Six Employment Considerations For M&A Deals Amid Pandemic

Posted: October 19, 2020

Recent press has explored how corporate transactions have evolved in the months of the pandemic. At first, they slowed to a crawl.

But, according to a June article in the Harvard Business Review, mergers and acquisitions may provide an “important and encouraging counterintuitive growth strategy for those executives and companies prepared to turn crisis into opportunity.”[1] And, as explored in depth in the publication’s September-October issue, joint ventures may be on the rise during an economic recovery as a way to pool resources with relatively lower financial risk.[2]

Over the past few months, we have seen many businesses look to merge with, acquire, invest in or partner with others, all during a time when the employment law complexities are magnified due to the unique circumstances brought about by the pandemic.

We are often asked by our clients and their M&A counsel what employment law issues need to be reviewed. The following six issues stand out as ones that can most affect such a transaction.

1. Wage and Hour Issues

Wage and hour issues are always a concern in a transaction. The exposure in this area can be significant, which the purchaser can inherit based on the seller’s prior mistakes. Depending on the jurisdiction, the potential liability can dwarf the amount of any actual damages, since these claims carry penalties and/or double (if not treble) damages, plus attorney fees and costs.

A target company’s timekeeping and pay practices should be carefully reviewed to analyze wage payment and overtime liability. This has become particularly important as many companies may not have taken the appropriate actions to guard against liability as they moved to a predominantly remote workforce.

Counsel should also review classification issues to see if there are any hidden liabilities that should factor into the transaction. The duties of employees who are treated as exempt and not entitled to overtime should be carefully reviewed to assess whether those classifications are legally defensible.

Salary practices should be analyzed, to ensure the target company has not violated the salary basis requirements for exempt employees, thereby rendering them eligible for overtime. This is particularly important now, as many businesses implemented pandemic-induced pay cuts that could have implications on employees’ exempt status. Similar attention should be paid to individuals who are classified as independent contractors, as a misclassification issue can subject a purchaser to costly wage claims.

2. Contractual Obligations

When examining any transaction, it is wise to assess what employment contract obligations the purchaser is assuming, as well as whether there are adequate protections in place for the purchaser.

Executive employment agreements should be carefully reviewed. What obligations are owed to them? What golden parachute or other rights may these executives have as a result of the purchase? This can have a significant financial impact, which should be addressed prior to the closing of any transaction.

Similarly, one needs to analyze if the proper protections have been put in place to shore up key executives and other personnel that a purchaser will want to retain. It is important to ensure that appropriate economic incentives and restrictive covenants are in place to protect the company after a transaction.

Finally, purchasers can encounter unexpected obligations where unions are involved. If the deal is not structured correctly or if the wrong steps are taken, the purchaser may be saddled with a union contract or union negotiations that result in labor costs that were not factored into the transaction.

3. Leave Considerations

A proper due diligence review should analyze what paid and unpaid leave obligations the purchaser may be assuming. This includes reviewing the target company’s policies and applicable laws, especially as many jurisdictions are enacting or amending paid sick leave laws.

Also, in response to COVID-19, not only did the federal government pass the Families First Coronavirus Response Act, which created new leave entitlements for employees grappling with COVID-19-related needs for leaves of absence, but state and local governments have also created their paid leave protections. Because many of these laws are so new, with governmental guidance and implementing regulations in flux, careful attention should be paid to the seller’s handling of these matters.

In addition, an employment lawyer’s analysis of past and current leave activity at the target company can uncover information that allows the purchaser to more accurately assess the financial impact of leave or accrued leave banks, as well as any disability accommodation issues that the purchaser should consider.

4. Employee Terminations

Given the recent COVID-19-related layoffs, furloughs and other cost-cutting measures, these issues have become an even more important focus in M&A transactions. In addition to the normal review of the target’s systematic approaches to hiring and firing practices — from a discrimination or litigation exposure standpoint — a purchaser or investor should look at how the seller has reacted to the current pandemic. For example, did the selling company commit to items that could obligate the purchaser such as severance, benefits continuation or reemployment promises?

In addition, the Worker Adjustment and Retraining Notification Act, and its state equivalents, should always be considered in corporate transactions. Will the sale result in a WARN Act-triggering employment loss, especially when considering recent layoffs that may have occurred?

If the WARN Act may come into play, companies should examine who will bear the burden of notice and/or pay obligations in relation to the sale. Strategically timing personnel terminations and drafting appropriate contract language can assist a purchaser in avoiding WARN Act-related liabilities.

5. Health and Safety Exposure

This is an area that has become more of a concern due to COVID-19. With the uncertainty relating to coverage and insurance for COVID-19-related workplace illnesses or fatalities, a review of a company’s safety practices is an important part of any due diligence review.

Ever-evolving health and safety guidance from the federal, state and local levels make this a daunting task. A review of safety issues should focus on what safety measures have been enacted at the target company, who at the target is tracking safety developments, and whether employees have raised concerns about safety at work — and how the target has responded.

Plaintiffs lawyers have already started bringing novel claims to impose liability against companies who do not maintain safe work environments, and it’s not clear what legal framework will apply to these claims.[3] In addition, a company with unsafe work practices or a history of not properly addressing employee concerns could have its reputation negatively impacted, adversely affecting its valuation.

6. Analysis of State and Local Compliance

Employment laws have become increasingly local. A purchaser from one state acquiring a business in another state needs to understand the state, county and municipal laws that may apply to the seller. These are often quite different from the federal or local laws that apply to the purchaser. The increase in the number of remote employees complicates this even further.

As a result, a purchaser needs to review the various laws that apply to the workforce of the target company.

Do their employee handbooks comply with all of the jurisdictions in which the target has employees? Are the hiring and termination documents they issue compliant? Are required trainings and notices being used by the seller? Are there remote workers who may have expanded the jurisdictional reach (and employment law obligations) of the seller? These issues need to be reviewed prior to a closing, especially when the target has a distributed workforce.

Conclusion

The pandemic has tested businesses like never before, and has resulted in a dramatic increase in M&A activity. In planning due diligence inquiries, acquiring companies or investors (and their representatives) need to ensure they have professionals review employment law issues, as these can substantially influence the ultimate value of the target. A strategic approach to these and other issues, with an eye to how these issues could play out in the future, is essential.

If you have any questions on this topic, please contact the authors Joel Greenwald, Kevin Doherty and Jessica Shpall Rosen, or your personal Greenwald Doherty attorney contact.