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New law expands successor liability

On Behalf of | Feb 4, 2021 | Business and Corporate |

This new law seeks to prevent business owners from avoiding wage and hour violations/judgements by closing or selling a business and forming or joining the same or another related business.

In addition to other information that must be filed with the Secretary of State on a regular basis, AB 3075 adds the following: “A statement indicating whether any officer or any director has an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for which no appeal therefrom is pending, for the violation of any wage order or provision of the Labor Code.”

The new law states a “successor to a judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor’s former workforce pursuant to a final judgment, after the time to appeal therefrom has expired and for which no appeal therefrom is pending.”

Successor liability for the successor business may be established upon meeting any of the following criteria:

(1) Uses substantially the same facilities or substantially the same workforce to offer substantially the same services as the judgment debtor. (This factor does not apply to employers who maintain the same workforce pursuant to Chapter 4.5 (commencing with Section 1060) of Part 3.)

(2) Has substantially the same owners or managers that control the labor relations as the judgment debtor.

(3) Employs as a managing agent any person who directly controlled the wages, hours, or working conditions of the affected workforce of the judgment debtor.

(4) Operates a business in the same industry and the business has an owner, partner, officer, or director who is an immediate family member of any owner, partner, officer, or director of the judgment debtor.

Employers and successors of a business should be proactive

Successor liability is a risk that always needs to be addressed properly by a new successor business and should always be a consideration in how a business is properly transferred. Most often, successor liability means that the successor could be responsible for paying debts and liabilities that the predecessor incurred. This new law expands the risk to the new successor business and makes it tougher for the predecessor to escape wage and hour liabilities/judgement.

This impacts not only how businesses are sold but it also increases the scrutiny a business should have when it considers bringing on partners, managers, owners, employees and family members of a prior or related business.