California is known for passing pro-labor legislation that protects workers' rights. In 2022, California added protections for workers at companies changing ownership. AB 3075 Section 200.3 makes successors responsible for compensating employees for unpaid wages earned while working with the prior company.
Before the law was enacted, the California Legislative Analyst's Office (LAO) reported that residents file nearly 30,000 unpaid wage claims annually with the California Labor Commissioner's Office. Unpaid wage filers wait an average of 396 days to receive judgments on their claims, not including lawsuits filed through a higher court or complaints filed with the United States Department of Labor. In addition, many California workers have faced problems getting paid after a company changes hands, or becomes a different one in name only.
AB 3075 sought to cut down on businesses getting away with breaking labor codes by simply closing their companies and forming new ones. The new law requires certain companies to inform the California Secretary of State if their owners, directors, officers, or members have connections with a company with outstanding judgments or violations from the California Division of Labor Standards Enforcement, for example.
Before this provision for employees was added, when a business transfers/sells to another entity, the new business owners were not liable for paying the debts and liabilities of the previous business, except in a few instances. These instances include when a business explicitly states or agrees (explicitly or impliedly) to absorb the existing business debts and liabilities, when the new business is the result of a merger or consolidation of two companies, or when the transaction was obviously completed to escape prior debts. The new business was also held liable if it is simply a continuation of the services of the selling business.
California has extended this business successor liability legislation to include owners and managing agents. An add-on to AB 3075, Section 200.3, protects workers from losing wages, damages, and penalties owed to them when their employer has transferred or sold their business by providing guidelines for a qualifying successor. When the company uses the same building and most of the same employees and offers overwhelmingly the same services as the prior business, Section 200.3 clearly establishes successor liability.
A company that retains the same managers in charge of the workforce as the previous company is a qualifying business, as is a company that employs a managing agent (employment agency) that directly controls employee wages, hours, or work conditions. Finally, if the new company is connected to owners, partners, officers, or directors of the previous company, the new business is liable for unpaid wages. The law also prevents companies from avoiding paying workers by selling the company to family members.
While the law protects workers, companies may face violations and have to appear at multiple hearings, which can incur costly legal expenses. To avoid violating the law, some experts advise companies to be vigilant when purchasing other companies. Companies must have full disclosure of the liabilities the company they intend to purchase, including unpaid wages.
