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30-SECOND SUMMARY Whether handling a stock purchase transaction or an asset purchase transaction, having and using a checklist of labor and employment issues can make life a bit easier for in-house counsel. A potential buyer should review all employment-related agreements to determine whether they contain provisions that affect continuation of those agreements or obligations. A standard but important area to review is pending and threatened litigation. Responsibility for defending and for liability, of course, will be addressed in the purchase agreement. The buyer will also want to know of existing health- and safety-related obligations it may need to undertake upon purchase. This information also will allow the buyer to determine if there is a history of safety problems, which in turn, may affect its interest in purchasing the business.

By Verona Dorch and Greg Utken

Buy-sell agreements are complex documents that cover numerous business and legal issues in a transaction. Every business has, and thus every transaction involves, employees. This article is a practical guide to the necessary — and less obvious — labor and employment issues that should be on in-house counsel’s “radar screen” when conducting merger and acquisition due diligence in the United States.

What to Keep on Your Radar Screen: LABOR and EMPLOYMENT Due Diligence in M&A

ACC DOCKET NOVEMBER 2013 57

Stock purchase vs. asset purchase – it makes a differenceIn a stock purchase transaction, one party simply is buying the stock of a company and the legal entity remains the same. The stock buyer will step into the shoes of the stock seller, and noth-ing will change with labor and employ-ment matters or liabilities unless the parties contractually agree otherwise.

In an asset purchase transaction, legal entity A is buying assets of legal entity B, and those assets become part of legal entity A. The obligations can be very different from those in a stock transaction. Generally, unless the asset purchaser agrees otherwise or is a legal successor to the seller, it does not as-sume the seller’s labor and employment obligations or liabilities. Unless other-wise noted, the perspective discussed is that of a buyer, but the buyer’s due dili-gence requests foretell information the seller should be prepared to produce.

Key documents and issuesExisting employment policies and formsA buyer should be interested in per-sonnel policies, procedures and forms that the seller has in place, which will provide the buyer with more infor-mation about the business. They also allow the buyer to determine if it wants to: 1) maintain some or all of those policies; 2) replace them with its own; or 3) prepare a new set containing the “best of ” the seller’s and buyer’s policies. Documents a buyer should request include:■■ organizational charts,■■ employee handbooks,■■ supervisor policy manuals,

■■ employment applications,■■ rules of conduct,■■ a performance evaluation template,■■ a disciplinary action form template,■■ a confidentiality agreement

template,■■ a severance agreement template,

and ■■ other standard personnel forms

seller uses.

Human resource auditsThe prospective buyer should de-termine if the seller commissioned or conducted any internal employee surveys, human resource audits or gap assessments in the past three to five years. If it has, the buyer will want to review those.

What to have on your radar screen ■■ Items identified in the audit as

deficient.■■ Steps the audit recommended to

address deficiencies.■■ What the seller has already done (or

planned) to correct the deficiencies.

Employment related agreementsA potential buyer should review all employment-related agreements for provisions that affect continuation of those agreements or any of the seller’s obligations. Depending on the terms, the buyer may wish to either assume or try to renegotiate them prior to the purchase. Agreements that the buyer should request include:■■ executive employment/severance

agreements,■■ other individual employment

contracts,

■■ non-compete agreements,■■ confidentiality agreements,■■ employee loan or reimbursement

agreements,■■ consulting agreements,■■ independent contractor agreements,

and ■■ agreements with temporary service

agencies.

What to have on your radar screen■■ Any terms for termination or

transfer of the agreements in the event of sale.

Employment litigation, administrative charges and internal complaintsLitigation

A standard but important area to re-view is pending and threatened litiga-tion. Responsibility for defending and for liability, of course, will be addressed in the buy-sell agreement. However, the number or the pattern of pending and threatened lawsuits might signal whether there are human resource or management issues about which the buyer needs to be concerned. This information could factor into not only whether the buyer wants to purchase the business, but also whether there are particular managers it would not want to retain. The buyer should request information about:■■ pending employment litigation, ■■ unfiled but threatened employment

litigation, ■■ recently settled cases, judgments,

verdicts or consent decrees, and■■ whether the seller has employment

practices liability insurance (EPLI) plus limits or is self-insured.

