Labor and Employment Implications in Mergers & Acquisitions

By Benjamin M. Ebbink Of Counsel, Fisher & Phillips LLP | December 03, 2017

The past few years have witnessed a number of high-profile mergers and acquisitions in the hotel industry – a trend that some commentators have referred to as a “merger frenzy.”  This trend may have broad repercussions across the industry, as large hotel companies seek to join forces with smaller operators to avoid being outpaced in the market. 

Aside from the general impacts on the hotel industry as a whole, mergers and acquisitions can raise significant labor and employment issues that operators need to keep in mind. A fundamental issue involves whether the transaction involves a sale of stock or a sale of assets.

Stock Sale or Sale of Assets?

In a stock sale, there is no change of employer so the labor and employment issues are fewer. However, in a sale of assets there is a change of employer. Typically the seller terminates all employees on the effective date of the sale and the buyer is generally free to decide whether to hire those workers and on what terms. The buyer may interview the seller’s employees, drug test them and do background checks before deciding whether to hire them. The buyer is also free to establish its own pay rates and benefits plans. However, the buyer should not consider prior workers compensation claims or other employment claims filed by a seller’s employee in determining whether to hire him or her.

Buyers should also be aware that some local jurisdictions have enacted ordinances that require an acquiring company, in certain industries, to retain a predecessor’s employees for 60 or 90 days. Good legal counsel can help you figure out if any of these local rules would apply to your situation.

Union Issues

If the seller’s employees are unionized ( which can be common in the hotel industry ), there are significant issues of which the buyer needs to be aware. It is important to learn whether the employees of the target company are unionized, the terms of their collective bargaining agreements, the benefits provided them under retirement and health and welfare trusts, the amount of any unfunded pension liability under applicable multi-employer pension plans, and the overall nature of the labor relations environment.

Under federal labor law, where the seller’s employees are unionized, the seller must bargain with the union over the effects of the sale on employees. Such effects might include severance pay or transfer rights. The buyer must recognize the union if it hires a majority of the seller’s employees and continues to operate substantially the same business. The buyer is not obligated to assume the seller’s labor contract but must bargain in good faith with the union over the terms of a new contract. It is essential, therefore, for a buyer of a unionized business to determine in advance its strategy with respect to the union. If the buyer’s goal is to substantially reduce the labor costs of the seller’s business it must have a plan for addressing the challenges likely to be posed by the union.

Advanced Notice Under State and Federal “WARN” Acts

Federal law, the Worker Adjustment and Retraining Notification ( WARN ) Act requires employers to provide notice 60 in advance of certain triggering events – such as plant closing and mass layoffs. Many states have adopted their own “WARN Acts” which contain similar, but not identical, requirements.

These federal and state requirements must be considered in any asset sale between hotel operators. If the seller of assets terminates all of its employees prior to the closing of the sale ( as is customary ), the seller will be required to provide 60 days advance notice ( or pay in lieu of notice ) under WARN if 50 or more employees lose their jobs. Under the federal WARN Act a “job loss” does not occur where an employee is fired by the seller and hired by the buyer, but under state law it can be less clear. In some states, employees terminated by the seller will not be deemed to have suffered a job loss if they are retained in their same “position” by the buyer under the same terms and conditions of employment. For this reason, it’s good to check with local employment counsel regarding the WARN Act requirements of your particular case.

The WARN Acts pose unique challenges in almost every asset sale. Sellers want to avoid the risk of liability for not providing notice yet they are reluctant to provide 60 days notice to employees that their jobs will end for fear that employees will leave sooner and make it difficult to keep operating until the sale closes. Buyers want to retain their freedom to pick and choose among the seller’s employees, but if those employees are essential to the operation the buyer will be just as motivated as the seller to prevent an exodus of employees likely to be triggered by a WARN notice. Usually some compromise is reached. One solution is for the buyer to agree to hire a sufficient number of the seller’s employees so as to avoid the need for WARN notice. However, such a commitment may limit the buyer’s ability to achieve operating efficiencies in the business.

Successor Liability for Wage and Hour Issues

What about liability for wage and hour claims of employees of the seller? Can the buyer be on the hook for those liabilities?

