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Am I liable for unpaid wages of prior owner?

Los Angeles, CA |

I bought a sole proprietor business and was wondering if I am liable for the previous owner not paying wages before I bought the business. This wasn't covered in the sales agreement.

Attorney Answers 3


It depends on the terms of the sale. If the purchase agreement included assuming the seller's liabilities, along with the assets, you may be on the hook. The trouble is, if an employee, who is owed wages takes legal action, they may name you as well as the selling party, since they won't know who is responsible for the wages, leaving it for you and the seller to fight it out over who should pay. Your best bet is to contact the seller to clarify the issue to make sure they will hold you harmless from any liability, should the employee come after you.

They say you get what you pay for, and this response is free, so take it for what it is worth. This is my opinion based on very limited information. My opinion should not be taken as legal advice. For true advice, we would require a confidential consultation where I would ask you questions and get your complete story. This is a public forum, so remember, nothing here is confidential. Nor am I your attorney. I do not know who you are and you have not hired me to provide any legal service. To do so would require us to meet and sign written retainer agreement. My responses are intended for general information only.

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Attorney Kirschbaum has given you sound advice. As a practical matter, if the employee is owed unpaid wages and/or overtime, that employee is likely going to sue both the former and the current owner of the business. Therefore, if this issue was not covered in the purchase and sales agreement, it would be prudent for you to enter into an amendment to the sales agreement to clarify this issue. Otherwise, you remain exposed to liability for the next 3 or so years.

Frank W. Chen has been licensed to practice law in California since 1988. The information presented here is general in nature and is not intended, nor should be construed, as legal advice for a particular case. This posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, please consult with your own attorney.

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A buyer can avoid these contingent liabilities by structuring the purchase transaction as an asset purchase. In an asset purchase, the buyer acquires the business assets, but not the business liabilities.

Does the agreement list any liabilities being assumed by the buyer and state that no other liabilities are being assumed?

Are you continuing the seller’s business? If so, you may be liable under a "successor liability" theory. The question of successor liability is difficult based on the “myriad [of] factual circumstances and legal contexts in which it can arise;” therefore, the court must give emphasis on the facts of each case as it arises. A finding of successorship involves two essential inquiries: (1) whether there is continuity of the business; and (2) whether the successor knew of the violations at the time it took over the business. A court may also consider whether: (a) the same plant is being used; (b) the employees are the same; (c) the same jobs exist; (d) the supervisors are the same; (e) the same equipment and methods of production are being used; and (f) the same services are being offered.

Other courts have stated the test for successor liability as: (1) whether the successor company had notice of the charge or pending lawsuit prior to acquiring the business or assets of the predecessor; (2) the ability of the predecessor to provide relief; (3) whether there has been a substantial continuity of business operations; (4) whether the new employer uses the same plant; (5) whether he uses the same or substantially the same work force; (6) whether he uses the same or substantially the same supervisory personnel; (7) whether the same jobs exist under substantially the same working conditions; (8) whether he uses the same machinery, equipment, and methods of production; and (9) whether he produces the same product.

No one factor is controlling.

If I have thoroughly confused you, it may be wise to talk to a lawyer.

Best regards,

David A. Mallen

David A. Mallen offers answers on Avvo for general information only. This offer of free, general answers is not intended to create an attorney-client relationship. If you need specific advice regarding your legal question, you should consult an attorney confidentially. Many experienced California labor and employment attorneys, including David A. Mallen offer no-risk legal consultations to employers and employees at no charge. David A. Mallen is licensed to practice law before all state and federal courts in California, as well as the California Labor Commissioner and the California Unemployment Insurance Appeals Board. Failure to take legal action within the time periods prescribed by law could result in the loss of important legal rights and remedies.

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