When faced with an unpaid wage claim (such as one brought under the Fair Labor Standards Act — FLSA, for short), an employer has one option that is often off the table, an option nicknamed the "nuclear option".
What is it?
It is to close the business, either through a bankruptcy or just an outright dissolution.
It’s often unthinkable because of the other consequences that such a decision can bring. And it is far from foolproof.
Why? Because often times, the owners will open up a new company that may be deemed to be a "successor" to the original and be forced to pay any judgment from the original company.
Case in point? Medina v. Unlimited Systems, LLC (download here), a recent federal district court decision in Connecticut.
In Medina, a small business was faced with tens of thousands of dollars in unpaid wages. The owners set up another company that, according to the decision, did the same type of work as the original company. The court ultimately found that this new company was a successor.
The court’s analysis is what is particularly notable about the case. The court said that, in the Second Circuit, the test for determining successor liability is unresolved. Therefore, the court looked at three different tests and punted. It said that it did not need to decide which test applied because under any of these tests, the new company was a successor.
For anyone looking at successor liability, the case provides a good description of each of the tests.
For small businesses faced with a significant piece of litigation, this case is an important reminder that setting up a new company may not solve the original company’s ills but rather merely postpone them until a judgment day later.
Also, do not merely rely on this legal issue if faced with an unpaid wage claim. In Connecticut, the state has gone after company owners as well on unpaid wage claims. Employers should certainly consider hiring legal counsel when financial troubles begin so that a big problem doesn’t become a bigger one.