Expanded Labor and Employment Liability in Hotel Acquisitions

By John R. Hunt Attorney, Stokes Wagner Hunt Martez & Terrell, ALC | December 17, 2017

The scale and pace of mergers and acquisitions has accelerated at a rapid speed and it cannot be stressed enough the need to review the current law and conduct a thorough review before entering into any M&A transaction.  For example, consider the purchase of the assets of a single hotel with 200 rooms and 350 employees. The hotel has several managers who are classified as exempt from overtime, an administrative assistant who has alleged sexual harassment by an executive committee member, a catering manager who has requested accommodation for a disability and an engineer who is on leave because of a medical condition. In addition, the hotel has outsourced housekeeping to another company, the general manager has an individual employment contract and the food and beverage employees are represented by a union. The buyer plans to begin business immediately after the closing and in order to do so, will hire most, if not all, of the seller’s employees.

Under traditional principles of corporate law, many of these human resources issues would not have caused undue concern for a business that only was acquiring the seller’s assets. Most Courts recognized that where one company sold or transferred all of its assets to another company, the buyer generally was not liable for the debts and liabilities of the seller. In the past, this rule helped distinguish asset purchases from mergers in which one business acquired all of the seller’s shares of stock. With mergers, the acquiring company more of less was automatically viewed as a continuation or successor of the seller. As a result, it inherited the seller’s liabilities.

With asset purchase agreements, the traditional rule that the buyer remained insulated from the seller's legal problems has eroded over the years. Some states now recognize that in certain circumstances, a sale of assets can constitute a de facto merger, and bring the seller's liabilities along with it. This exception frequently has been invoked in products liability litigation where the courts have considered whether there was a continuation in fact of the seller corporation, so that the seller's management, personnel, physical location, assets and general business operations essentially remained the same after the sale.

In the labor and employment area, the erosion of the rule has been even more pronounced. The Supreme Court initially recognized that a company which only buys the assets of another corporation can succeed to the seller's relationship with a union that represents the seller's employees. In general, this requires a finding that the buyer hired a majority of the seller's employees and continued the same operations, events which are not unusual in the hotel industry where the buyer naturally will want to continue the business at the same location, often with much of the same workforce. Over time, the application of this principle has expanded to other employment laws.

For example, in the asset purchase scenario described above, the seller has several managers it has treated as exempt from overtime under the Fair Labor Standards Act. If the seller improperly applied the exemption, it is possible that the buyer could become liable for overtime violations. Under the FLSA, many courts will consider whether there was: (1) a continuity in operations and work force of the successor and predecessor employers; (2) notice to the successor of its predecessor's legal obligations; and, (3) an ability on the part of the predecessor to provide relief. Although it may appear that lack of notice would prove to be an “easy out” for an acquiring company, the existence of notice can be either express or implied from the facts. As a result, an employee who files a lawsuit may be able to successfully argue that a fact question exists about whether the purchaser had notice and this will be sufficient to have the case continue into the costly discovery phase of litigation.

The same general principle applies to the sexual harassment claims of the administrative assistant. These may be covered by the anti-discrimination provisions of Title VII of the Civil Rights Act of 1964 as well as any state law. Again, the courts generally focus on continuity in business operations, whether the buyer had notice of the claims and whether the predecessor was in a position to provide relief before the purchase. While a buyer may claim it lacked actual notice of the claim, the wholesale hiring of the seller's work force or a manager who was involved in the harassment or had knowledge of it, may be enough to create a fact issue about notice. This, in turn, may embroil the purchaser in a lawsuit over events that took place long before it began to manage the property.

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