On April 3, the Third Circuit Court of Appeals set an important precedent regarding successor-employee liability for the U.S. Fair Standards Labor Act (FSLA). For the first time, the court determined that a successor-employer — one that has acquired an existing business and chooses to continue its operations in the same manner as the previous employer — may be held financially liable for its predecessor’s wage-and-hour violations.

This ruling is significant for businesses across countless different industries, as it potentially exposes them to additional claims under the FSLA and provides plaintiffs with additional ways to recover wage-and-hour claims. In this case, Thompson v. Real Estate Mortgage Network, the plaintiff sought to hold her previous employer and its predecessor company accountable for their alleged refusal to compensate her for overtime hours. This failure to pay is a violation of FSLA wage-and-hour laws in the state of New Jersey, where Thompson worked.

The FSLA is responsible for establishing overtime pay, minimum wage, youth employment standards and recordkeeping standards throughout the United States, including its territories. These standards apply to employers in the private sector as well as at the local, state and federal governmental levels. According to the law, any covered nonexempt employees are required to receive adequate overtime pay for any hours worked over 40 in a given workweek, at a rate of one and a half times the regular wage.

When evaluating the Thompson case, the court needed to decide whether the New Jersey state law test or the federal common law approach for successor-employer liability should apply. The federal common law approach, according to the court, presents a lower bar for relief than most state law philosophies. The court determined that the federal common law standard was the appropriate choice for governing Thompson’s claims, explaining that adopting a less stringent standard would make it more difficult for violators to escape liability. In addition, the court reasoned that the broader approach supports the federal statute’s mission of protecting workers’ rights and fostering labor peace.

This decision will likely have a significant impact on successor-employers in the U.S. Virgin Islands and across the United States. When acquiring a new business, employers should make an effort to understand and inquire about any existing state wage-and-hour violations to evaluate their risk of successor liability. It’s likely that this will become a standard practice when it comes to business valuation and transactions in the years to come.

BoltNagi is a widely respected and well-established employment law firm serving businesses and organizations throughout the U.S. Virgin Islands.