An important Oregon Supreme Court decision reminds all business owners of the perils of successor liability. When acquiring a business or any business assets — regardless of the acquisition method — the new owners face potential successor liability for wage claims by employees who were not paid by the former employers.
In Blachana, LLC v. Bureau of Labor and Industries, 354 Or 676 (2014), the Oregon Supreme Court imposed liability for reimbursement of wages paid from the Wage Security Fund on a bar ("New Pub") that opened one month after its predecessor ("Former Employer") closed its doors without paying certain employees. New Pub acquired the assets of Former Employer by repossession when Former Employer was unable to make its lease and other payments to its landlord. The landlord was a corporation with the same principals as New Pub.
The Wage Security Fund was established to allow recovery for wage claimants if the employer that failed to pay the claimants was no longer in business or otherwise unable to pay the wage claims. Pursuant to Oregon statute, BOLI pays the claimants through the Wage Security Fund, and the commissioner is authorized to pursue recovery from the employer or any person or property that may be liable for the unpaid wages. The wage claim statute includes in its definition of "employer" two classes of individuals or entities: (i) a successor to the business of the employer; or (ii) a lessee or purchaser of any of the employer's business assets, which assets are used in the continuance of the employer's same business. ORS 652.310(1). New Pub was liable for the unpaid wages of Former Employer (also a bar) that were paid out of the Wage Security Fund, as New Pub was deemed a successor to the business of the wage claimants' employer.
The central issue in Blachana was defining a "successor to the business of employer" as contemplated under the definition of "employer" in ORS 652.310(1). Because New Pub did not lease or purchase the Former Employer's business assets, the only way it could be deemed an "employer" under the statute, and therefore liable to BOLI for reimbursement of wages paid, was if it was a "successor to the business of employer." The court rejected New Pub's argument that it was not a successor to Former Employer because it was a separate and distinct entity with no ties to Former Employer. Additionally, the court disagreed with the Court of Appeals' conclusion that an entity was only liable as a successor to the business of an employer when that entity would be liable for the employer's unpaid wages under some law other than the wage claim statute.
In holding New Pub was a successor to Former Employer as contemplated by the statute, the court accepted the test offered by BOLI: an employer was a successor for purposes of wage claims if it "conducts essentially the same business as conducted by the predecessor." The court considered a number of factors introduced in a previous BOLI case to determine if this test was met: (i) the name or identity of the business; (ii) the business location; (iii) the amount of time between the operation of predecessor's business and the new business; (iv) the continuity between the predecessor's workforce and the new business's workforce; (v) the products or services offered by the predecessor compared to the products or services offered by the new business; and (vi) whether the same equipment or production methods were used by the predecessor and the new business. In analyzing whether New Pub was a successor to the business of Former Employer, the court noted that not all of the six factors need to be met. All factors were present under the facts of Blachana, except the similar workforce. New Pub did not employ any of the same employees as Former Employer, but still was deemed a successor to the business of Former Employer and liable for reimbursement of the wages paid from the Wage Security Fund.
There are some ways attorneys can attempt to protect successor businesses from the wage claim successor liability in Blachana. In any acquisition, significant due diligence should be performed, including a careful examination of the business's financial and payroll records. Any asset purchase agreement should always contain strong representations regarding payment of wages and indemnity provisions. However, the representations and indemnity provisions in any agreement are only as strong as the seller or guarantor standing behind such provisions. If the seller is solvent and/or a deep pocket guarantor is standing behind the representations and indemnity, a buyer's risk is not that great. However, if there is any question as to the solvency of the seller or other transferor of assets, the attorney should craft a provision in the applicable agreement whereby the buyer obtains proof that all employee wages are paid by the closing date. Part of the purchase price could be allocated and a process established for the payment of any unpaid wages, vacation, or other employee compensation at closing. Another protective device is a holdback agreement that withholds a portion of the purchase price for one to two years and provides the acquirer with security not only for unpaid wages, but also for any other indemnification claims.
The Blachana decision highlights the potential exposure that any acquirer of a business or any business assets faces and reconfirms the importance of performing thorough due diligence in any acquisition. The potential successor liability for employers in this context applies to all subsequent business owners — no matter how the acquisition is structured. It also potentially applies to a business (or individual) that acquired only a few assets from another business and then used those assets in a similar business. While a buyer of stock expects significant liabilities to follow, a buyer of assets does not. This case serves as a reminder that an acquirer of any assets used in a business faces potential successor liability of wage claims.