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Buying and selling the stock or assets of a business is a complicated process. There are always a number of issues to consider.  It is critical that proper attention is given to employment and benefits matters.

In this article, we will highlight some of the employment and benefits issues that should be analyzed and addressed as part of the purchase or sale of a business.

  1. WARN Act: The federal Worker Adjustment and Retraining Notification (“WARN”) Act requires covered employers (“Covered Employers”) to give its employees and certain government officials sixty days’ notice of a mass layoff or plant closing which affects fifty or more employes at a single site of employment. Covered employers are those with one hundred or more full-time employees, who have been employed for at least six month of the twelve months preceding the date of the required notice. Many sales of businesses result in employment losses at Covered Employers, so WARN Act implications must be analyzed.  In addition, due diligence should be conducted into prior mass layoffs and/or plant closings conducted by the seller to determine if they were triggering events under the WARN Act, and, if so, whether they were handled properly. In some circumstances, employment losses that occur on different dates must be aggregated for purposes of triggering notice requirements, so due diligence should include information about past and planned employment losses.  A final point is that some states have adopted their own Mini-WARN Acts, which oftentimes cover smaller employers and/or layoffs that are not subject to the WARN Act. North Carolina does not have a Mini-WARN Act.
  2. Misclassification of Employees: Employees generally must be paid overtime for all hours worked over forty in a workweek unless they are covered by an exemption under the federal Fair Labor Standards Act (“FLSA”). A buyer should carefully examine whether any of the seller’s employees were misclassified as exempt from overtime. A buyer should analyze whether the seller properly calculated overtime wages and that employees were not misclassified as independent contractors. Violation of the FLSA can result in significant liability, including liquidated damages and attorney’s fees. In addition, in some cases, corporate officers and directors can be held personally liable for FLSA violations. Finally, a buyer, which is deemed to be a successor employer under applicable law, even in an asset purchase, can be potentially held liable for FLSA violations that took place prior to the purchase.
  3. Employment Contracts: Buyers and sellers need to review existing employment agreements and restrictive covenant agreements. Decisions will need to be made as to possible termination, renewal or assignment of these agreements. In addition, the restrictive covenants should be reviewed to determine whether they are enforceable under the applicable state law.
  4. Existing and Potential Claims: Buyers need to determine whether the seller has any existing or potential employment claims including, but not limited to, wage and hour, harassment, discrimination, OSHA, and workers’ compensation. The inquiry should not be limited to lawsuits but should include threatened and pending administrative claims i.e. EEOC, OSHA and DOL.
  5. Employee Handbooks and Policies: The buyer should carefully review the seller’s handbook and separate employment policies to ensure that they comply with applicable law.
  6. Compensation and Benefit Plans: The buyer should carefully review the seller’s compensation and benefit plans to determine the likelihood, and potential amount of, any liability associated with the plans.  For example, the buyer should consider any expense associated with maintaining or winding down the seller’s plans after the transaction, whether any unfunded liability exists with respect to the plans, and whether the plans have been maintained in compliance with applicable law.  The buyer should also consider how it will provide benefits and compensation to any acquired employees after the transaction, including whether or when to integrate acquired employees into the buyer’s existing compensation and benefit plans, as well as what will happen to the seller’s plans.  The buyer should also consider to what extent the transaction will impact it and its existing plans, for example, by subjecting the buyer to new legal requirements or by changing the employee population included in its plan testing.  When possible, it is helpful to address compensation and benefit issues early in a potential transaction because the buyer typically will have more flexibility in addressing compensation and benefit issues prior to closing and because a significant amount of administrative work often is associated with changes to such plans.

Poyner Spruill has experience in advising clients on employment and benefits issues related to the sale and purchase of businesses. Please contact a member of the firm’s employment and benefits section for assistance.

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