What Every In-House Counsel Needs To Know About The Employment Issues Affecting Mergers, Reorganizations And Restructurings: What You Don't Know Can Hurt You!

Matthew T. Miklave
Epstein Becker & Green, P.C.

Matthew T. Miklave is a Partner in the New York, New York and Stamford, Connecticut offices of Epstein Becker & Green, P.C. He may be reached at (212) 351-4663 or by email at mmiklave@ebglaw.com





Any corporate restructuring (whether a reorganization, merger or acquisition, collectively called "restructuring" throughout this article) potentially affects the corporation's employment relations obligations and liabilities. The decisions made early in the planning process could limit the company's ability to address employment relations concerns later or could adversely affect the desired result. In order to avoid the "unpleasant surprise," in-house counsel should consider the labor and employment issues affecting corporate restructurings. The following non-exhaustive list of topics should be considered by counsel at as early a stage as possible whenever considering a corporate restructuring.

Executive Agreements

Restructurings obviously do not terminate a party's obligations under existing employment contracts. Executive employment contracts or compensation plans often contain "change in control" provisions calling for immediate stock vesting, deferred compensation, golden parachutes or other financial packages. If not carefully drafted, change in control provisions could be triggered by unintended events, at times with puzzling results. See Fix v. Quantum Industrial Partners, 374 F.3d 549 (7th Cir. 2004) (bankruptcy of company triggered change in control provision, entitling executive to $5 million payment).

Typically, change in control provisions require either a so-called "single" or "double" "trigger" in order to become effective. A "single trigger" provision comes into play upon the happening of a specific event, oftentimes a change in the membership or composition of the Board of Directors. A "double trigger" provision comes into play when two separate events occur, usually a change in Board membership coupled with a significant change in duties or responsibilities, job location or management or reporting level. Significantly, a restructuring might trigger change in control provisions in the seller's executives' contracts, the buyer's executives' contracts or both. Thus, counsel should review all executive employment agreements and compensation plans to avoid unintended consequences.

If due diligence reveals a "change in control" issue, federal securities concerns might limit the ability to renegotiate the executives' employment agreements before any public announcement of the transaction. In those cases, the parties may seek to make the acquisition conditional on a certain number of executives agreeing to modify their contracts. This would permit the acquisition to move forward while preserving the ability to modify the impact of these provisions.

Counsel should also consider the impact of restructuring on traditional non-compete provisions. For example, a threshold question concerns whether a successor company could enforce the non-compete provision in the first place. The transaction may significantly affect the scope of the non-compete, for example where a small local business is acquired by a national wholesale operation. The ability to assign these agreements and the enforcement of non-compete provisions will all depend on state law. Indeed, the form of the transaction could be critical to post-acquisition enforcement.

Labor Relations

Any restructuring involving employees represented by a union triggers contractual and bargaining obligations. Rules governing a purchaser's obligations distinguish between the purchaser's obligation to comply with the seller's contract and the obligation to bargain with the employees' union representative. A "successor" employer has an obligation, upon request, to recognize and to bargain with a union that represented the "predecessor's" employees. A successor company, however, is under no obligation to abide by the predecessor's union contract, and both the successor company and the union are free to negotiate new contract terms. In other words, a purchaser of assets may not be compelled to assume the obligations of a pre-existing union contract.

Where a majority of the seller's employees are hired by the purchaser and the business is continued in substantially unchanged form, the purchaser has been held to be a "successor." Notably, once a purchaser commits to hire a majority of the workforce from the seller (which easily could occur in preliminary negotiations with the seller), the obligation to bargain with the union attaches and the purchaser of assets is prohibited from making any changes to the terms or conditions of the employees' employment, absent good-faith negotiations with the union.

While a purchaser is under no obligation to abide by the seller's union contract, a seller remains bound to that contract even after the sale. In many cases, labor agreements restrict the owner's right to sell or dispose of its business. Where a seller ignores these restrictions, arbitrators have awarded damages. Alternatively, a court can enjoin the transaction pending the outcome of any union-initiated grievances or compliance with any contractual obligations.