The answer to this question can depend on whether the wage and hour claims arise under state or federal law. In general, “successor liability” for wage and hour issues is harder to prove under state law compared to federal law. Under traditional common law and most state laws, a company that purchases the assets of another company is generally not liable for the seller’s liabilities unless one of the following four exceptions apply:

( 1 ) There is an express or implied agreement of assumption;
( 2 ) The transaction amounts to a consolidation or merger of the two corporations;
( 3 ) The purchasing corporation is a mere continuation of the seller; or
( 4 ) The transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller’s debts. Golden State Bottling v. NLRB ( 1973 ) 414 U.S. 168, 185; Ray v. Alad Corp. ( 1977 ) 19 Cal.3d 22 ).

However, “successor liability” is generally easier to establish under federal law. Over the years, federal courts have developed a federal common law successorship doctrine that now extends to almost every employment law statute that is more favorable to plaintiffs. Most federal wage and hour issues arise under the Fair Labor Standards Act ( FLSA ). In general, under the FLSA, a succeeding employer may be responsible for a predecessor’s liabilities where: ( 1 ) the alleged successor was a “bona fide” successor; ( 2 ) the alleged successor had notice of the potential FLSA liability; and ( 3 ) the predecessor employer is not able to provide complete relief.

In assessing whether an alleged successor is a “bona fide” successor, courts evaluate several factors to determine whether there is substantial continuity of business operations. For example, in the Ninth Circuit, courts look at:
( 1 ) whether there was substantial continuity of business operations between the predecessor and successor,
( 2 ) the extent to which the alleged successor used the same plant and/or facilities that the predecessor used,
( 3 ) the extent of the successor's use of the same or substantially the same workforce,
( 4 ) the existence of the same jobs under the same conditions,
( 5 ) whether the supervisors in the predecessor carried over to the successor,
( 6 ) the successor's use of the same machinery, equipment, and methods of production,
( 7 ) whether the alleged successor provided the same product or service to its customers. Steinbach v. Hubbard, 51 F.3d 843, 846 ( 9th Cir. 1995 ).

Buyers should be wary of attempting to avoid these successor liability issues merely by putting language in the purchase agreement disclaiming any liability. At least one federal court of appeals has expressly rejected this tactic, ruling that an explicit contractual disclaimer of FLSA was not sufficient to avoid successor liability, and that holding otherwise would frustrate the “statutory goals” of the FLSA. Teed v. Thomas & Betts Power Solutions LLC, 711 F. 3d 763, 764 ( 7th Cir. 2013 ).

Because the exact test for successor liability can vary from state to state, or from federal district to federal district, be sure to check with employment counsel on the specific test for liability where you operate.

Executive Employment Contracts and “Change in Control” Provisions

The buyer will need to evaluate whether executive employees of the seller will be retained following the sale, and under what terms and conditions. However, even if a buyer decides not to retain high-level employees, the buyer will want to carefully review any executive employment contracts. Many such agreements contain “change in control” language that trigger expensive payouts should the company be sold or acquired by another entity. For example, many executive employment agreements contain “incentive retirement compensation” provisions that provide for retirement payments that kick in at a determined retirement date or age. However, it is very common for such agreements to contain a “change in control” clause to require expensive payouts to be made immediately upon a sale of the hotel. Buyers will want to carefully review any executive employment contracts for any similar triggering provisions.

The Importance of a Good Due Diligence Review

All of the foregoing underscores the critical reason for hotels to conduct a good due diligence review prior to making any decision to merge with or acquire another company. A good due diligence review will analyze the issues discussed above and evaluate any potential liabilities the buyer may be taking on. Nothing can sour a deal like learning ( after the fact ) that not only did you acquire a new company, but you also picked up several millions dollars in liabilities. A due diligence review should be done early on to determine how these issues may impact the buyer’s desire to complete the transaction, and how these issues might affect the purchase price.

Mr. EbbinkBenjamin M. Ebbink is Of Counsel in the Sacramento office of Fisher & Phillips LLP. With nearly two decades of experience in labor and employment law and in assisting the development of California labor law and regulations, he focuses on legislation introduced at the state and local level. Mr. Ebbink assists employers with navigating evolving legislative and regulatory landscapes in a variety of areas. For nearly 15 years, Mr. Ebbink served as Chief Consultant to the California Assembly Committee on Labor and Employment where he was the primary policy expert on labor and employment matters for the California State Assembly. Mr. Ebbink can be contacted at 916-210-0407 or bebbink@fisherphillips.com Please visit http://www.fisherphillips.com for more information. Extended Bio...

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