Administrative chargesThe buyer will want to review pend-ing or threatened discrimination or retaliations charges filed with the Equal Employment Opportunity Commission (and similar state agen-cies), or the Department of Labor under OSHA, the Fair Labor Standards Act, Sarbanes-Oxley, or other laws.

Verona Dorch is VP, GC and corporate secretary of Harsco Corporation. Previously, she served in

senior legal positions with firms in Boston, New York and San Francisco, and on the legal team

for Sumitomo Chemical Company. [email protected]

Greg Utken is a partner at Faegre Baker Daniels LLP, and has been representing management in

labor and employment law matters and litigation for over 35 years.

[email protected]

58 ASSOCIATION OF CORPORATE COUNSEL

WHAT TO KEEP ON YOUR RADAR SCREEN: LABOR AND EMPLOYMENT DUE DILIGENCE IN M&A

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The buyer also should determine any EPLI coverage the seller may have for administrative charges. Similarly, the buyer will want to know about compli-ance orders, conciliation or settlement agreements with government agencies.

Internal complaintsSometimes overlooked in due diligence are internal complaints or investiga-tions. A buyer’s inquiry should not be limited to external employment claims. Most employers have some form of internal complaint procedure available to employees. Some employers also have “hotline” mechanisms.

What to have on your radar screen■■ Any repetitive types of claims (e.g.,

sexual/racial harassment).■■ Same manager/supervisor named

in multiple cases, charges or complaints.

■■ Same department or organizational area involved in multiple cases, charges or complaints.

■■ Same policy/practice challenged in multiple cases, charges or complaints.

■■ Obligations on the seller that may continue after the buyer takes over.

Supervisory trainingThe buyer should determine any labor- and employment-related training the seller has provided to its supervisory force, to inform whether the buyer should consider provid-ing this training itself. (Note: the US Supreme Court held in Kolstad v. American Dental Association (1999), that employers cannot be held liable for punitive damages under Title VII of the Civil Rights Act of 1964

based on discriminatory actions of supervisors that are contrary to the employer’s good faith efforts to com-ply with Title VII.)

What to have on your radar screen■■ Whether training has been provided

on harassment, investigations and employment laws.

■■ How often the training has been provided.

■■ The last time the training was provided.

■■ If participation in the training was documented.

SafetyThe safety record of a facility that may be purchased also can be important and telling. In this area, the buyer should ask for:■■ OSHA logs for the past three to five

years,■■ pending or prior OSHA (or state

OSHA) inspection reports and Compliance Safety Orders,

■■ work safety or work environment audits, studies or reports,

■■ the worker’s compensation claims history,

■■ the worker’s compensation insurance modification (“mod”) rating,

■■ internal safety committee reports/studies,

■■ safety training records for the past three to five years,

■■ insurance company safety reviews or recommendations,

■■ any industrial hygiene reports regarding the facility’s air quality/environmental contamination for the past 10 years,

■■ any asbestos surveys of the facility and, if there are none, whether such a survey should be conducted, and

■■ whether the facility is ISO certified, and if not, whether it ever attempted to secure ISO certification.

These should reveal any exist-ing obligations the buyer may need

to undertake, and the history of, or potential for, safety issues.

What to have on your radar screen■■ Any required medical or

environmental surveillance. (Under various OSHA standards, exposure to certain levels of hazardous materials/products requires ongoing surveillance of affected employees or air quality.)

■■ Any required or recommended environmental safety infrastructure additions/changes (e.g., facility modifications, air venting, etc.) by OSHA (or a state OSHA agency), worker’s compensation or liability insurance carrier, or safety consultant.

■■ Past accidents/injuries to determine whether the facility has issues with poor training and safety enforcement.

■■ Review of OSHA (or state OSHA agency) citations (as well as safety consultant and safety committee reports) to determine abatement status and potential for future safety and health inspections.

