Minimizing Labor and Employment Risks When Acquiring or Selling a Business

Mergers and acquisitions reached historic levels in 2021, and while 2022 had lower deal volumes, coupled with the ongoing concern that 2023 may continue on a downward trajectory, it is imperative for corporate buyers and sellers to know about labor and employment issues associated with these transactions. 

Acquiring or selling a company can be an exciting and complex process, but it also comes with a host of legal and regulatory considerations that can have significant legal, financial and reputational implications. Effective and thorough due diligence will aid in avoiding labor and employment pitfalls. Though not exhaustive, here are some important labor and employment issues to consider when purchasing or selling a company. 

1. Wage and Hour Liability

A potential hidden liability in an asset acquisition is the seller’s past wage and hour violations under the federal Fair Labor Standards Act (FLSA). Even when the potential liability is identified by the purchaser and the parties have negotiated contractual terms in an asset purchase agreement for the purchaser not to assume such liability, the purchaser may still have exposure for such wage claims when it is deemed a successor under federal common law.

Wage and hour claims under the FLSA can result in significant liability to an employer. Most FLSA claims are brought as a collective action (similar to a class action) on behalf of all similarly situated employees. This can often lead to hundreds of thousands of dollars in liability and, if the collective class is large enough, even millions of dollars for underpayment of required wages. Typical FLSA claims include:

• • Misclassification of employees as exempt
  • Failure to properly calculate an employee’s “regular rate” of pay in the calculation of overtime
  • Failing to pay employees for hours worked such as for travel time, donning and doffing, meals and rest periods
  • Improperly classifying workers as independent contractors rather than as employees

Many federal courts have recognized that when liability is based on a violation of a federal statute involving labor relations or employment, application of successor liability under federal common law is appropriate in suits to enforce federal labor or employment laws, like the FLSA. Successor liability is imposed to stop employers who violated wage and hour laws from avoiding liability by selling or disposing of their assets and dissolving. Because a purchaser can be held liable as a successor for the seller’s past wage and hour violations, it is essential that the purchaser perform a thorough due diligence of the seller’s compliance with wage and hour laws. 

2. Prior Employment Agreements and Restrictive Covenants

The acquiring or selling company should carefully review employment agreements to ensure they are enforceable and do not violate any laws or regulations. Restrictive covenants, such as non-compete clauses, may be unenforceable in some states or require certain conditions to be met. This is especially important in light of the Federal Trade Commission’s recently proposed rule that would ban employers from enforcing non-compete agreements for their workers. If valid, restrictive covenants can greatly impact the amount of protections companies can place on their employees and company assets, like trade secrets and proprietary information. Companies looking to be acquired should ensure, to the extent legally permissible, they have robust protections in place to make them more attractive to potential purchasers. Likewise, potential purchasers will want to understand the landscape of employment agreements and corresponding restrictive covenants they may inherit as part of an acquisition. 

3. OSHA

Occupational Safety and Health Administration (OSHA) regulations exist to ensure that workplaces are safe and healthy environments for employees. Compliance with OSHA regulations helps to reduce the number of workplace accidents and injuries, which can result in lower workers’ compensation costs and increased productivity. It also helps establish a culture of safety in the workplace, which can improve employee morale and retention. In light of COVID-19, it is especially important to ensure compliance with OSHA regulations. 

Although much of the world has moved on from the COVID-19 pandemic, OSHA continues to enforce its workplace guidance on prevention and mitigation. OSHA’s general duty clause provides that each employer shall furnish to employees a place of employment which is free from recognized hazards that are causing or are likely to cause death or serious physical harm.

While OSHA’s last update to its COVID-19 guidance was in August 2021, an “Update Coming Soon” banner has been posted on its website for almost a year, leaving employers confused about OSHA’s future approach to the pandemic. Nevertheless, COVID-19-related enforcement continues, and companies must therefore ensure scrupulous compliance with OSHA standards. Moreover, it is important to request OSHA 300, 300A, and 301 Forms, as well as materials with respect to any OSHA inspections, corrective actions, settlements and citations while conducting due diligence.

4. Purchasing a Unionized Company

Between October 2021 and September 2022, the National Labor Relations Board saw a 53% increase in union election petitions, the highest single-year increase since fiscal year 2016. With unionized workforces trending, purchasers of unionized companies should carefully analyze the terms of collective bargaining agreements (CBA) to determine whether a “successor clause” exists. A successor clause is often included in CBAs, which typically states that the CBA will be binding on any successor. 

When a company purchases the assets of a unionized employer, with certain caveats, the asset purchaser is deemed a successor to the bargaining obligation if a majority of its employees formerly worked for the unionized employer. If the purchaser is deemed to be a successor, it must recognize and bargain with the union that represented the seller’s employees. Accordingly, companies considering purchasing a unionized business must analyze the added burden of a union contract.

5. WARN Act Compliance

The Worker Adjustment and Retraining Notification (WARN) Act protects workers, their families and communities by requiring employers with 100 or more employees—generally not counting those who have worked less than six months in the last 12 months and those who work an average of less than 20 hours per week—to provide at least 60 days advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site of employment. 

Many states have also adopted “mini-WARN” acts that apply to smaller employers or to layoffs affecting fewer employees than the federal WARN Act threshold. Each has its own notification procedure. Employers who have engaged in layoffs or plant closings in the past should assess whether they were required to follow WARN, or mini-WARN, requirements, and, if so, whether they complied with those requirements. As part of the due diligence process, and when evaluating potential large-scale layoffs or plant closures, a purchaser should analyze the seller’s compliance with WARN requirements and ensure that all required notices were provided to employees. 

6. Immigration

The Immigration Reform and Control Act of 1986 was established to prevent individuals who are not eligible to work in the U.S. from performing work. Some companies, however, fail to properly determine whether employees are authorized to work in the U.S. A purchaser should therefore consider whether the selling company has timely and properly completed Form I-9s for current and former employees and complied with E-Verify when required by federal or state law. I-9 requirements can be complex, and timing is key, so consider consulting with an attorney to ensure proper compliance. 

Whether you are interested in purchasing or selling a company, effective and thorough due diligence is crucial to avoid the costly and time-consuming consequences of non-compliance with labor and employment laws. Please contact Will Bishop, Jason Pill, Austin Laurienzo, or any member of Phelps’ Labor and Employment or Business teams if you have questions or need compliance advice and guidance.