Third Circuit Embraces 'Lower Bar' For Successor Liability Under The FLSA

In Thompson v. Real Estate Mortgage Network, No. 12-3828, 2014 WL 1317137 (3d Cir. Apr. 3, 2014), the Third Circuit adopted a standard of successor liability that will lower the bar for whether an employer can be held accountable under the Fair Labor Standards Act ("FLSA") for the wage and hour violations of its predecessor. This alert discusses the implications of the decision for employers that acquire or merge with another business.

Background

Patricia Thompson and her colleagues worked for Security Atlantic Mortgage Company ("Security Atlantic"). During the course of their employment, they were asked by their supervisors to fill out new job applications to work for Real Estate Mortgage Network ("REMN"). Upon completion of this request, Thompson's paychecks were issued by REMN instead of the now "defunct" Security Atlantic. Despite this "transfer,"1 Thompson and her colleagues continued to work at the same location, perform the same job responsibilities, and retain the same supervisors, rate of pay, and work email addresses.

Thompson subsequently filed a lawsuit in the District of New Jersey against Security Atlantic and REMN (and individuals of these entities) for wage and hour violations under the FLSA and the New Jersey Wage and Hour Law. Among her allegations, Thompson claimed that REMN was liable for the violations of Security Atlantic under theories of joint liability and successor liability. REMN moved to dismiss Thompson's complaint on the pleadings and the lower court granted the motion. The Third Circuit reversed, finding, among other things, that REMN could be held liable under the FLSA as both a joint employer2 and successor of Security Atlantic.

Holding

To determine whether REMN could qualify as the successor of Security Atlantic under the FLSA, the Third Circuit embraced for the first time the federal common law standard for successor liability as articulated by the Seventh and Ninth Circuits. Under the federal standard, which is less stringent than its state law counterpart,3 an employer may be liable for the conduct of its predecessors "when necessary to protect important employment-related policies." To make this assessment, courts must consider the: (1) "continuity in operations and work force of the successor and predecessor employers"; (2) "notice to the successor-employer of its predecessor's legal obligation"; and (3) "ability of the predecessor to provide adequate relief directly."

Applying the three-factor test...