The U.S. Court of Appeals for the Third Circuit has for the first time endorsed successor liability for claimed wage-and-hour violations of the Fair Labor Standards Act.
Thursday’s ruling, in Thompson v. Real Estate Mortgage Network, 12-3828, reinstates a New Jersey putative class action suit against a mortgage underwriter for allegedly cheating employees out of overtime.
“Two of our sister circuits have addressed the merits of this issue and concluded that application of the federal standards to claims under the FLSA is the logical extension of existing case law” that applies successor liability to other employee disputes, U.S. Circuit Judge Thomas Vanaskie wrote.
The action was lodged by Patricia Thompson, who in June 2009 was hired as a mortgage underwriter by Security Atlantic Mortgage Co. of Edison.
Security Atlantic, now defunct, was one of 15 mortgage companies under investigation by the U.S. Department of Housing and Urban Development for high claims rates against the Federal Housing Administration’s mortgage insurance program, according to a January 2010 HUD news release.
Thompson alleges that in February 2010, Security Atlantic asked its employees to fill out job applications with an affiliated company, Real Estate Mortgage Network Inc. of Iselin (REMN). After the switch, REMN issued their paychecks but all other aspects of the job, including the work, office location, supervisors and email, were unchanged, she alleges.
Thompson quit in August 2010, not long after Security Atlantic Executive Vice President Noel Chapman told her that the company did not pay overtime to underwriters, she alleges.
She sued in March 2011, claiming that throughout her tenure with Security Atlantic and REMN, employees were treated as salaried workers exempt from overtime pay and were required to work more than 40 hours per week, including nights and weekends.
In August 2012, U.S. District Judge Dennis Cavanaugh dismissed the case, without prejudice, for failure to state a claim on which relief could be granted.
Thompson, instead of amending her complaint, appealed, seeking among other things to hold REMN responsible not only for its own alleged violations but also those of Security Atlantic based on the theory of successor liability.
REMN didn’t contest the applicability of successor liability in the FLSA context but urged the court to subject Thompson’s FLSA claims to a more stringent standard used for claims under the New Jersey Wage and Hour Law.
Thompson argued for the federal common law standard used to establish successor liability in connection with other types of federal employee claims.
On Thursday, the Third Circuit agreed with her, saying that standard “has slowly gained traction in the field of labor and employment disputes over the course of almost fifty years” and “presents a lower bar to relief than most state jurisprudence.”
Vanaskie, joined by Circuit Judges Joseph Greenaway Jr. and Jane Roth, said only three factors apply: “continuity of operations and work force” from the predecessor to the successor, the successor’s notice of the predecessor’s legal obligation, and the ability of the predecessor to provide the relief sought.
The common law standard dates back to the U.S. Supreme Court’s 1964 ruling in John Wiley & Sons Inc. v. Livingston, 376 U.S. 543, where it originally applied in the context of the Labor Management Relations Act.
Since then, it’s been applied to other employee disputes, including benefits, under the Employee Retirement Income Security Act, and workplace discrimination under Title VII of the Civil Rights Act, the court said.
The Seventh and Ninth circuits have extended successor liability to FLSA claims and have applied the federal common law standard, Vanaskie said.
The court relied principally on Teed v. Thomas & Betts Power Solutions, 711 F.3d 763 (7th Cir. 2013), where Circuit Judge Richard Posner said successor liability is necessary to protect the rights of workers who can’t control the corporate sale of their employer companies.
Vanaskie found “that pronouncement well reasoned, directly applicable, and in accord with our own jurisprudence,” and said REMN gave “no compelling reason why the federal common law standard should not be applied[.]” He didn’t address REMN’s attempts to distinguish Thompson’s case from Teed.
The court deemed Thompson’s allegations sufficient to survive a dismissal motion, noting that further information will come to light during discovery.
Vanaskie reinstated Thompson’s claims under the New Jersey Wage and Hour Law, finding that her allegations satisfied the more restrictive state law standard as well.
The court also reinstated individual claims against Chapman and another principal, Samuel Lamparello, co-owners of Security Atlantic who later became REMN officers, as well as claims against REMN and Security Atlantic relying on theories of primary and joint liability.
East Brunswick solo Mitchell Schley, who argued for Thompson, says: “Not only did they find the complaint was adequate, they chose to make some good law.”
By this ruling, a successor entity could be held liable for a predecessor’s wrongs even if it improved wage-and-hour practices going forward, Schley adds.
“To the general public, it’s sort of very technical—in the world of employment law, it’s a significant decision” because of the frequency of mergers and acquisitions and other corporate transformations, he says.
REMN in February changed its name to HomeBridge Financial Services Inc. Ari Karen of Offit Kurman in Maple Lawn Md., who argued for the company, didn’t return a call Friday. A message left with the company was not returned.
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