A Seller’s Labor Law Violations Can Transfer to the Buyer of Business Assets

Businesses often acquire other businesses through an asset purchase, rather than a stock purchase, so that the buyer does not inherit the liabilities of the seller. Not all business owners realize that state contract law (which governs the purchase transaction) does not apply to federal labor law violations, and that buyers may be liable for seller’s violations no matter what their purchase agreement says.

Federal courts have been extending successor liability to the Fair Labor Standards Act (“FLSA”) since 2013. This would apply to overtime violations and misclassification of workers, either as contractors instead of employees or as exempt instead of non-exempt. Penalties for violations include back pay and liquidated damages equal to the amount of back pay owed. Willful violations are subject to fines and imprisonment.

The Seventh Circuit (with jurisdiction in Illinois, Indiana and Wisconsin) ruled in Teed v. Thomas & Betts Power Solutions, LLC, that a buyer of a company’s assets can’t rely on state law to keep a seller’s violations of the FLSA from transferring to the buyer of assets. Federal labor law claims are governed by federal common law, not state law.

The Court’s rationale was that it is not fair for deals in some states — but not others – to extinguish federal labor law violations upon sale of a company. In addition, employees with claims do not have power to stop the employer from selling the company to get out of paying for the employment law violations. When certain criteria are met, the buyer (successor) is stuck with the seller’s liability, no matter what their contract says.