The Seventh Circuit recently held that a purchaser in an "asset deal" of a business in receivership was found to be a successor employer for the purposes of a $500,000 wage/hour settlement. The liability was imposed on the purchaser even though the contract formalizing the asset deal expressly excluded that liability. Teed v. Thomas & Betts Power Solutions, LLC. Found here.
Savvy deal attorneys have long been aware of the "successor employer" doctrine as it relates to unionized employers. This doctrine means that even in an "asset deal," Newco likely will be subject to a duty to bargain with the incumbent union at the very least. The Seventh Circuit has applied that same "federal common law doctrine" to a wage/hour settlement. In this instance, Newco knew of the wage/hour settlement, had expressly excluded that liability in the purchase documents, but yet acquired an ongoing business (albeit in receivership), continued to operate in the same manner, with the same equipment and with most of the same employees. Thus, the Seventh Circuit reasoned, even though the bid in receivership by the purchaser was expressly contingent on the sale being "free and clear of all liabilities," the wage/hour settlement by the predecessor employer was the responsibility of the buyer.
The reach of this decision could be significant, particularly if the liability that could attach is not merely a wage/hour settlement (it was a liquidated sum and the violation had been established) but a wage/hour violation (or even an alleged violation).
So what does this mean?
- Not surprisingly, due diligence is even more critical, particularly for possible wage/hour (and other federal law) claims. The Seventh Circuit, in its reasoning, did not limit the reach of the federal common law doctrine to only wage/hour claims but, in dicta, mentioned other federal statutes, including discrimination claims.
- Recognize in pricing and in structuring the deal that potential federal violations may attach to the asset deal.
- Note that this occurred even in a receivership and thus an asset purchase even in a reorganization could be impacted.