What is Successor Liability?
Successor liability is a theory employees can use to impose financial responsibility on a defendant for its predecessor’s conduct. For example, an employee may argue that a company that purchased a business is liable for the wage underpayments that occurred before it purchased the business.
The pleading requirements for alleging successor liability are relatively lenient when compared to the standards courts apply to similar types of claims. The U.S. District Court for the Eastern District of New York has held that a plaintiff does not need to actually use the phrase “successor liability” in their complaint to adequately rely on this theory. See, Zhang v. Wen Mei, Inc., No. 13-CV-1647, 2017, U.S. Dist. LEXIS 213389 (E.D.N.Y. Dec. 28, 2017). There is good reason why courts assess successor liability complaints more liberally than, for example, claims for fraud. Namely, an employee/plaintiff is usually not in a good position to have detailed knowledge regarding the details of the contractual arrangements between the seller and current owner (i.e., the buyer and seller of the business). In other words, at the early, pleading stage, the defendant (i.e., alleged successor) holds most of the information about the circumstances surrounding its purchase of the former’s employer’s business.
The employee/plaintiff needs an opportunity to conduct discovery regarding the dealings between the buyer and seller before he or she can present all of the relevant facts to the court. It would be egregiously unfair to toss out a plaintiff’s claim (frequently the employee’s only chance to recover his or her lost wages) before the employee and court has an opportunity to acquire full information.
To be clear, successor liability is not a separate cause of action, and it need not be pleaded as such in a plaintiff’s complaint. However, the complaint must allege at least some facts that, if proved, would provide the court with a valid basis for holding an entity responsible as a successor.
When Can the Buyer of a Business be Held Responsible for a Seller’s Wage Violations?
Federal courts in New York rely on two different standards to determine whether the purchaser of a business can be held responsible for a previous seller’s labor law/wage violations. These are known as the “common law” standard and the “substantial continuity” test.
The Common Law Test for Successor Liability.
Under the common law test, the buyer of a business is responsible for its predecessor’s wage violations if any one of the following standards is met: (a) the buyer formally assumes (usually as a term in its contract with the seller) the seller’s debts; (b) the sale of the business is done with the intent to defraud creditors; (c) there has been a de facto merger between the two entities; or (d) a buyer is a mere continuation of the seller.
The Substantial Continuity Standard.
The “substantial continuity standard” is generally considered more liberal (easier for the employee/plaintiff to establish). The three factors of greatest significance are whether: (a) the purchasing/successor corporation had notice of claim/pending lawsuit when it purchased the business; (b) the seller/predecessor is able to provide relief to the plaintiff; and (c) there is a substantial continuity of business operations. See, Moreno v. Ramos, No. 17-CV-9439, U.S. Dist. LEXIS 29936 (S.D.N.Y. Feb. 17, 2021). There are other considerations a court may consider, but these are generally given less weight. Examples include whether the purchasing entity carries on the same business as the predecessor (for example, it sells the same products) or whether it uses the same machinery in its operations.
Example of a Successful Claim of Successor Liability in the Context of a Wage Claim.
In 2018, employment attorneys Marc Rapaport and Meredith Miller of Rapaport Law Firm commenced a federal court overtime class action on behalf of painters, plasterers and dry-wall installers who worked on construction projects throughout New York City. These claims were asserted in the case entitled Quispe et al. v. MEC Construction Corp., et al., Docket No. 18-cv-0773 (Eastern District of New York).
Our clients worked for a family-owned painting and drywall enterprise known as “MEC Construction.” During the lawsuit, defendants declared bankruptcy and, claiming poverty, asserted they had no assets to satisfy our clients’ claims. However, We investigated the circumstances surrounding the transfer of the construction business. We learned that many of MEC Construction’s workers continued to perform their same duties for an entity known was Woodside Drywall. This new entity had the same telephone number as MEC Construction, as well as some of the same clients. United States Magistrate Judge Peggy Kuo granted our motion to add Woodside Drywall as a defendant in the case. This victory was crucial to our obtaining a six-figure settlement on behalf of our clients.
If you have questions about whether your employer, or its successor, is liable to you for unpaid wages or overtime pay, call New York employment lawyers Marc Rapaport and Meredith Miller for a consultation regarding your claims. We know that construction workers, building maintenance personnel, restaurant workers, retail employees, domestic caregivers and workers in countless other industries make profound sacrifices, without which New York City could not function. We have represented workers in these industries for more than 15 years. We provide personal attention to every client, regardless of the size of your claim. We have three staff members who speak fluent Spanish. Call us today: (212) 382-1600.