■■ Any heightened OSHA citations (e.g., alleged “Willful,” “Repeated” or “Failure to Abate”), significant OSHA penalties (five figure and over), and whether seller has been put on the OSHA Severe Violator Enforcement Program (SVEP).

■■ Any workplace fatalities and repeat injury scenario issues.

■■ A poor worker’s compensation insurance rating/mod rating in comparison to industry average.

Some issues requiring special commentGovernment contractor statusEmployers that do business with the federal government may be subject to affirmative action requirements. Those can include having written an-nual affirmative action plans (AAP) and reporting obligations. The Office of Federal Contract Compliance

Sometimes overlooked in due diligence are internal complaints or investigations.



Programs (OFCCP) of the United States Department of Labor enforces affirmative action regulations. It periodically conducts random compli-ance audits or audits in response to employee complaints. These audits can result in a letter of compliance or a Conciliation Agreement in which the employer agrees to rectify areas where it has been found non-compliant. Conciliation Agreements are for a defi-nite period. In this area, the prospec-tive buyer will want to review:■■ the current and prior two years’

AAPs,■■ seller’s OFCCP audit history, and ■■ Conciliation Agreements between

the seller and OFCCP.

What to have on your radar screen■■ Do the AAPs comply with OFCCP

regulations?■■ What potential problem areas

have the AAPs identified in hiring, promotion or termination?

■■ Do any of the AAPs’ statistical analyses indicate adverse impact for any job group in hiring, promotion or termination?

■■ What have the AAPs reported about progress toward goals that were set in the AAPs?

■■ Do any Conciliation Agreements remain in effect?

■■ Are there any seller obligations in a Conciliation Agreement that may continue with the buyer?

WARN mattersThe Worker’s Adjustment and Retraining Notification Act (WARN), 29 U.S.C. 2101, governs when em-ployers must give employees 60-days written notice of loss of employment. If the buyer promptly re-employs all of the seller’s employees on terms similar to those employees enjoyed under the seller, an asset sale is not an event requiring a WARN notice.

WARN regulations provide that in a transaction, absent an agreement to the contrary, a seller is responsible for WARN obligations, if any, that will result when a sufficient number of employees experience an “employ-ment loss” at or before the closing. Thereafter, the buyer is responsible for any employment losses and attendant WARN obligations. 20 C.F.R. 639.4(c). Keep in mind that an employment loss under WARN includes: 1) an employ-ment termination (other than dis-charge for cause), voluntary departure or retirement; 2) a layoff exceeding six months; or 3) a reduction of work hours of more than 50 percent during each month of any six-month period. 29 U.S.C. 2101(a) (6) (A)-(C).

Thus, WARN considerations can come into play: ■■ If the buyer will not employ all of

seller’s employees. The sale may be a WARN event for those employees who will not be kept by the buyer if the WARN thresholds are exceeded during the relevant time frames.

■■ If the employees’ terms and conditions of employment will be materially different from what they enjoyed with the seller. There may be a WARN event requiring the 60-day advance notice.

Additionally, if the seller learns before the transaction closes that, sometime after the closing, the new owner will have a mass layoff or plant closing, under WARN, that fact should be discussed with the buyer, and the seller should consult with its counsel.

What to have on your radar screen■■ Has the seller had any layoffs, any

hour cutbacks, or discontinued a department, line or other organizational unit within the prior 90 days? If so, did seller provide WARN notices to affected employees?

■■ Did the seller plan further cutbacks or area shutdowns?

■■ Are there upcoming seasonal workforce reductions that will occur at, around or after the sale?

■■ Is there any anticipated loss of contracts/orders that would affect the seller’s employment levels materially?

■■ Does seller have any handbook/union contract provision providing for loss of seniority/loss of recall rights, and if so, how many individuals retain a reasonable expectation of recall (and when will those rights terminate)?

Immigration issues Immigration is an area often over-looked in a transaction. Two key issues to have on your radar screen are the immigration status of seller’s employees and seller’s immigration compliance.

