G. Hidden Labor Issues When Buying or Selling a Business

During the purchase of a business, both the buyer and seller are understandably concerned with financial considerations affecting the terms of sale and financing. However, after the deal is structured satisfactorily from the financial end, many labor issues come into play which should be carefully considered but are sometimes overlooked.

The buyer of an ongoing business must decide which employees will stay on board. For those who will not be rehired under the new regime, issues of severance, vacation pay, and other post-termination benefits come into play. Pension and profit-sharing plan obligations must also be examined and followed to comply with federal law and to adhere to collective bargaining obligations. Discrimination laws must be considered to ensure that older workers are not being displaced by younger workers with lower salaries and earned benefits. The following are some important issues to consider in this area.

Severance Pay And Related Benefits

When workers are laid off, issues of severance and other post- termination benefits must be addressed. As a business grows, informal pay policies are frequently relied upon by terminated workers as a contract right. Often, the buyer of a business will view such payments as discretionary and gratuitous. This thinking may clash with the view of terminated workers who consider such benefits guaranteed.

Many state courts have ruled that employees have rights that cannot be modified by buyers or sellers of businesses. With the enact- ment of the Employee Retirement Income Security Act of 1974 (ERISA), most severance plans fall under its protection. As a result, terminated workers have recently won major cases imposing severance obligations. For example, in cases where the buyer retains the services of a worker for a short time, then fires that worker, the worker may be able to sue and collect severance benefits as if he or she were still working for the former employer.

Counsel Comment #143: Thinking ahead before a sale, companies that adopt formal severance rules forbidding the payment of excessive severance and limiting the amount of severance to be paid if a company is sold are better served in this area. In addition, your company may reserve the right to modify or terminate a severance policy and should consider doing so where appropriate.

Collective Bargaining Agreements

In many cases, collective bargaining agreements already in effect protect union employees from modified working arrangements following the sale. When the seller does not comply with these agreements, workers typically request a court to impose "successor involuntary liability" on the buyer, even if the buyer only purchased assets, without any of the seller's obligations. Thus, a buyer must consider whether it will be forced to negotiate and deal with the labor union recognized by the seller or be bound by the existing collective bargaining agreement.

TIP: The U.S. Supreme Court has ruled that when the buyer wants to lay off the entire workforce or substantially change the company's method of operations, it does not have to bargain with the union representing the seller's employees. The key issue is whether the buyer can be held liable as a successor, either because it failed to change operations substantially or because it used the services of the seller's workers in some significant way.

Discrimination Concerns

When anticipating layoffs due to mergers or acquisitions of a company, special attention must be paid to age discrimination laws. Violations often occur when employers attempt to soften the impact and encourage voluntary resignations of elderly workers by offering early retirement incentives and enhanced severance packages. One area of age discrimination involves forced retirement, which occurs when companies exert pressure on older workers to opt for early retirement or face firing, demotion, cuts in pay or poor recommend- ations. Many older employees are successfully challenging company retirement plans stemming from large layoffs.

Thirty years ago, companies were generally free to cut payroll costs by laying off large number of employees. But because layoffs generally affect those with the least seniority, many employees who left were at the low end of the wage scale (which didn't solve a company's problem). Using early retirement packages, companies found that they could get rid of fewer workers at a higher cost savings, because those leaving were generally at the top of the wage scale because of their seniority. Although by nature such plans are discriminatory, since they target older employees, the ADEA generally allows early retirement programs (since they are perceived as an employee benefit). However, employees cannot be forced or coerced into taking advantage of them (except for bona-fide executives in certain limited situations).

Counsel Comment #144: To increase the chances that an early retirement or "golden parachute" offer will be legally valid after acceptance, companies should require terminated workers to execute releases and waivers to resolve all potential employment claims. Care must also be taken in selecting personnel for layoff to avoid charges of actual or perceived discrimination based on age, sex, race, religion, or national origin. Terminating those most recently hired may reduce problems.

Engage a qualified individual to analyze all relevant data, such as the respective ages of all employees considered for termination, to be sure that the ages are not unfairly skewed toward older workers. This is important when considering the discharge of a large number of employees due to a layoff or reorganization.

Warning Requirements

As discussed in a previous section, the federal Worker Adjustment and Retraining Notification Act (WARN) requires employers with more than 100 workers to give employees and their communities at least 60 days notice of plant closings and large layoffs that affect 50 or more workers at a job site. Strict compliance with this federal law is essential to avoid potential problems.