scope of the supervisors' authority over her pay and schedule that the court reasonably could infer that they were responsible for the alleged violations.

Practical Implications

The Third Circuit joined the Seventh and Ninth Circuits in applying federal common law to evaluate whether a purchasing company may be liable as a successor in interest to its predecessor's FLSA violations. As more circuit courts consider and approve holding purchasers liable under common law successor liability principles for FLSA violations, employees should ensure that stringent review of target companies' wage and hour practices be part of merger and acquisition due diligence. The Third Circuit's decision in Thompson v. Real Estate Mortgage Network highlights the importance of conducting thorough due diligence about targets for acquisitions. In the Seventh, Ninth and now the Third Circuit, successors that acquire a company with outstanding liabilities under federal labor or employment laws may become liable for them. Where an acquisition target is solvent, the parties may effectively use indemnification agreements to defray any resulting successor liability instead of reducing a purchase price. However, when the acquisition target is insolvent, as appears to be the case here, an asset purchaser should more seriously consider adjusting its bid for the acquisition target to account for potential successor liability.