Third Circuit Adopts Lower Bar for Successor Liability in FLSA Cases

In Thompson v. Real Estate Mortgage Network, Case No. 12-3828 (3d Cir. Apr. 3, 2014), a case of first impression, the Third Circuit Court of Appeals adopted the federal common law standard in determining successor liability for wage-and-hour violations under the Fair Labor Standards Act (“FLSA”).

In June 2009, Plaintiff Patricia Thompson was hired as a mortgage underwriter by defendant Security Atlantic Mortgage Company (“Security Atlantic”). Shortly after being hired, Thompson attended a training class conducted by a different mortgage company, defendant Real Estate Mortgage Network (“REMN”). During this class, REMN’s representative described REMN as a “sister company” of Security Atlantic. In February 2009, in response to a government investigation, Thompson and many of her co-workers were asked to fill out applications for a job with REMN. From that date forward, Thompson’s paychecks were issued by REMN instead of Security Atlantic. However, despite the transfer of employment, Security Atlantic’s employees stayed in the same position, at the same desks, with the same email, salary and supervisors.

Subsequently, Thomson filed a lawsuit against Security Atlantic, REMN and two owners of Security Atlantic alleging they violated the Fair Labor Standards Act (“FLSA”) and New Jersey’s wage-and-hour law by failing to compensate her for overtime pay for time worked in excess of 40 hours a week and misclassifying her as exempt from the overtime wage requirements of the FLSA. Plaintiff also sought to hold REMN liable for Security Atlantic’s own statutory violations under theories of joint liability and successor liability. On August 31, 2012, the District Court dismissed without prejudice the entirety of Thompson’s Amended Complaint for failure to state a claim and Thompson appealed.

On appeal, Defendants urged the Court to apply New Jersey law, which holds that successor corporations are legally distinct from their predecessors and do not assume any of the debts or liability of the prior entity unless enumerated exceptions apply. Thompson argued that the Court should apply the federal common law standard for successor liability which presents a lower bar to relief. Following the lead of the Seventh and Eighth Circuits, the Third Circuit agreed with Plaintiff and applied the federal common law standard to FLSA claims. In determining successor liability, the federal standard sets forth the following factors to consider: “(1) continuity in operations and workforce of the successor and predecessor employers; (2) notice to the successor-employer of its predecessor’s legal obligations; and (3) ability of the predecessor to provide adequate relief directly.” In applying those factors, the Court vacated the lower court’s dismissal concluding that “essentially all facets of the business at issue, including operations, staffing, office space, email addresses, employment conditions, and work in progress, remained the same” after REMN took over. Second, the Court determined that at this stage in the litigation, Plaintiff was not require to prove whether REMN had knowledge of Security Atlantic’s alleged wage and hour violations and third, the Court stressed that since Security Atlantic was now defunct it was likely to be incapable of satisfying any award of damages.

Given the lower standard adopted by the Third Circuit, employers that acquire or merge with another business should be sure to inquire into potential wage-and-hour violations, review its predecessor workplace operations and consider successor liability during the negotiation process.