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Last month, we outlined the importance for entrepreneurs growing their businesses in part because of acquisitions of other businesses or properties to conduct a thorough due diligence of the businesses under evaluation to ensure compliance with the employment and labor laws. For sure, while many believe “due diligence” applies primarily to financial records and accounting practices, the application of due diligence requires much more. Limiting review to merely financial matters could subject the owner (and potential acquirer or purchaser) to significant liabilities if certain legal obligations are not analyzed and accounted for as outlined below.

As stated, there are five primary areas that fall within the practice of labor and employment law, which must be analyzed during a sale or purchase of a business. In last month’s issue, we discussed the impact of the anti-discrimination employment laws on mergers and acquisitions. This month, we will review the effect of the labor laws, and next month, the employee benefits laws, the immigration laws and laws that govern mass layoffs.

Applicability of Traditional Labor Laws (Unions)

Some businesses may have a segment of the workforce that is unionized. In such cases, these employers are subject to a collective bargaining agreement (CBA) and must negotiate with the bargaining agent for the unionized employees over terms and conditions of employment. Because having to deal with a union may significantly limit the flexibility of the purchaser/employer to implement its own hiring and personnel practices, the purchaser must be prepared for the challenges presented when acquiring a property with both a union and non-union workforce. In dealing with a union, the most common terms of employment that are negotiated include wages, health insurance benefits and job security issues.

Sale of businesses that are unionized may trigger a number of obligations for either the seller or the purchaser or both, though generally speaking, a strict asset purchase may absolve the purchaser from being bound to the substantive provisions of the collective bargaining agreement (CBA). Even in the strict asset purchase context, however, if the purchaser is deemed to be a “successor” to the seller based on an analysis of industry-related and operations-related factors applied by the National Labor Relations Board (the NLRB governs private sector employer-union relations), the purchaser may still be obligated to negotiate with the union over employment terms if certain prerequisites are satisfied.

When considering a unionized property, the purchaser should fully analyze the CBA in effect to determine whether there exists any contractual obligation attributable to the successor or purchaser. Many CBAs contain successor clauses that have been negotiated by the employer and union. The primary thrust behind a successor clause is that the union wants to ensure the negotiated terms of the CBA continue in the event of a sale. Where these clauses exist, however, both the purchaser and seller must tread carefully. Some successor clauses require the purchaser to assume full or partial responsibility to continue the CBA’s terms, which as stated, may limit the flexibility of the purchaser to impose its own terms and conditions of employment. The clause also may include penalties for the seller where the purchaser does not assume responsibility under the CBA, may obligate the seller to pay certain benefits to union employees, or otherwise negotiate with the union over the sale’s effects.

As an aside, to make a sale more palatable to a potential purchaser, at the time of bargaining over the CBA, the seller (or potential seller) may consider taking a hard line in negotiations by not agreeing to a successor clause. And, like in the employment law context, the purchaser should attempt to negotiate an indemnification clause into the purchase/sales contract to redress any liability attributable to any unfair labor practice committed by the seller. In any event, it is recommended that labor counsel critically review the CBA, including any pending unfair labor practice charges, so that the purchaser and seller understand their obligations under the labor laws prior to consummating the sale.

The information presented in this article is general in nature. Nothing in this article is intended to provide specific legal advice. Please contact your labor counsel or other counsel if you have any particular issues that require attention.

Nikhil N. Joshi, a labor counsel with concentration in Human Resources Management at Kunkel Miller & Hament, P.A. in Sarasota, can be reached at 800-828-7133 or e-mail

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