Immigration status of key personnelImmigration regulations permit most foreign nationals to retain their US work visa status in the wake of an asset purchase transaction. A buyer, howev-er, should not assume that all of these individuals would be able to transfer their visa status automatically to the buyer. A failure to address these issues can lead to interruptions or even loss of a person’s authorization to work. In addition, certain types of transactions will entirely negate some US work visas (which is often the case when the seller has managers and other key personnel authorized to work in the United States pursuant to E-1 or E-2 Treaty Trader or Investor Visas).

Immigration is an area often overlooked in a transaction. Two key issues to have on your radar screen are the immigration status of seller’s employees and seller’s immigration compliance.



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It is important to assess the transaction’s impact on each person’s visa status.

It is important to assess the trans-action’s impact on each person’s visa status. For example, a sale of just US operations to a company with only a US presence could result in L-1 work visa holders (i.e., personnel who transferred from seller’s foreign offices to the United States) losing their right to work in the United States once the transaction is completed. Depending on the work visas and status of the var-ious immigration cases, there may be a need to coordinate travel for foreign national workers and family mem-bers, visa applications and amended or other filings of visa petitions, and applications with the US Department of Labor.

In an asset purchase, these coordina-tion efforts will be critical to ensure that the many employer obligations under the federal regulations are satis-fied. A failure to do so can expose the foreign national employees (holding TN visas under NAFTA, H-1B visas for professionals and other work authori-zations) to lapses in their immigration status, which can have costly and seri-ous ramifications for the company, the foreign workers and their families.

Identifying immigration compliance concernsIn recent years, the US Immigration & Customs Enforcement agency has engaged in greater worksite enforce-ment. This has meant more I-9 audits, issuance of a record number of subpoenas on immigration-related matters, and record civil and criminal fines. Including I-9 and immigration compliance in due diligence is espe-cially important in industries where the seller employs a large number of hourly workers. Buyer will want seller to resolve on a pre-close basis I-9 errors and take action on unlawful workers. Even when buyer has had the benefit of reviewing and addressing I-9 issues, it may want to complete its own I-9s upon closing to ensure the highest level of compliance. If the company participates in the federal E-Verify program, personnel being rehired from seller must be verified within three business days of the new hire date.

What to have on your radar screen■■ Do any of seller’s key executives or

technical team members have US work visas that were dependent upon the seller’s sponsorship?

■■ Determine the kind of visas held (e.g., H-1B Specialty Occupation Visas; E-1 or E-2 Treaty Trader or Investor Visas; L-1 Intracompany Transferee Visas; O-1 Extraordinary Ability Visas, etc.), their validity dates

and key actions taking place on any of them. (For example, is the seller seeking a visa extension or pursuing permanent resident status on an employee’s behalf?)

■■ Obtain an active employee list with copies of corresponding I-9 documents for all personnel hired in the United States since Nov. 6, 1986. Require seller to address outstanding compliance issues prior to close.

■■ Has the seller been audited, investigated, fined, or otherwise sanctioned by ICE or DOL?

■■ Has the seller received notices of social security “no-match” and what has it done to address those notices? Assign accountabilities for immigration issues (e.g., work visas, I-9s, etc.) in advance of closing to ensure deadlines and employer responsibilities are met, and as necessary, consider incorporating specific immigration compliance issues into seller’s warranties, reps and indemnifications.

Seller’s union statusIf the facility or company being sold is non-union, the buyer will want to know whether the seller has been either a frequent or a recent target of union organizing attempts. If so, that might suggest the buyer also will be a target, which may play into a decision to buy the assets, or it may cause the buyer to plan some training after the purchase.



