Expanded Labor and Employment Liability in Hotel Acquisitions

By John R. Hunt Attorney, Stokes Wagner Hunt Martez & Terrell, ALC | December 17, 2017

The scale and pace of mergers and acquisitions has accelerated at a rapid speed and it cannot be stressed enough the need to review the current law and conduct a thorough review before entering into any M&A transaction.For example, consider the purchase of the assets of a single hotel with 200 rooms and 350 employees. The hotel has several managers who are classified as exempt from overtime, an administrative assistant who has alleged sexual harassment by an executive committee member, a catering manager who has requested accommodation for a disability and an engineer who is on leave because of a medical condition. In addition, the hotel has outsourced housekeeping to another company, the general manager has an individual employment contract and the food and beverage employees are represented by a union. The buyer plans to begin business immediately after the closing and in order to do so, will hire most, if not all, of the seller’s employees.

Under traditional principles of corporate law, many of these human resources issues would not have caused undue concern for a business that only was acquiring the seller’s assets. Most Courts recognized that where one company sold or transferred all of its assets to another company, the buyer generally was not liable for the debts and liabilities of the seller. In the past, this rule helped distinguish asset purchases from mergers in which one business acquired all of the seller’s shares of stock. With mergers, the acquiring company more of less was automatically viewed as a continuation or successor of the seller. As a result, it inherited the seller’s liabilities.

With asset purchase agreements, the traditional rule that the buyer remained insulated from the seller's legal problems has eroded over the years. Some states now recognize that in certain circumstances, a sale of assets can constitute a de facto merger, and bring the seller's liabilities along with it. This exception frequently has been invoked in products liability litigation where the courts have considered whether there was a continuation in fact of the seller corporation, so that the seller's management, personnel, physical location, assets and general business operations essentially remained the same after the sale.

In the labor and employment area, the erosion of the rule has been even more pronounced. The Supreme Court initially recognized that a company which only buys the assets of another corporation can succeed to the seller's relationship with a union that represents the seller's employees. In general, this requires a finding that the buyer hired a majority of the seller's employees and continued the same operations, events which are not unusual in the hotel industry where the buyer naturally will want to continue the business at the same location, often with much of the same workforce. Over time, the application of this principle has expanded to other employment laws.

For example, in the asset purchase scenario described above, the seller has several managers it has treated as exempt from overtime under the Fair Labor Standards Act. If the seller improperly applied the exemption, it is possible that the buyer could become liable for overtime violations. Under the FLSA, many courts will consider whether there was: ( 1 ) a continuity in operations and work force of the successor and predecessor employers; ( 2 ) notice to the successor of its predecessor's legal obligations; and, ( 3 ) an ability on the part of the predecessor to provide relief. Although it may appear that lack of notice would prove to be an “easy out” for an acquiring company, the existence of notice can be either express or implied from the facts. As a result, an employee who files a lawsuit may be able to successfully argue that a fact question exists about whether the purchaser had notice and this will be sufficient to have the case continue into the costly discovery phase of litigation.

The same general principle applies to the sexual harassment claims of the administrative assistant. These may be covered by the anti-discrimination provisions of Title VII of the Civil Rights Act of 1964 as well as any state law. Again, the courts generally focus on continuity in business operations, whether the buyer had notice of the claims and whether the predecessor was in a position to provide relief before the purchase. While a buyer may claim it lacked actual notice of the claim, the wholesale hiring of the seller's work force or a manager who was involved in the harassment or had knowledge of it, may be enough to create a fact issue about notice. This, in turn, may embroil the purchaser in a lawsuit over events that took place long before it began to manage the property.

With respect to disability related claims, such as those under the Family and Medical Leave Act and the Americans with Disabilities Act, liability also can be imposed on an acquiring company. Indeed, in the case of the engineer on FMLA leave, a court might not bother to consider whether the buyer even had implied notice. Rather, the focus would be on whether there was a continuity of business operations and working conditions. Under the ADA, an outstanding request for an accommodation simply would carry over to the new employer, particularly if there has been little or no intervening change in the hotel's managers. Claims for past discrimination under the ADA would be viewed in a manner similar to claims for gender or race discrimination under Title VII.

