In 2020, the California Legislature enacted a series of employment reforms that may affect our clients’ businesses. Of particular importance was AB 3075, which was signed by Governor Gavin Newsom on September 30, 2020, and effective as of January 1, 2021 as Labor Code § 200.3, which expands the applicability of the doctrine of successor liability.
In general, one business entity is not liable for the debts of another business entity. Successor liability, however, is an exception to the general rule and allows a creditor/plaintiff to recover an outstanding debt or legal judgment from the entity who is the “successor” of the entity liable for that debt or judgment. Most often, this occurs when one entity purchases another entity and assumes all of its debts and judgments, or when two entities merge and form a new, larger entity. The new law, AB 3075, codified into law as Labor Code § 200.3, expands on the concept of successor liability and its legislative purpose is specifically aimed at preventing business owners who have violated the Labor Code from escaping liability by shuttering one business and forming another.
The new law provides that “a successor to any judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor’s former workforce pursuant to a final judgment.” It further defines “successor” to apply in situations where any business that “[u]ses substantially the same facilities or substantially the same workforce to offer substantially the same services as the judgment debtor.” It also includes any business that “[e]mploys as a managing agent any person who directly controlled the wages, hours, or working conditions of the affected workforce of the judgment debtor.” In addition, it includes “a business in the same industry [that] has an owner, partner, officer, or director who is an immediate family member of any owner, partner, officer, or director of the judgment debtor.”
Furthermore, AB 3075 added Sections 1502, 2117, and 17702.09 to the California Corporations Code to require companies to attest in their statement of information filed with the California Secretary of State that no officer, director, or LLC member or manager “has an outstanding final judgment issued by the California Division of Labor Standards Enforcement or a court of law … for the violation of any wage order or provision of the Labor Code.”
The immediate effect of these laws is that the successor entity of any business entity that was dissolved with an outstanding Labor Code violation judgment or order is now liable for the prior entity’s debt, within the applicable statute of limitation. Thus, if you had a business that ceased operations with an unresolved Labor Code violation judgment, and then the owner, the owner’s family, or the officers of that company started a new business in the same industry, with a substantially similar workforce, the new entity may now be liable for the obligations owed by dissolved entity.
As always, the best way to prevent Labor Code judgments is to actively prevent lawsuits from occurring in the first place by complying with the Labor Code and making sure that adequate documentation is being maintained for each employee. If you think that you may be subjected to liability due to this new law, please contact Raimondo & Associates to discuss potential liability exposure and options for resolution.