A recent Sixth Circuit case reminds business owners of the importance of not only doing due diligence when purchasing an existing business, but also starting off on a good foot with the new business and implementing anti-discrimination policies immediately upon closing the sale. On November 8, 2010, a federal judge dismissed a complaint against an IHOP franchisee filed by the Equal Employment Opportunities Commission and titled U.S. Equal Employment Opportunity Commission v. 786 South LLC et al. In November 2007, Tripoli II Inc. purchased IHOP franchise 786 from 786 South LLC, a month after the EEOC filed a lawsuit alleging race and sex discrimination against 786 due to the general manager’s alleged repeated requests for sex and dates, fondling one worker’s breasts, and allegedly making ethnic slurs towards the restaurant’s black employees. After the purchase, the EEOC added Tripoli II as a defendant under a successor in liability theory.
So how was Tripoli II able to avoid liability? It demonstrated that it removed much of the management staff upon taking over, including the alleged offender. Although most 786 non-management employees were simply hired by Tripoli II, the company made sure that it issued employees orientation packages that included anti-discrimination and anti-harassment policies. The company also had employees acknowledge receipt of the policy. Employees were also encouraged to report any claims of discrimination or harassment to Tripoli II. In short, with a few simple actions, the company managed to change the corporate culture for the better and was able to demonstrate that it was not a successor in liability. In addition to insuring that anti-harassment and anti-discrimination policies are issued to all new employees, employers buying an existing business should make an honest assessment of managers and supervisory staff before hiring in order to eliminate problem supervisors.