This is the last post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another company.  The previous post discussed issues that can arise when a union company acquires a nonunion business.  This post will address employment law considerations that should be discussed in the due diligence phase of a proposed acquisition, regardless of whether either company is represented by a union.

Employment Law Considerations in the Purchase of a Business

Although union issues are often a critical factor in the purchase and sale of a business, there are other employment law issues to be considered.  For example:

  1. Are the seller’s employees subject to restrictive covenants such as noncompetition agreements?

    In a stock purchase situation, it is likely these restrictive covenants will continue to apply if the buyer chooses to retain employees governed by these agreements.  In the case of an asset purchase, the agreements need to be reviewed to determine whether the agreements expressly provide that the agreements can be assigned to others.

  2. Is the buyer in an asset purchase liable for pending discrimination charges?

    Generally, whether a buyer is liable for discrimination claims will depend on whether the buyer is a successor to the seller.  If there are pending liabilities the purchase agreement should state whether the buyer or the seller is liable.

  3. Are there current or potential issues regarding the classification of workers as independent contractors? Are there wage and hour violations, immigration concerns, work place safety issues or other workplace concerns? What are the seller’s vacation and sick pay policies? If the buyer intends to hire all or most of the seller’s employees, will the buyer allow employees to carry over accrued paid time off from the seller?
  4. Is the buyer obligated to reinstate an employee on a state or federal mandated leave of absence?

    In the case of a stock transaction, the buyer steps in the shoes of the seller and has the same obligation to reinstate an employee on a required leave.  In an asset purchase, whether the buyer has an obligation to reinstate an employee at the expiration of a leave of absence will depend on whether the buyer is a successor to the seller.  If the buyer hires all the seller’s employees, an employee on an FMLA leave would have to be re-instated unless the buyer can prove the employee’s position would have been eliminated whether or not the employee was on leave.

  5. If the buyer does intend to hire all the seller’s employees, or there will be a hiatus between the closing date and the buyer’s active operation of the business, is the seller required to give its employees a WARN Act notice of layoff?

    The federal Worker Adjustment and Retraining Notification Act (WARN Act) must be considered in designing an acquisition.  The WARN Act requires employers to notify affected workers at least 60 days before a plant closing or a mass layoff that will last more than 6 months and affect 50 or more employees.

    Under the federal WARN Act, a covered employer is a business enterprise that employs:
    (i.)   100 or more employees, excluding part-time employees; or
    (ii.)  100 or more employees, including part-time employees, who in the aggregate work at least 4,000 hours per week, exclusive of overtime.

    Many states have some form of a WARN Act.  In Minnesota, there is no notice requirement separate from the federal WARN Act, but employers are “encouraged” to give advance notice of the decision as early as possible to affected employees and their unions, the state commissioner of jobs and training, and the government of the locality where the facility is located.  Parties to a sales transaction should work with their attorneys to determine if WARN Act notices must be provided in connection with a business acquisition.  Buyers should be clear in the transaction documents that the seller is responsible for compliance with any applicable state and federal WARN laws.

  6. Does the seller have change in control or other agreements with key management employees such that the acquisition costs will be increased or the buyer’s ability to retain these key executives is compromised?

    In a stock transaction it is likely that the buyer continues to be bound by such agreements.  This is not necessarily the case in an asset purchase although the seller may request that the buyer provide similar severance benefits to seller’s key employees.

Thus, it is important that a prospective buyer engage in due diligence to fully understand and, if possible, minimize risk in an acquisition transaction.  The buyer should have a full understanding of the seller’s employment practices, existing or threatened employment obligations and union obligations.  Where there are such existing or threatened obligations, the transactional documents should contain appropriate representations, warranties, covenants and indemnification provisions to clarify what the buyer’s understandings are and what the respective obligations are between the buyer and seller.  In designing the transaction, the buyer should attempt to determine whether integration of the buyer and the seller’s facilities and employees is important, understanding the legal consequences of integration.

It is helpful for the buyer to have a due diligence checklist to ensure that all of the appropriate questions are asked.  Buying a business can be an integral part of the expansion and success of an existing company.  However, whether or not such an acquisition is in the buyer’s best interests needs to take into account the seller’s labor and employment obligations, agreements and liabilities.  Due diligence is critical to any acquisition and it is important that a labor and employment lawyer be involved in the planning and documentation of the transaction.

Do you have further questions about business acquisitions?  Phyllis Karasov is chair of Larkin Hoffman’s Labor and Employment Law Group.  She, or another member of the team, is available to answer your questions.  Phyllis Karasov,, 952-896-1569.