ACC EXTRAS ON… Labor and employment due diligence in M&A transactions

ACC Docket Integrating Global Operations After the Multinational Acquisition (June 2013). www.acc.com/docket/global-acq_jun13

Top TenTop Ten Employment Considerations for Sellers and Buyers in Acquisitions (Apr. 2013). www.acc.com/topten/sell-buy_apr13

Quick Reference M&A Non-disclosure Agreement Checklist (Oct. 2011). www.acc.com/quickref/m&a_oct11

QuickCounselEmployment Considerations When United States’ Companies Manage or Acquire Employees in Europe or Canada (Mar. 2010). www.acc.com/quickcoun/m&a-empl-eur&can_mar10

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The prospective buyer will want information about the seller’s employees, not only to help determine its interest in hiring some or all of them, but also to identify any unique issues that need to be addressed in the purchase agreement.

If any of the seller’s employees are unionized, the buyer will want to re-view a variety of items including:■■ current labor contracts, ■■ pending contractual grievances and

arbitrations, ■■ arbitration awards rendered within

the past three to five years, and ■■ history of labor disputes (e.g.,

strikes, lockouts, slowdowns, etc.).

What to have on your radar screen■■ Seller’s contractual wage and benefit

obligations compared to buyer’s planned pay and benefits.

■■ Restrictiveness of contractual work rules to identify desirable changes.

■■ Successorship, or other language in the labor contract, that may affect the transaction.

■■ The number of contractual grievances/arbitrations, which can reflect the relationship that exists between the union and the seller, and identify potential problem areas in the labor contract.

■■ Do any arbitration awards contain obligations with which the buyer will have to live?

Under the Supreme Court’s Fall Riv-er Dyeing & Finishing Corp. decision, if the purchaser continues substan-tially the same business at the same location, using substantially the same assets to provide substantially the same product or service, it is a legal “successor.” The “substantial identity”

test is met if the seller’s employees constitute a majority of the buyer’s work force at the location. Under Fall River, this is analyzed when the new employer’s work force employs a substantial and representative comple-ment of workers. If the purchasing company is a successor, then it may have an obligation to recognize and bargain with the union depending on how other facts are resolved.

Information on seller’s employeesThe prospective buyer will want infor-mation about the seller’s employees, not only to help determine its interest in hiring some or all of them, but also to identify any unique issues that need to be addressed in the purchase agree-ment. Information a buyer should re-quest about seller’s employees includes:■■ Any change of control provisions

or severance arrangements in executive agreements.

■■ A list of employees with date of hire, job title, whether full time or part time, and whether working under some immigration status.

■■ A list of employees who have been laid-off and their recall rights, if any. (The buyer needs to determine if it will have obligations to recall them in the future after it takes over the business.)

■■ A list of employees on any form of leave of absence (e.g., FMLA, non-FMLA medical leave, short-term disability/long-term disability, personal leave, educational leave, military leave or other leave). The list should include type of leave, date leave commenced, and scheduled or anticipated return date. The status of these individuals needs to be addressed in the purchase agreement. For example: º Will those on leave be considered

terminated at point of sale? º Will the buyer agree to make

them job offers and allow them to become employees when their leave status ends?

º What benefit plans will they stay on or move to?

■■ A list of announced or planned retirements. It needs to be clear, not only to the buyer and to seller, but also to the individual, how retirements will be handled. Additionally, when planning its staffing needs, the buyer may need to factor in the number of retirements.

■■ The seller’s workforce turnover rate. A pattern of significant turnover could suggest problems with management of the business or facility.

■■ How often the seller uses leased or temporary employees.

What to have on your radar screenIf the buyer contemplates offering employment to all or any portion of seller’s workforce, it needs to think about the following issues:■■ Will the seller allow the buyer to

review the personnel files of the seller’s employees? Personnel files are created and maintained by the employer and, thus, generally are considered the seller’s property. Therefore, there should not be an issue about the seller permitting review. The law of the state in which the facility is located, however, should be checked. Of course, the buyer cannot use information in the personnel files to make discriminatory or otherwise unlawful hiring decisions.

■■ Will individuals hired by the buyer receive a new hire date or carry the one they had with the seller? If employees hired by the buyer will retain their hire date with the seller, for what purposes will that date be given credit by the buyer?

■■ How will vacation pay or other benefits already accrued, but not paid, be handled?

