In a fairly recent federal case, an employer hotel, through its owner/principal, violated Title VII by using racial and ethnic comments in the workplace toward hotel employees. The hotel also retaliated against employees who complained. After EEOC filed a Title VII lawsuit against the corporate employer, the hotel was sold not once but twice. The EEOC amended the complaint after each sale to add the new owner under something called the “successor employer theory.” The longstanding common law rule was that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. There are exceptions to the common law rule; one such exception has been applied in favor of employees to avoid harsh outcomes that might flow from the strict application of the common law rule. In employment cases, some federal courts have examined nine factors in determining whether successor employer liability is justified. Other circuits have distilled those nine factors to three: (1) whether the successor had prior notice of the claim against the predecessor; (2) whether the predecessor is able, or prior to the purchase was able, to provide the relief requested; and (3) whether the predecessor and successor engaged in continuous business operations.
At least one court has held that “constructive” notice might be sufficient to meet the test’s first prong. In this federal case, the EEOC argued that the second successor bargained with the first successor for a 30-day due diligence period to allow an investigation of business liabilities; that if the second successor had conducted a reasonable and adequate investigation of those liabilities, it would have discovered the pendency of the EEOC lawsuit; and, that second successor failed to discover the lawsuit because it had failed to conduct a reasonable and adequate investigation. The trial court rejected that argument and dismissed the case against the successor employer. The Circuit Court reversed, suggesting that “constructive” notice might be sufficient to meet the test’s first prong.