Navigating Labor and Employment Considerations in Mergers and Acquisitions

Merger and acquisition (M&A) transactions are complex endeavors involving various legal, financial, and operational considerations. Among these considerations, labor and employment law and regulations play a crucial role in ensuring a smooth transition for both employers and employees. Whether it’s an asset purchase, a stock purchase, a merger, or another form of M&A deal, understanding and addressing key labor and employment considerations is essential to mitigate risks. This article will provide a brief overview of some of the key labor and employment considerations employers and business owners (whether as the seller or as the buyer) should keep in mind.

Due Diligence

As part of any M&A transaction, all parties should perform thorough due diligence on each other. The due diligence process is often the longest and most time-consuming part of the transaction, but it’s essential to identify potential labor and employment issues.

Obtaining a deep understanding of both parties’ employment policies and practices allows all parties to operate efficiently during the deal, modify the structure of the deal, and affect the transition of employees and business operations pre- and post-closing. Proper labor and employment due diligence would include:

• Obtaining and reviewing any employment contracts, collective bargaining agreements, and employee handbooks;
• Ensuring the seller’s proprietary information—such as intellectual property and trade secrets—is adequately documented, assigned, and protected; and
• Obtaining sufficient information related to any pending or potential employment-related litigation.

Understanding the workforce composition, employment policies and practices, and compliance history of the target company is crucial for assessing potential risks and liabilities.

Transfer of Employees

In M&A transactions, employees are often transferred from the target company (seller) to the acquiring company (buyer). Depending on the structure of the deal—i.e., whether the transaction is structured as an asset purchase, a stock purchase, or a merger—the transfer of employees may have different results. In an asset purchase, the buyer typically has the option to selectively hire employees from the seller or hire no employees.

However, the results of the due diligence process may require the buyer to recognize transferred employees’ employment rights, including seniority, benefits, employment agreements, and collective bargaining agreements.

In a stock purchase, the employment relationships of the seller’s employees are typically maintained because there’s no change in the legal employer. The buyer typically assumes any existing liabilities related to employment law compliance. In a merger, the merging companies become one entity, and employees of both companies generally continue their employment without interruption.

However, make sure you combine employment policies and practices to ensure consistency and compliance, as even though the companies are merging, there might be redundant roles and tasks.

Additionally, in many M&A transactions, the transfer of employees is heavily negotiated and can take a form that has some of the aforementioned characteristics. For instance, the parties may agree that although the buyer isn’t required to hire or maintain all the seller’s employees, the buyer may be required to hire and maintain “key” employees, such as those from the C-suite.

An efficient M&A transaction will include thorough negotiations regarding the employment terms of the seller’s “key” employees during the due diligence process rather than post-closing.

Classification of Employees

Employee classification is a well-known and critical aspect of any business. Ensuring each party to an M&A transaction is properly classifying its employees is critical to a smooth transaction and risk mitigation. As part of the due diligence process, the seller is required to disclose how it classifies its workers, ultimately confirming that the workers are properly classified as employees or independent contractors. Proper classification prevents post-transaction liability claims from the buyer.

The buyer, on the other hand, not only wants to rely on the seller’s disclosure relating to worker classification but also should perform its own analysis on those issues with respect to the workers it intends to retain. To determine what post-transaction liabilities a buyer may have, the buyer should:

• Determine where each worker resides;
• Review the applicable labor and employment laws that would apply to those workers; and
• Review all agreements and other documents covering the workers’ work for the seller.

The buyer needs to avoid any misclassification issue arising out of the seller’s activities, which can impose great liability on a buyer, including unpaid taxes, unpaid benefits, and various penalties from regulating authorities. Although a buyer is likely to seek indemnification from the seller, carefully reviewing and resolving these issues during the due diligence process is a must.

Pre- and Post-Transaction Employee Integration

A common misunderstanding is that worker integration only occurs after the transaction is completed. However, it’s critical to ensure the buyer’s HR and business teams are involved with the integration as soon as possible. This would include:

• Ensuring all of the seller’s employees have executed and delivered any necessary tax documents or employment agreements;
• Reviewing the seller’s existing policies for inconsistencies or impossibilities with the buyer’s policies; and
• Determining whether any compensation models or plans will need to be adjusted with the onboarding of the seller’s workforce.
• The buyer needs to be proactive in understanding any potential labor and employment issues early on in the due diligence process.

After the transaction is completed, employers must focus on integrating the workforce, systems, and cultures of the merged or acquired entities. This may involve aligning employment policies, integrating payroll and HR systems, and providing training and support to employees during the transition period. Collaboration among HR, legal, and business teams is essential to ensure a successful integration process.

Bottom Line

Buying and selling businesses is complex and detail-oriented, and the resulting labor and employment matters can be deal-breakers that potentially carry a lot of risk. Discussing these matters with an attorney who practices in the states or countries where the buyer and seller are located is necessary to ensure a smooth closing, transition of workers, and mitigation of potential risk.

Tyler T. Manley is an attorney with Axley Brynelson, LLP, in Madison, Wisconsin. He can be reached at tmanley@axley.com.

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