ACC DOCKET NOVEMBER 2013 65

Special issues when seller is unionizedFrom the seller’s perspectiveNotice and effects bargaining obligations

A seller will need to notify the union that it will no longer be the em-ploying entity. The National Labor Relations Board (NLRB) has held that notice must be given sufficiently in advance so that bargaining is meaningful. [See, First National Maintenance Corp. v. NLRB, 452 U.S. 666, 681-682 (1981).] The NLRB has held that absent unusual or emergen-cy circumstances, the union’s right to discuss the impact of the sale on em-ployees must occur before the sale is a fait accompli. Typically, this notice should be in writing at least two to three weeks prior to the transaction’s closing. Occasionally, the labor con-tract also may contain specific notice requirements.

Under federal labor law, the seller is always obligated to bargain, at the union’s request, about the effects of the sale on bargaining unit employ-ees. This includes negotiating as to any severance, insurance continua-tion, accrued and unpaid vacation, holiday, medical insurance, sick-pay and pension benefits. Negotiations do not require reaching an agreement but only that the parties negotiate in good faith.

If the seller fails to give notice and bargain about the effects of the sale decision, the NLRB imposes a remedy requiring bargaining, and can order back wages and benefits to employees.

Possible decisional bargaining obligationsDepending on the circumstances, a seller also may have an obligation to bargain with the union about the “de-cision” to sell the business before that decision is final. Under federal labor law, an employer has an obligation to bargain concerning a “decision” (i.e., close a facility, sell a certain type of business, etc.) when that decision is driven by factors about which a union could make proposals that

might affect the decision. These could include changes or concessions on wages, benefits, work rules or employ-ee efficiency. [See Parma Indus., Inc., 292 NLRB 90 (1988) (Employer acted unlawfully when it did not bargain over its decision to close and sell the assets of one of its facilities.)]

For example, if the employer is selling because it can “no longer compete” due to labor costs, that usu-ally requires “decisional” bargaining. However, if the seller is making the decision to sell for non-labor rela-tions factors (i.e., wants to get out of business, seeks to redeploy assets to other areas, does not want to make needed investment to continue, etc.), and it gives notice to the union and is willing to bargain over the “effects” of the sale, then it typically has satis-fied its obligations. In First National Maintenance, the Court held that the employer is not required to bargain about decisions that “involved a change in the scope and direction of the enterprise” because an employer’s “need to operate freely in deciding whether to shut down part of its busi-ness” outweighed “the incremental benefits that might be gained through the union’s participation in making the decision.” However, the potential downside risks are so great that, in many cases, it may be best to assume there might be an obligation because the comparative burden of notice and bargaining is relatively slight.

If the seller’s reasons are labor rela-tions driven, then its failure to give notice and bargain, upon the union’s request, prior to that decision being finalized are unfair labor practices. The remedy can be rescission of the sale and an order requiring the seller to continue operations. [See Vice Prods. Co., 336 NLRB 583, 599. (“In light of the Company’s refusal to notify in advance and bargain with the union before undertaking the re-location, such a remedy is not unduly burdensome.”)]

Interested in writing for the ACC Docket?

Contact Managing Editor Tiffani Alexander

at [email protected] or visit acc.com/docket for more information.

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Successor obligations in the labor contract Many labor contracts contain “succes-sor” clauses. They often provide that any purchaser is obligated to follow the seller’s labor contract. This type of general language is unenforceable because the purchaser is not a party to the labor contract.

Some labor contracts, however, in-clude language providing that the seller must require a purchaser to adopt the labor contract and/or recognize and bargain with the union as a condi-tion of the sale. A labor contract also may prohibit the seller from disposing of the business unless it obtains the purchaser’s agreement to hire sub-stantially all of the seller’s employees. Once again, a labor contract cannot impose those conditions directly on the purchaser. However, those provi-sions are enforceable against the seller and might prevent it from selling the business unless it gets the purchaser’s agreement to recognize and bargain with the union.

