If you are acquiring a Company through purchase and you are not paying close attention to potential Labor issues, you could be creating serious and risky problems for the future. It is extremely important to understand that liability in the context of Labor and Employment related issues are governed by Contract and Common Law Successorship with an overriding theme of “protecting the little guy.” This is vastly different from the traditional Corporate Veil Piercing Analysis that exists in traditional Corporate Law.

While some people would conclude that Indemnification Clauses from the Seller, where the Seller agrees to accept all responsibility for any violations that occurred prior to closing, may look good, one of the biggest misconceptions is that these clauses will insulate the Buyer from any post-closing Claims. At best, these Indemnification Clauses offer the opportunity to seek repayments of damages, costs and fees incurred from the Seller and may have little value if the Seller does not have the resources to “back up the Indemnification Clause.”

Here are a few of the issues that should be considered as part of the due diligence regarding Labor/Employment review:

1. Does the Seller have any current relationships with Labor Unions or is there any Organizing Activity? The Labor Contracts may contain clauses that obligate the Buyer to assume those Contracts and certainly may raise an issue of potential Withdrawal Liability from Multi-Employer Pension Plans if the Seller has previously contributed to them. If you as the Buyer are not planning to continue the operation of the Unionized Facilities, you may be responsible for posting a bond in escrow to cover Withdrawal Liability that will be held for a period of five (5) years and maybe hundreds of thousands, or even millions of dollars. Certainly “Union related issues” require attention!
2. Wage and Hour Obligations – These type of violations, while easily correctible, are also easily overlooked, and may blossom into Class or Collective Action Litigation. Are there currently any pending State or Federal Agency Charges or Investigations going on? Are Employee Handbooks up to date and compliant for all jurisdictions in which the Company is operating?
3. WARN Act and COBRA Notices – The WARN Act (Worker Adjustment and Retraining Notification Act) impacts individuals requiring certain minimum dates of notification before Plant Closure, or pay in lieu thereof. If Facilities are to be closed, have those Notices been prepared and sent in a timely fashion to all affected Employees? As well, COBRA Rights may be triggered by the sale and the cancellation of the Seller’s Medical Insurance Plans. Have appropriate protections been taken to protect the Buyer from ultimately being culpable if these COBRA Notifications are not sent?
4. Executive Compensation – Are there in existence any Contracts of Employment for Executives that provide Severance Obligations and also may invoke restrictive covenants? Just as importantly, what are the triggers that create the requirement for Severance Pay in an Executive Buyout? As well, if certain Executives are being transitioned over to the new operation, what actions are being taken to negotiate a new “Executive Package” and terminate the existing procedures?
5. Who is actually performing the work for the Seller – Actual Employees of the Seller or Independent Contractors? Do these issues raise possible violations of the Fair Labor Standards Act in misclassification of Employees or inadequate/inaccurate compensation?

All of these issues must be addressed as part of the due diligence investigation and resolved so the Buyer does not get any unexpected surprises once the sale is completed.

Questions? Contact attorney Walter Liszka in our Chicago office at (312) 629-9300 or by email at waliszka@wesselssherman.com.