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Kentucky Court of Appeals determines what it takes to be a 'successor'

07.01.2007

Generally, an employer that acquires all or substantially all of another employer's assets, or otherwise succeeds its business, is considered a "successor" to the acquired employer. In that capacity, the new employer assumes the assets and liabilities of the predecessor's unemployment compensation reserve account. The Kentucky Court of Appeals recently had an opportunity to address the factors that allow the new owner of a business to be deemed a successor.

Facts

Norfolk Southern Railway Company owned the Shelbyville Mixing Center, a facility located in Shelby County, Kentucky, where railroad cars are loaded and unloaded. Norfolk owned the building, the rail yard, and the railcars but contracted out the work. Before August 2002, Shelbyville Mixing Center, Inc. (SMCI), operated the facility under a contract with Norfolk. SMCI also had a collective bargaining agreement (CBA) with Teamsters Local Union No. 89 covering the workers at the Shelbyville Mixing Center.

The company's contract with Norfolk was set to expire on August 25, 2002. Consequently, Norfolk began accepting bids that summer. In addition to SMCI, Competitive Auto Ramp Services, Inc. (CARS), submitted a bid and eventually won the Norfolk contract.

CARS operated the same facility and performed the same work as SMCI. There was no interruption in the operation of the business, and CARS employed approximately 98 percent of SMCI's former employees.

A few months into the CARS/Norfolk contract, a Kentucky Division of Unemployment Insurance auditor received a delinquent report assignment on SMCI. The auditor's investigation revealed that CARS was operating the same facility as SMCI and performing the same work with 98 percent of the same employees. Based on those facts, the auditor notified CARS that it was the "successor" to SMCI, and if the Division was unable to collect the amounts owed from SMCI, then CARS would be responsible for the delinquency. CARS was informed that SMCI owed the Division more than $250,000, including taxes, interest, and other penalties.

CARS asked the Kentucky Unemployment Insurance Commission to review the auditor's determination. That request was followed by an appeal to the Franklin Circuit Court and, finally, an appeal to the Kentucky Court of Appeals.

Court's decision

The court found that CARS operated the same business at the same facility with essentially all of the same employees as SMCI. But the court also found that Norfolk owned the facility and the railcars, that no conversations or negotiations between CARS and SMCI occurred, and that there was no agreement, assignment of rights or liabilities, or transfer of assets between CARS and SMCI. Moreover, CARS had negotiated its own separate CBA with the local union rather than adopting SMCI's contract.

The Division of Unemployment Insurance was unable to produce any evidence of a "connection, negotiation, or transaction" between SMCI and CARS. The court determined that CARS couldn't be a successor to SMCI without that evidence.

It's worth noting that the statute at issue, KRS 341.540, was significantly amended during the litigation of this case. The new statute reads, in pertinent part:

For the purposes of this chapter, if a subject employer transfers all or part of its trade or business to another employing unit, the acquiring employing unit shall be deemed the successor if the transfer is in accordance with administrative regulations promulgated by the Secretary, or if the transferring and acquiring employing units have substantially the same ownership, management, or control. If an employing unit is deemed the successor, the transferring employing unit shall be deemed a predecessor.

Any successor to the trade or business of a subject employer shall assume the resources and liabilities of the predecessor's reserve account, including interest, and shall continue the payment of all contributions and interest due under this chapter, except that the successor shall not be required to assume the liability of any delinquent contributions and interest of the predecessor or predecessors unless the Cabinet notifies the successor of the delinquency.

Bottom line

Unemployment compensation insurance reserve accounts are a source of potential liability for a company that acquires another employer's business or assets. The impact of acquiring that liability should be well thought out before the deal is closed.

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If you have any questions or need help, please contact any member of the Bingham Greenebaum Doll LLP Labor and Employment Department. Find us online at www.bgdlegal.com. 

Copyright 2007 M. Lee Smith Publishers LLC 
KENTUCKY EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Kentucky employment law.  Questions about individual problems should be addressed to the employment law attorney of your choice.

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