If a labor contract contains restric-tions on the seller related to the sale of its business, the union can sue to enjoin the sale pending the seller’s compliance with the contract’s suc-cessor provisions. [See Aeronautical Indus. Dist. Lodge 91 of the Int’l Asps’ of Machinists and Aerospace Workers, AFL-CIO v. United Techs. Corp., 230 F.3d 569,581 (2d Cir. 2000) (Federal court can enjoin company from transferring work in violation of labor contract.)] If the union does not seek to enjoin the transaction, and the buyer institutes less favorable wages and benefits, the union can later seek damages from the seller.

What a seller needs to have on its radar screen■■ Identifying legal and any

contractual notice requirements.■■ Determining any decisional

bargaining obligations prior to finalizing the decision.

■■ Planning for bargaining over the effects of the transaction on union employees.

■■ Language in the labor contract that may affect the ability to complete the transaction.

From the buyer’s perspectiveOptions if seller is unionized

If the seller’s employees are union-ized, the prospective buyer will need to make several practical and strategic decisions sooner rather than later. That is because there is no legal requirement that a buyer hire any of the seller’s em-ployees. Subject to some caveats identi-fied below, the buyer is entitled to select its own workforce. Additionally, in an asset purchase, the buyer is not obligated to assume the existing labor contract, but has options, and several variables come into play.

What a buyer needs to have on its radar screen■■ Whether buyer wants to offer

employment to any or all of seller’s employees. If it does, is it likely that a majority of employees used will be from the seller?

■■ Will buyer want to adopt the existing labor contract or negotiate a new one?

■■ If buyer wants to bargain a new labor contract, what wage and benefit package will it want to offer?

■■ If buyer wants to bargain a new labor contract, when will it want to do that?

■■ Does buyer want to make closing the transaction contingent on reaching an acceptable labor contract?

Use a checklistUsing a checklist of labor and employ-ment issues should make in-house counsel’s life a bit easier when the company is in merger and acquisition mode. The checklist helps ensure that important topics and considerations are not missed or discovered late in the process and identifies decisions that may need to be made before closing. It also helps avoid or minimize issues that can cause delay or surprise as the transaction moves forward. ACC

If the seller’s employees are unionized, the prospective buyer will need to make several practical and strategic decisions sooner rather than later. That is because there is no legal requirement that a buyer hire any of the seller’s employees.


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Scenario ABUYER PLANS TO HIRE MOST OF SELLER’S EMPLOYEES.

A purchaser often hires substantially all of the seller’s employees based on a written undertaking in the asset purchase agreement or by making a mass offer of hire to all current employees (without job applications or interviews). Under those facts, the purchaser is a successor and obligated to recognize and bargain with the union.

In this scenario, the buyer can accept the existing labor contract, but the union also must agree to accept it. The buyer, however, is not required to accept the seller’s union contract but can bargain a new one with different wages, benefits and provisions. However, by operation of federal labor law, during that time, the buyer must continue the existing wage, benefit and practices until it bargains a

different labor contract with the union or bargains to an impasse. Bargaining could take several months or more and would be from the seller’s current wage and benefit levels. In the case of impasse, the employer is entitled to implement its final contract offer unilaterally.

A buyer also might recognize the union unintentionally and take on a bargaining obligation by simply allowing the employees to come to work the day after the sale and taking no action to change their employment status. By doing so, it accepts the seller’s terms and conditions of employment as its own and is obligated to recognize and bargain with the union.

Scenario BBUYER PLANS TO HIRE ALL SELLER’S EMPLOYEES AND NEGOTIATE A NEW LABOR CONTRACT PRE CLOSING.

Another avenue often pursued when the purchaser knows it will offer jobs to the seller’s employees but does not want to assume the seller’s labor contract is negotiating a new labor contract with the union pre-closing.

In this instance, the buyer makes reaching a labor contract with the seller’s union on terms acceptable to the buyer a condition for the transaction closing. The buyer then notifies the union that (a) it is in discussions with the seller to purchase its assets; (b) it is willing to retain the current workforce and recognize the union but it is not interested in adopting the labor contract; and (c)

reaching a new labor contract is a condition of the sale. The labor agreement reached would be effective as of closing. This approach has the following advantages:

■■ The purchaser does not go through an application, interview, and selection process.