Even where the seller's union contract permits the unrestricted sale of the business, the seller nevertheless may be obligated to bargain over its decision to sell the business ("decisional bargaining") or the effects of that decision on the bargaining unit employees ("impact bargaining"). "Decisional bargaining" contemplates notice by the seller to the union prior to the final implementation of the business decision: that is, at a time when the purchase-sale agreement remains somewhat conditional. Once notified, the union has the burden of seeking discussions with the seller. Even if the union does not seek to bargain over the decision to sell the business, the seller may be obligated to bargain over the impact or effects of the transaction on the employees. Such "impact bargaining" covers a variety of employment terms, including severance, vacation, holidays, insurance and fringe-benefit payments.

Plant Closing

When restructuring results in the layoff of employees or the closing of one or more facilities, the employer must take into account the requirements of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101 et seq. ("WARN"). WARN requires covered "employers" to give 60 days' notice of any "plant closing" or "mass layoff" to affected employees (or their union representative) and designated government officials.

WARN defines a "plant closing" as a permanent (six month or longer) shutdown of a single site of employment, or of one or more facilities or operating units within a single site of employment, where 50 or more full-time employees suffer an employment loss. In contrast to a plant closing, WARN defines a "mass layoff" as a reduction in force of (i) 500 full-time employees at a single site of employment or (ii) at least 50 full-time employees who also comprise at least 33% of the workforce.

WARN's notice requirements may present special problems in the context of the acquisition of a going concern. WARN expressly provides that the seller shall be responsible for providing notice of any plant closing or mass layoff "up to and including the effective date of the sale." Nevertheless, WARN also provides that any full-time employee of the seller employed "as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale." (emphasis added). Thus, WARN presents some ambiguity in the context of an acquisition in which the employees will not be terminated until the day of the sale. Further complicating the matter, the Department of Labor ("DOL") regulations implementing WARN provide that seller has the responsibility for providing WARN notice "up to an including the effective date [time] of the sale and is then assumed by the buyer." (emphasis added).

The ambiguity created by these provisions remains unresolved. Some courts interpret WARN to the effect that the seller remains obligated to provide notice of a plant closing or mass layoff that occurs prior to the sale of the business, but that the purchaser becomes responsible for providing notice of a plant closing or mass layoff that occurs at the time of the sale or thereafter. Other courts have read WARN as requiring notice by the buyer only when the employees actually become employed by the buyer.

In many restructurings involving a going concern, the parties may not know the date on which the transaction will be completed, consummation of the transaction may be conditional, or circumstances may require completion of the transaction in less than 60 days. Where the seller would find it difficult to operate with a reduced workforce, the seller understandably may be reluctant to terminate employees on a date certain prior to the completion of the transaction. Given their concerns, the parties should give early consideration to the treatment of employees and allocate WARN responsibility accordingly.

Family And Medical Leaves

Under the federal Family and Medical Leave Act ("FMLA"), covered employees are entitled to take up to twelve weeks of unpaid leave for the birth or adoption of a child, their own serious medical condition, or the serious medical condition of a covered family member. In a merger or acquisition, the seller and buyer should consider what will happen to those employees who were out on either family or medical leave. The DOL has taken the position that a successor inherits the obligation to reinstate these employees. A successor may have this obligation even if not aware that the employee was on approved FMLA leave. An employer that refuses to consider for employment employees on a medical leave of absence at the time of the acquisition may be found to have violated ERISA as well.

Military Leave

Companies involved in a restructuring should also keep in mind the re-employment status of certain employees on a long-term unpaid leave of absence to serve in the United States Armed Forces. Under the Uniformed Services Employment and Re-employment Rights Act ("USERRA"), an employee absent from work to serve in the United States Armed Forces is entitled to reinstatement to his or her former position for up to five years following commencement of the leave. USERRA specifically imposes the reinstatement obligation on any successor in interest. In addition to reinstatement rights, under USERRA the returning employee is entitled to such seniority and other benefits as if the employee was an active employee for the period of military service. Furthermore, upon re-employment, the employee may not be discharged without "just cause" for a period of one year (if serving in the military for more than 180 days).

As shown by this non-exclusive list of topics, given the numerous ways in which the underlying business transaction may impact labor and employment liabilities, in-house counsel should give early consideration to these issues and plan accordingly.