When a buyer acquires the assets of another company, both the buyer and the seller must focus on federal and state laws in the United States which impact on employees who transition on the sale of the business. For example, if a sufficient number of employees are affected, the federal Worker Adjustment and Retraining Act (“WARN”) may require the seller to provide 60 days’ notice to those individuals who might experience a job loss, to a union if they are represented, and to agencies of the state and locality in which they work. Some states have comparable notice and compliance obligations if few employees are impacted. The buyer should not expect to be immune from WARN claims if it hires a large number of the seller’s employees, then terminates them after a transition period without providing the required notice. The burden is on either the seller or the buyer to comply, and the transactional documents should allocate that burden between the two.
State laws address the timing of pay on termination, and in an asset sale, even if employees are retained, the seller may be required to provide final pay on the date the transaction closes. The pay would include any amounts accrued and not paid, for example, paid sick days, paid time off, and paid vacation. Some states allow, and other states which do not will not challenge, a buyer who gives retained employees the option of being paid out by the seller or carrying over their vacation days under the new ownership. Again, negotiations addressing the sale price as well as the transactional documents should address this issue.
If a seller knows that some or all of its employees will not be retained by the buyer, it should determine whether a letter of reference is advisable or required. A number of states’ laws require that a “service letter” be provided to terminated employees providing, at a minimum, the dates of tenure and the last position held. In those and other states, the seller should consider a letter of reference in accordance with its policy. And in some circumstances, the seller may weigh the benefits of entering into a general release of post-termination claims, supported by adequate monetary consideration. The release would bar the employee from asserting such claims as discrimination, harassment, retaliation, and wrongful termination except before a federal or state agency. Unless its policies or contractual arrangements require, terminated employees are not entitled to severance payments.
Terminated employees who may not be re-hired by the buyer enjoy certain rights. If covered by group health or medical insurance, federal law requires that the employee be allowed to retain coverage at his or her own costs for at least 18 months, more in certain circumstances. The seller’s insurer is required to provide this notice. Employees who are not re-hired are eligible for unemployment insurance benefits, and the seller is advised to notify the state agency administering such benefits of the names of those terminated to hasten the procedures required to determine eligibility.
A buyer of assets that intends to hire employees of the seller must look to other legal obligations and risks. A buyer may not, for example, refuse to hire individual because of their former affiliation with a labor union. A buyer should carefully evaluate the record of performance of each individual in the workforce during the due diligence phase and undertake an analysis to ensure that its hiring decisions do not discriminate against individuals in protected classes such as race, national origin, age, disability, military service, and gender, including pregnancy. The laws of many states prohibit discrimination based on those and other factors, including marital status, gender identity, and sexual orientation.
The buyer should consider presenting a formal offer letter to employees of the seller it wants to retain before the transaction closes so that it can plan for an adequate, appropriate workforce after. The letter should identify salary and job title, and contain language assuring the employee that the buyer does not discriminate on any basis prohibited by federal or state law, but state that employment is at-will and may be terminated for any reason by either party at any time. Requiring new job applications and distributing new handbooks is advisable, and some states require that new hires be provided information regarding position, pay, insurance, and workers’ compensation coverage.
Especially where the buyer needs the senior executives of the seller, it should examine in due diligence the contractual arrangements of those executives to determine whether they are subject to agreements that protect the sellers’ trade secrets and confidential information and whether they are barred from hiring away employees. The buyer may want to offer key executives contracts with structured retention bonuses to ensure their participation in a successful transition. Such contracts should include, in those states where these terms are enforceable, covenants not to compete and not to hire away employees of the buyer, and restrictions on the use of trade secrets.
Sellers and buyers can minimize, even avoid the risks of post-dispute litigation between them and by the employees who are not retained by careful attention to these key points during due diligence and after.