■■ The purchaser knows before the transaction closes what its labor costs will be upon taking control.

■■ A contractual no strike provision will be in effect as soon as the purchaser takes control.

The downside is that the union might not want the sale to go through and thus, may not agree to a new labor contract.

Scenario CBUYER TAKES APPLICATIONS FROM SELLER’S EMPLOYEES AND OFF THE STREET, AND A MAJORITY OF THOSE HIRED CONSISTS OF SELLER’S EMPLOYEES.

In this instance, before taking over the business, the buyer notifies seller’s employees that it will consider them, along with all other applicants, and requires that each person file an application and be interviewed. At the same time, the buyer solicits applicants from other sources, including newspaper advertising, state unemployment department, etc.

The buyer sets the wages and benefits it wants to offer and tells the candidates what they are before making any job offers. The purchaser establishes neutral hiring criteria, and based on the pool of applicants from all sources, it conducts interviews and selects the best candidates. This process typically requires at least a two- or three-week lead-time before taking over the operation.

If it is clear during — or at the conclusion of — the hiring

process that a majority of the buyer’s new work force will be composed of the seller’s unionized employees, then the buyer must recognize and bargain with the union. The facility is then union, but there is no labor contract. The purchaser has to bargain a labor contract, but it is doing so from its wage and benefit levels, not the seller’s. At that point, the buyer can continue to follow the wages, benefits and working conditions it announced at the time it began the interview process, but it cannot make any further changes until they are negotiated either to agreement or to impasse with the union.

There are disadvantages to this approach. The first is the time commitment involved. Second, it is critical that any working condition the buyer wants to change be part of the announced new terms of employment lest the

DIGITAL DOCKET EXCLUSIVE

buyer be required to follow the seller’s prior practice in this regard. Additionally, once the purchaser takes over, there is no longer a contractual prohibition on strikes (because the seller’s labor contract does not apply) and the union can go on strike at any time. This is true even if the purchaser and union are negotiating. The union

could strike to protest the purchaser’s failure to hire all of the seller’s employees; the purchaser’s setting of its own wages; or the purchaser’s refusal immediately to sign a new union contract. The buyer needs to evaluate whether it is willing to tolerate the potential for a strike.

Scenario DBUYER TAKES APPLICANTS FROM SELLER’S EMPLOYEES AND OFF THE STREET, BUT A MAJORITY OF THOSE HIRED DOES NOT CONSIST OF SELLER’S EMPLOYEES.

Under this scenario, the facility will be non-union. The employer may continue to follow the terms and conditions of employment it initially established and can make any changes it desires. However, the union and unionized employees who were not hired likely will claim the buyer

“picked and chose” to avoid hiring union workers, which is unlawful. The penalty for failing to hire individuals to avoid a union is a required offer of employment, back pay, recognition of the union and bargaining.

Buyer Plans to Hire Seller's Ees

Adopt existing labor contract

Pre-closing Post-closing

Buyer Sets Wages and Benefits, Neutral Hiring

Criteria, and Takes Applications

Hires majority of

Seller’s Ees as its Ees

Must recognize and bargain

with union

Hires less than majority

of Seller’s Ees as its Ees

No duty to recognize or bargain

with union

But may draw unfair labor practices

for not hiring majority to avoid the union

Negotiate new labor contract

Buyer Plans to Hire Seller's Ees

Adopt existing labor contract

Pre-closing Post-closing

Buyer Sets Wages and Benefits, Neutral Hiring

Criteria, and Takes Applications

Hires majority of

Seller’s Ees as its Ees

Must recognize and bargain

with union

Hires less than majority

of Seller’s Ees as its Ees

No duty to recognize or bargain

with union

But may draw unfair labor practices

for not hiring majority to avoid the union

Negotiate new labor contractBUYER OPTIONS IF SELLER IS UNIONIZED