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Employment Due Diligence in Mergers and Acquisitions

Posted in Labor Law

By:  Lizbeth V. West

In Teed v. Thomas & Betts Power Solutions LLC, the Seventh Circuit held that a company that acquired another business’s assets at a receiver’s auction was responsible for paying a $500,000 settlement reached in a Fair Labor Standards Act (FLSA) lawsuit between the predecessor business and its employees. The acquiring company knew about the FLSA lawsuit prior to the asset acquisition and specifically disclaimed liability for the lawsuit as a condition of the asset-transfer agreement. The court essentially held that the disclaimer was irrelevant. The court ruled that an explicit contractual disclaimer of the FLSA liability was not a good enough reason standing alone to avoid the "default rule" that a predecessor’s FLSA liability should normally be imposed upon the successor, unless there are good reasons not to do so. The court concluded among other things that, if an acquiring employer could contractually disclaim liability in this fashion, the "statutory goals" of the FLSA would be frustrated, and "a violator of the Act could escape liability or at least make relief much more difficult to obtain." The court also rejected a variety of other arguments to the effect that finding successor liability would be inequitable or economically unwise.

This case is another reminder of how important it is in M&As to conduct employment due diligence to analyze any actual or potential (sleeping) liability that the predecessor may have that the successor may be found responsible for under the successor liability doctrine.