Appeals Court Finds Business Successors Can Inherit Employment Discrimination Liabilities

Companies or individuals acquiring an existing business should determine if the seller faces potential civil rights violations and, if so, take this fact into account in the acquisition process. If a buyer overlooks these liabilities, they could inherit them, despite longstanding Illinois precedent against such “successor liability,” at least according to one appeals court.

In People ex rel. Dep’t of Human Rights v. Oakridge Nursing & Rehab Ctr., the First District Appellate Court held that the general rule of successor corporate nonliability may not apply to Illinois Human Rights Act claims against predecessor companies, if circumstances fit an exception to non-liability previously applied only in federal courts.

Specifically, the First District adopted the nine “MacMillan Factors” (named after the case holding from which they derive, EEOC v. MacMillan Bloedel Containers, Inc. and adapted from considerations federal courts have used for determining successor liability under the National Labor Relations Act).

By doing so, the First District followed the lead of several other states that have already adopted the federal standard for successor liability under their own states’ human rights acts, including New York, Iowa and Michigan.

The “MacMillan factors” adopted by the Court for determining successor liability are:

(1) Whether the successor corporation had notice of the charge;

(2) Whether the predecessor was able to provide relief;

(3) Whether there has been a substantial continuity of the business operations;

(4) Whether the successor uses the same plant;

(5) Whether the successor uses the same or substantially the same workforce;

(6) Whether the successor uses the same or substantially the same personnel;

(7) Whether the same jobs exist under substantially the same working conditions;

(8) Whether the successor uses the same machinery, equipment and methods of production; and

(9) Whether the successor produces the same product.

The Court, relying on Seventh Circuit precedent, appeared to give the first two factors the greatest weight.

The judges noted that the first factor, “notice” of a discrimination claim, is required so that the buyer has some time to negotiate a change in the purchase agreement to reflect the potential liability. But, they emphasized that the “burden is on the successor” to find out from the predecessor all outstanding potential and actual liabilities,” signaling that it won’t allow successors to bury their heads in the sand and forego meaningful pre-purchase due diligence as a means of avoiding successor liability.

As for the second factor, the Court indicated that the existence of a solvent, viable predecessor post transfer may cut against imposing successor liability.

With respect to the remaining factors, the court indicated that factor three, “continuity” subsumes the remaining factors and that the amount of continuity required between predecessor and successor will vary from case to case. And like the Seventh Circuit has ruled before, the court cautioned that successor employer liability is “not automatic” and must be determined on a case-by-case basis with the primary goal of providing the victim of discrimination full relief.

What’s next and what does it mean to today’s buyers of Illinois businesses?

This case serves as a potent reminder to business buyers, including private equity firms, to include employment practices liability and employee relations in their due diligence toolkit, or they could end up buying unknown liabilities without fairly factoring it into the terms of the acquisition.

And buyers would be well served not to misinterpret this case as having closed the book on the scope of successor liability for employment claims other than employment discrimination. Although the court noted that it was extending this successor liability rule only to cases involving employment discrimination in violation of the Illinois Human Rights Act, other courts could conceivably extend its reach to other types of employment liabilities, including tort and wage claims.

In fact, the Illinois Supreme Court will have its first chance to do just that; on September 25, 2019, it accepted the Oakridge case on appeal from the First District. Stay tuned to this blog for future updates.

Until then, Illinois businesses considering buying an existing Illinois business would be well served to engage a qualified Illinois employment attorney to audit their targets’ employment practices and liabilities, as part of a comprehensive due diligence process before closing on any acquisition.

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Gary Savine is an Illinois employment lawyer and founder of Savine Employment Law in Chicago. Gary regularly conducts employment practices audits and investigations for businesses.