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BUYER BEWARE: TOP 5 EMPLOYMENT PITFALLS WHEN BUYING A BUSINESS

Anyone who has ever tried to buy a business understands that it is very difficult to know prior to the purchase about all of the potential liabilities that may be lurking in the business.  Even though a buyer may avoid a stock purchase in order to shield against taking on all of the business’ liabilities, a court may still determine that a buyer is responsible for the liabilities of the business while under the ownership of the seller if the buyer has purchased all of the business’ assets.  This may be particularly true in the realm of successor liability for employment issues where the buyer has hired some or all of the seller's employees. Given the large number of issues facing buyers of businesses, employment liability issues can sometimes be overlooked.

  1. A buyer should make sure to request information on all claims against the business of harassment of employees, wrongful termination or alleged violations of employment laws. This includes both claims made internally and those coming from an outside agency. Of course, pending lawsuits should also be reviewed and understood. If the claims are unresolved or involve potentially large liabilities, then special consideration should be taken to address those matters specifically in the purchase documents
  2. Another potential issue involves the WARN Act.   Generally speaking, WARN Act notices are required if the seller has 100 or more employees and 50 or more of those employees would be terminated due to the sale.  WARN Act notices must be provided prior to the closing of a sale, even if the buyer is intending to hire most of the seller’s employees.  Liabilities for violation of the WARN Act involve payment of 60 days’ worth of wages and benefits to each affected employee, a penalty of $500 per day, and reimbursement for employee’s attorney’s fees if the employee is successful in an action. Buyers need to make sure that responsibility for compliance is spelled out in the purchase documents and that compliance actually occurs.

  3. Buyers need to be aware that they may inherit the seller’s workers’ compensation ratings and liabilities as a result of hiring seller’s employees.  If a buyer hires some of the employees of the business, that buyer may assume the business’ workers’ compensation experience rating which, if worse than the buyer’s rating, can result in increased workers’ compensation insurance rates for the buyer. Buyers would also be responsible for any unpaid workers’ compensation premiums, even if the purchase agreement says otherwise. Buyers should be sure to investigate the seller’s workers’ compensation ratings and liabilities and will need to take those into account in evaluating the business purchase.

  4. Buyers must also be sure to verify that all documentation for employees is accurate and complete. A buyer cannot rely on the seller to make sure that all immigration documentation is up to date and complete. Buyers must make sure that steps are in place prior to purchasing the business to assure appropriate documentation.

  5. Another potential trap is unpaid payroll taxes. In many states, the state taxing authority can come after the buyer of the business for the unpaid payroll taxes of the seller, even if the buyer is only buying assets and not stock. Buyers can obtain a clearance letter from the taxing authority in order to satisfy themselves that all prior payroll taxes have been paid.

Awareness of the employment law issues that can surround the purchase of the business and dealing with them head on during the due diligence phase of your business purchase is as important as the financial and operational due diligence that buyers undertake. Relying on representations and warranties from the seller and other liability shifting language in the purchase agreement will not protect a buyer from all potential employment related liabilities. Paying attention to the potential employment related pitfalls prior to a purchase of a business can avoid unexpected surprises after the business is bought.