If you are contemplating the purchase of an existing business, due to newly enacted California labor codes, potential buyers must be even more circumspect of a business’ previous debts or previous judgments than ever before.
Assembly Bill 3075, effective January 1, 2022, or upon certification by the Secretary of State that California Business Connect is implemented, whichever is earlier, adds Section 200.3 to the California Labor Code, which will allow employees to collect on a wage and hour judgment from both their employers and certain successor businesses. The new law makes it easier for workers to enforce judgments for unpaid wages by making certain successor businesses liable for their predecessor’s unpaid wage and hour judgments owed to any of the predecessor employer’s former workforce. The bill seeks to prevent employers from evading unpaid wage and hour judgments by discontinuing the judgment debtor entity, only to form a new business entity that is substantially similar to the prior entity.
Under existing law, when one business entity sells or transfers all of its assets to another business entity, that latter business is not liable for the debts and liabilities of the former. However, California courts will ignore that general rule regarding certain successor businesses under four circumstances:
- The purchaser expressly or impliedly agrees to assume the seller’s debts and liabilities;
- The transaction amounts to a consolidation or merger of the two business entities;
- The purchasing business is merely a continuation of the selling business entity, i.e., there was no adequate consideration given by the purchaser for the assets, or one or more persons were officers, directors, or stockholders of both businesses; or
- The transaction is entered into fraudulently to escape liability for debts.
Section 200.3 expands this definition for wage and hour judgements. Successorship liability can be established upon meeting any of the following criteria:
- The successor uses substantially the same facilities or substantially the same workforce to offer substantially the same services as the predecessor employer;
- The successor has substantially the same owners or managers that control the labor relations as the predecessor employer;
- The successor employs as a managing agent any person who directly controlled the wages, hours or working conditions of the affected workforce of the predecessor employer; or
- The successor 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 predecessor employer.
Although the bill is intended to prevent an employer from evading a judgment, the addition of the first point above will affect any unwary successor business without ties to the predecessor business, who does not make changes to both the facilities and the workforce used to operate the business.
Additionally, AB 3075 adds Section 1502 to the Corporations Code, which requires a business to disclose whether certain owners or managers have any wage judgments against them. This will require a company to attest in their statement of information they file with the California Secretary of State’s Office that no officer, director, or LLC member / manager has an outstanding final judgment for the violation of any wage order or provision of the Labor Code.
If you have questions about wage and hour issues or any Labor & Employment issue, reach out to Makayla.Whitney@berliner.com or any of our experienced employment attorneys at Berliner Cohen, LLP.