Fire, Rehire


FIRE, REHIRE

Published: The Deal
Date: Vol. 4 No. 10 February 20-26, 2006
BUYERS BEWARE. THE COST OF RESOLVING UNFINISHED EMPLOYEE ISSUES CAN EXCEED ANY COST SAVINGS IN AN M&A DEAL

You may think that if you acquire the assets of a business, your liabilities will be limited to those listed in the agreement. In fact, that is often not the case. When you take on existing employees of the acquired company, you may also be acquiring a wide array of potentially costly liabilities that may have never been discussed.

The selling company will often ask the acquiring company to take the existing employees sight unseen. That may be tempting because it will be easier in the short run than recruiting and training an entirely new workforce, or going through the time-consuming process of reviewing each of the existing employees. But resist the temptation. The cost of resolving claims that may not become apparent until after the closing can far exceed any savings.

An acquirer typically will try to avoid surprises by requiring indemnification as part of the terms of purchase. But that won’t necessarily cover employment liability that could carry over. That’s why you should consider a far more effective solution: require the seller to terminate the employees, and have each employee sign a statement that they have no outstanding claims. This will allow the acquiring company to start with a clean slate by hiring only those employees that it wants, and then on its own terms.

If the acquired firm has a large number of employees, it may not be feasible to interview all of them. But an acquirer should go through the fundamental steps as if they were new employees. For instance, collect new I-9 employment eligibility verification forms. At the same time, it should be made clear in writing that whatever promises the selling company made do not pass to the new employer. An acquirer should be wary of the “hidden” issues that could straddle a closing. For example, an employee could have been sexually harassed by a supervisor and not reported it yet. If the entire workforce wholesale is imported, without an affirmative disclaimer, that

employee could be working for the same supervisor in the new company – and the ongoing harassment claim could be inherited. The victim’s damages could include compensation for acts that occurred before, during and after the acquisition. Allocation may prove difficult, at best.

There are numerous other types of liability that may be assumed if the employees are hired en masse, whether the sales agreement between the two companies mentions those issues or not. For example, a successor company can be held responsible by law for claims by a spouse for injuries to an employee caused by an unsafe work environment, such as exposure to carcinogens. Workers’ compensation claims are one of the biggest potential sources of assumed liability because some injuries, such as back, heart or repetitive stress, can occur over a long period of time, again straddling the closing.

Assuming the target’s entire workforce without precaution could also lead to the importation of previous promises that have become part of the “unofficial” terms and conditions of employment. The impression that if a promise is not in writing, it isn’t part of the employment agreement is incorrect. Even written contracts can be modi- fied by a supervisor promise. A supervisor’s comment to the target company’s employees, “Don’t worry, everything will be the same with the new company,” if left unchecked could become binding. Old policies and practices that have become part of the employment relationship, such as progressive discipline, if not terminated may also have binding carry over effect.

By assuring that all employment contracts are terminated, obtaining an affirmative representation of no claims, and then clearly setting out the new terms of employment can avoid these unanticipated problems. By assuring that anything requiring disclosure is in fact disclosed – such as unreported workers’ compensation claims, workplace harassment or discrimination issues, or promises as to terms and conditions of employment – the acquirer is more likely to prevent the unanticipated “surprise.”

Only when the slate is clean should the employee be accepted. It must be absolutely clear to employees that when they go home on the last day before the acquisition, their relationship with the prior company is over, and any claims rest with the old management. Starting the next workday, they have a new relationship with a new employer on new terms.

The acquisition agreement must be clear that the seller is responsible for the terminations, obtaining releases, and providing notices. The seller should pay accrued vacation and bonuses, cash out all severance packages and deferred compensation plans, and terminate stock options. At closing, documentation establishing compliance should be required. There must be an absolute clean break with the past.

As a final safeguard against unanticipated liabilities, the acquiring company should have a sufficient holdback, held in an escrow account for the relevant period of the employment law statutes of limitation for any claims that despite best efforts, are asserted after the time of closing.

Terminating and rehiring the entire workforce may seem like more trouble than it is worth. But clarity from the outset about the employees’ new relationship with their new employer not only will greatly reduce the potential for costly surprises for the acquiring company, it will also reduce confusion and morale problems among the employees after the close.

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