Successors Liable for Wage Claims

Recently, the Oregon Supreme Court issued an opinion that may have an impact on wage claims for anybody who purchases a business in Oregon. In an opinion written by Justice Walters, the Court decided what a “successor to the business” means when the Oregon Bureau of Labor and Industries (BOLI) is seeking to recover amounts distributed for unpaid wage claims. Because of this opinion, anyone purchasing an existing business could be responsible for wages that the former owner failed to pay

In Blachana, a property owner leased building space to NW Sportsbar, and sold NW Sportsbar the inventory and goodwill of the Portsmouth Club, which previously occupied the space.  The owner of NW Sportsbar operated the business for fifteen months, using the names Portsmouth Club and Anchor Grill, selling food and drinks and offering live music and entertainment.  During his brief operation of the restaurant, the owner of NW Sportsbar hired several employees, but failed to pay them.  The owner failed to pay  two individuals any wages in the final five months of the restaurant’s operation and failed to pay two other employees any wages during their employment.  The owner of NW Sportsbar was also behind in his payments under the terms of the lease and sale agreements.  The owners then entered into a surrender and release agreement with the property owner to surrender its business assets, name, and goodwill to the property owner in exchange for a release of his obligations under the lease and sale agreements.  The owner of NW Sportsbar then “left town” without paying those four employees.

The property owner, after receiving the surrendered assets, then formed a new limited liability company, Blachana LLC, with an assumed business name of “Penner’s Portsmouth Club.” The new LLC obtained all the necessary licenses and permits and began operation as a bar, including offering live music and entertainment, and later adding food under the name “Portsmouth Pizza and Pub.” Blachana used most of the equipment and same beer vendor as NW Sportsbar, but used a different food vendor and did not hire any of the same employees.  Blachana did not have common ownership or management with NW Sportsbar, however its LLC apparently continued the same phone number as used by NW Sportsbar.

BOLI ultimately paid the wage claims, and notified Blachana that it was responsible as a “successor to the business.” Blachana contested the findings in an administrative hearing, and the BOLI commissioner affirmed, finding that Blachana “conducts essentially the same business as conducted by the predecessor.”  Blachana appealed the decision of the BOLI commissioner to the Oregon Court of Appeals, who reversed the finding because it agreed with Blachana’s argument that it was “a separate corporate entity with no connection to NW Sportsbar.”  BOLI then appealed to the Oregon Supreme Court, which ultimately affirmed BOLI’s initial finding that Blachana was a “successor to the business.”

The Court engaged in an extensive analysis of common law successor liability and legislative intent. The legislature first enacted statutes pertaining to wage claims and enforcement of the right to make wage claims in 1931. According to the Court, the legislature “indicated an intent to include a broad class of successors.” In determining whether a business should be liable as a successor, the Court examined the following nonexclusive list of factors, as set forth by BOLI:

  • The name or identify of the new business;
  • The location of the new business;
  • The lapse of time between the previous operation and the new operation;
  • The same or substantially the same workforce employed;
  • Whether the same product is manufactured or same services offered; and
  • Whether the same machinery, equipment, or methods of production are used.

Although not every factor was present in Blachana, the Court found that as to the two businesses, there was similarity in both the name and identity of the restaurant, both businesses were located in the same place, Blachana opened 47 days after NW Sportsbar closed, Blachana used most of the same equipment as NW Sportsbar, and both businesses offered the same services, including “food, alcoholic drinks, and music in a club atmosphere.”  Notably, however, the court did not consider whether the lack of any commonality of management or ownership should be considered as a factor against successor liability.

As a result of the Court’s opinion, anybody looking to purchase a distressed business should pay close attention to the factors listed above to avoid potential liability for unpaid wage claims, or even other obligations that may arise as a result of the previous owner’s actions. A buyer should closely examine the books and accounts of an existing organization during the due diligence period to identify any potential claims against the business as early as possible, and consider contacting BOLI.  Traditionally, a sale of a business may include representations and warranties by the seller regarding potential liabilities, and indemnification clauses that would shift liability for such claims back to the seller.  In the sale of a distressed business, however, enforcement of such measures against the seller is unlikely to occur, which makes the due diligence process much more important.