The Gibson & Perkins, PC Litigation Alert – 07/09/14

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Gibson & Perkins Litigation Alert

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 3rd Circuit Decision Exposes Tri-State Companies to Greater Liability For Their Predecessors’ Labor Violations

On April 4, 2014, the U.S. Court of Appeals for the Third Circuit issued a ruling, in Thompson v. Real Estate Mortgage Network, adopting a lax federal common law standard for imposition of liability on corporate successors-in-interest for their predecessor’s violations of the Fair Labor Standards Act.  Declining to apply a more stringent state law standard, the Court noted: “[A]pplication of the federal standard to claims under the FLSA is the logical extension of existing case law.

The Facts

Security Atlantic Mortgage Company (“Security Atlantic”) hired the Appellant, Patricia Thompson, as a mortgage underwriter in June of 2009.  In February of 2010, Ms. Thompson and other Security Atlantic employees were “rehired” by a sister-company, Real Estate Mortgage Network (“REMN”).  Despite the rehiring process, ostensibly nothing changed for Security Atlantic’s former employees, as facilities, management, clients, and daily tasks all remained the same under REMN.  Ms. Thompson resigned in August of 2010.

On March 16, 2011, Ms. Thompson filed suit against Security Atlantic, REMN, and a number of managers in the U.S. District Court for the District of New Jersey alleging wage and hour violations of the Fair Labor Standards Act of 1938 (“FLSA”).  Ms. Thompson alleged that during the entire term of her employment with both Security Atlantic and REMN, both companies denied overtime to her and other underwriters, despite being forced to work over eight-hour days, through lunches, and on weekends to meet the companies’ turnaround demands for assignments.  Moreover, Ms. Thompson alleged that management routinely misrepresented to employees that they were exempt from the FLSA and ineligible for overtime.  The FLSA, with certain statutory exceptions, mandates time and a half overtime compensation for employees working over forty hours a week.

Ms. Thompson’s lawsuit alleged several theories of liability.  She claimed Security Atlantic and REMN were liable individually for their primary terms of operation, that both were liable as joint employers, and most importantly that REMN had successor liability for Security Atlantic’s violations.  The District Court granted the companies’ motion to dismiss on August 31, 2012 and Ms. Thompson filed a timely appeal.

The Decision

In a case of first impression, the Third Circuit set forth the standard for determining successor liability in the context of FLSA violations.  The Court declined the Appellees’ plea for imposition of the more stringent New Jersey state law standard.  New Jersey law treats successor companies as separate, distinct, entities that do not assume their predecessor’s debts and liabilities except, (1) when agreed upon by the parties, (2) when the transaction is a consolidation or merger, (3) when the successor is merely continuing the predecessor’s business, or (4) when the transaction is a fraudulent attempt by the predecessor to escape debts or liabilities.  Instead, Ms. Thompson persuaded the Court that labor law precedent in the Third Circuit and its sister Circuits mandated the adoption of the more lax federal common law standard.  This federal standard imposes successor liability based on consideration of, (1) continuity of work force and operations between the companies, (2) notice to the successor of the predecessor’s legal obligations, and (3) the predecessor’s ability to provide adequate relief.  In doing so, the Court noted that the Supreme Court created this standard for successor liability in the context of a labor dispute.

Practical Application

No doubt Thompson presents significant implications for companies in Pennsylvania, New Jersey, and Delaware, as well as the professionals who advise them.  When structuring a take-over, assumption, or similar transaction, parties seeking to shift or limit liability for the predecessor’s labor violations must be wary of the newly announced standard.

Best Regards,

The Litigation Department, Gibson & Perkins, PC

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