Seventh Circuit Settles Open Issue: Can't Contract Around Successor Liability for Federal Wage Claims

When buying corporate assets, a buyer wants to buy just assets, not liabilities. But a recent decision from the United States Court of Appeals for the Seventh Circuit means that a buyer of corporate assets must ask additional questions when it comes to liabilities arising from federal wage claims. In a case of first impression, the Seventh Circuit has ruled that federal law governs the question of successor liability for wage claims under the federal Fair Labor Standards Act ("FLSA") - and federal law nullifies attempts to disclaim successor liability.   

In Teed v. Thomas & Betts Power Solutions, 2013 WL 1197861 (7th Cir. Mar. 26, 2013), a company settled an FLSA overtime pay action for $500,000. The company was later sold at auction and purchased "free and clear" of any liabilities. The buyer also disclaimed any successor liability. But the plaintiff in the FLSA action then sought to hold the buyer liable for the $500,000 settlement under a successor liability theory.

The district court found the buyer liable for the settlement by applying the federal standard for successor liability. The Seventh Circuit affirmed. State laws often permit a buyer to disclaim any liability when it acquires corporate assets. But when liability arises from a federal labor or employment statute, the federal successor liability rule typically applies. And this federal standard does not permit the buyer to disclaim successor liability. The question for the Seventh Circuit was whether the state or federal rule applied to an FLSA claim for unpaid wages.    

In Teed, though the buyer purchased the assets "free and clear," and even expressly disclaimed any liabilities, that was not enough to avoid responsibility for the federal wage claims. The Seventh Circuit pointed out that if Wisconsin law applied, then the buyer would have been "off the hook." But if federal law applied, the court would then decide successor liability using a set of factors, none of which had the same sort of bright-line safe harbor as Wisconsin law.      

Figuring prominently in the court's analysis was a concern that companies would escape paying penalties for federal wage violations by selling their assets and then dissolving. Buyers, the court reasoned, can anticipate the risk of successor liability by requesting a set-off in the purchase price.

The court's decision in Teed means that buyers of corporate assets must consider how any potential federal labor or employment claim may affect the price of an acquisition. Based on Teed, a potential buyer must weigh these factors:

• Did the buyer have notice of the federal wage lawsuit?
• Could the seller have satisfied the claim before the sale?
• Could the seller have satisfied the claim after the sale?
• Could the buyer provide the relief sought in the suit?
• Is there continuity between the operations and work force of the seller and buyer?

Navigating these factors adds another layer of inquiry for a prospective buyer when the company is subject to federal wage or employment claims. Merely reciting that the assets are sold "free and clear," and even expressly disclaiming liability, is no guarantee of avoiding such claims. The teaching of Teed is that the buyer must also consider the factors of the federal standard for successor liability. And if there's any doubt, an adjustment of the purchase price or other safeguards should be considered.

For more information, please contact E. King Poor at (312) 715-5143 / king.poor@quarles.com, William Walden at (312) 715-5111 / william.walden@quarles.com or your Quarles & Brady attorney.