Where portions of the hotel's operations, such as housekeeping, have been outsourced, the seller probably has considered the vendor to be an independent contractor and may have an agreement confirming this relationship. Here, the courts generally will examine whether the contractor and its workers have been properly classified as truly independent or as a matter of the “economic realities” of the situation, should have been treated as employees of the seller. If a contractor was misclassified, it can create a potential for FLSA and other wage liability as well as claims for unpaid benefits and taxes.

Individual employment contracts, including those that may exist for the general manager or other senior executives, also need to be reviewed. Any provisions regarding a termination upon a change in control of the business and should be carefully examined. If the buyer is retaining these management employees, it may need to assure that new contracts are negotiated which can go into effect shortly after the closing.

Union contracts pose their own set of issues. In our example, the food and beverage employees of the hotel are represented by a union and a collective bargaining agreement exists between the seller and the union. If the hotel hires a majority of the employees who are represented by the union, it will become subject to the relationship with the union. Nevertheless, an opportunity also will exist in which the new employer may be able to renegotiate the terms of the contract. Under no circumstances should the buyer blindly agree to accede to the terms of the labor agreement. Any successor clauses in the contract also should be reviewed.

Of course, whenever a union contract exists, there also is a potential for inheriting liability for delinquent employee benefit fund contributions under the Employee Retirement Income Security Act ( "ERISA" ). The courts will consider whether the buyer had notice of any debts under the plans and whether there was a continuity of the workforce, management, equipment and the location of the business. If a fund sues over past due contributions, it is not overly difficult for it prove that a fact question exists about whether the buyer had notice of the debt.

In view of the above, the best strategy for a buyer is to review the seller's employment and labor claims and practices prior to a sale. An audit conducted by outside labor and employment counsel can be particularly helpful. This will involve an examination of pending lawsuits as well as the seller's history of employment litigation and discrimination and unfair labor practice charges, if any. Internal complaints about discrimination, overtime and minimum wages also should be reviewed. As noted above, any collective bargaining agreements along with any "side agreements, " memos of understanding and grievances deserve special attention. The following is a brief checklist of some of the items that should be reviewed:

Americans with Disabilities Act

  • Title II Employment Claims
  • Outstanding requests for accommodation Litigation/ Cases/ “Unasserted Claims”
  • Administrative proceedings ( EEOC or state agencies )
  • OSHA citations
  • Tort Claims
  • Negligent hiring/ retention claims
  • Wage & Hour investigations, audits, or claims
  • Contract Claims
  • NLRB charges
  • OFCCP audits/ compliance inquiries
  • Discrimination claims
  • Wrongful or abusive discharge claims
  • Intentional infliction of emotional distress claims
  • Intentional interference with performance of contact of contractual relationship claims
  • Sexual harassment for extortion of sexual
  • Breach of contract claims
  • Breach of duty of fair dealing/promissory estoppel/implied covenant of fair dealing & good faith
  • Wage & Hour claims
  • Job safety and health charges
  • Violation of polygraph laws
  • Unfair labor practice charges
  • Workers compensation claims
  • Unemployment compensation matters
  • In-house or union grievance & arbitration procedure
  • Retaliation & violation of city, state, or federal laws & rights
  • Premises liability claims
  • “Other” miscellaneous claims
  • Court proceedings not listed above

FMLA

  • Current employees on FMLA and duration of leave
  • Whether responsibility for their reinstatement been addressed with seller?

Based upon what the buyer discovers, it can negotiate with the seller about appropriate indemnification provisions and warranties. In some instances, the parties can consider establishing an escrow account to address particularly problematic claims. ?

Mr. HuntJohn Hunt has litigated employment, labor and commercial law cases in over 75 US federal and state courts. He represents clients at trials, arbitrations and mediations. He also provides counseling and advice on a variety of issues. Mr. Hunt provides early, practical assessments of the pros and cons of each case and its potential economic and emotional consequences. Mr. Hunt and his team work to implement the best strategy to win at trial or resolve the dispute in other ways, including mediation or arbitration. They use their experience in the hospitality industry and its unique labor and employment issues to identify the best and most practical solutions as quickly as possible. Mr. Hunt can be contacted at 404-766-0076 or jhunt@stokeswagner.comExtended Bio...

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