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Thelen Reid Brown Raysman & Steiner LLP Although
labor relations issues may not drive the deal when businesses are sold, they can
have significant unintended consequences unless the acquisition is structured
properly. This
article focuses on the doctrine of successorship. Under it, a new employer can
be obligated to bargain collectively with the union in place at the newly acquired
facility. The new employer could even be compelled to adopt the requirements of
the former employer's labor contract in limited circumstances. Proper planning
is essential to avoid such unintended results, which may restrict the ability
of the new operation to compete and may preclude the employer from obtaining the
benefits sought through the acquisition.
The Rules of Successorship
The
National Labor Relations Board will conduct a broad inquiry to determine if it
is appropriate to require a new employer to recognize and bargain with the existing
union. Two factors are critical. First, the NLRB will consider whether there is
a "substantial continuity" between the seller and the buyer. The NLRB
will view this issue from the perspective of the employees and try to determine,
from their viewpoint, whether the sale has changed their jobs. If the employees
would perceive that their jobs have not changed, they would have a legitimate
expectation of continued representation by their union. Second,
NLRB will consider whether the new employer has hired a substantial portion of
its predecessor's workforce. If the seller's employees chose to have union representation
and these employees make up a majority of new employer's workforce, it follows
that the new workforce also would prefer union representation. Generally,
successorship is only an issue in asset purchases. When the stock of a company
transfers but the operation continues as an ongoing enterprise, the company's
labor relations obligations also continue unchanged. As a result, the new employer
is obligated to recognize the union and to assume the existing collective bargaining
agreement. When the company undergoes dramatic changes at the same time as the
stock transfer, however, the NLRB may rely on successorship analysis to decide
what, if any obligations, apply to the new company. For example, when the employees
remain in place but the company completely changes ownership and management, the
new employer may be obligated only to bargain with the existing union and not
to continue the terms of the labor contract.
Practical considerations
| 1. | No Obligation to Hire Any Specific Employee
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A
purchaser has no obligation to hire the existing employees when staffing a new
acquisition. It can choose to hire some, all or none of the employees. The new
employer cannot, however, base this decision on an employee's support for a union.
Section 7 of the National Labor Relations Act forbids discrimination on the basis
of an employee's preference to join (or not to join) a union. For this reason,
it would be unlawful for a purchaser to refuse to hire the seller's unionized
employees solely to avoid becoming a "successor." The
new employer should make hiring decisions only on business-related criteria. For
example, the new employer can select personnel on the basis of job skills, years
of experience or special qualifications. Thus, an employer could lawfully reject
the existing workforce and hire a new complement of employees if it decided to
improve the level of skills at the facility. In that case, the new employer should
only hire employees with more experience, additional education or certification
documenting their advanced skills.
2. Early Planning is Essential
A
new employer might want to change the manner of operation of the purchased operation.
It might want to add work shifts. A new owner might be able to centralize and
consolidate a new operation with other facilities it owns. This reorganization
might decrease the number of employees necessary to operate the plant but increase
the skill level required for the remaining employees. To
the extent any such changes are contemplated, they should be reflected from the
beginning in all staffing decision. Otherwise, the employer is likely to end up
keeping the predecessor's workforce. These employees know the operation, have
the skills to keep it running, and are ready and able to work. However, they may
not be the right employees for the organization the new owner contemplates In
addition, there can be consequences to relying on the available employees while
making planning decisions. Because NLRB gives great weight to the composition
of the workforce when evaluating the successorship issue, retention of the seller's
employees, even as a stop-gap measure, could create an adverse finding. As a result,
the employer could be subject to a duty to recognize the union and to bargain
with it before making any changes affecting the terms and conditions of employment.
Thus, new employers need to plan their operations carefully to avoid the imposition
of legal requirements that could sharply limit their ability to manage effectively
in a competitive environment.
Other Consequences of Successorship
1. Successor Liability If
a new employer is found to be a successor, it may also become responsible for
its predecessor's unfair labor practices. Generally, a purchaser with notice of
a pending unfair labor practice charge, which has continued the business without
interruption or substantial changes in operations, will be jointly responsible
for its predecessor's conduct and will be required to remedy these violations.
In cases involving unlawfully discharged employees, the successor may be responsible
for rehiring the employee and for providing back-pay remedies. Similarly,
a buyer also may be liable for pending discrimination claims if it has notice
of these claims. The buyer could face the costs of remedying these claims if they
are proven. The
doctrine of successorship liability creates a tension between the buyer's obligations
to conduct careful due diligence before completing a transaction and the buyer's
desire not to learn of pending claims and, therefore, to avoid liability for them.
In most cases, this conflict can be resolved through properly drafted indemnification,
hold harmless and defense language in the purchase agreement, which will properly
apportion the liability for the seller's alleged misconduct.
2. Assumption of the Seller's Contract
If
an asset purchaser is found to be a successor employer, the purchaser ordinarily
is not required to assume the seller's collective bargaining agreement. There
are, however, limited exceptions to this rule. When the successor is found to
be an alter ego of the predecessor, it will be bound by the terms of the predecessor's
labor contract. An
alter ego determination focuses on the identity of the employer, unlike NLRB successorship
issues, which are based on the effect of the transaction on the employees. NLRB
will find a new employer to be an alter ego of the seller when the two companies
have substantially the same management, business purpose, operations, equipment,
customers and ownership. A
successor company also may be bound by the existing labor contract if it voluntarily
adopts the contract. For this reason, a purchaser should be very careful about
the representations it makes while negotiating the purchase agreement.
Successors and Assigns Language
Some
collective bargaining agreements include "successors and assigns" provisions.
This language states that the terms of the contract are binding on the signatory
company and all entities that succeed to its interest. As a result, if the company
is sold, the collective bargaining agreement may require the seller to secure
the buyer's agreement to assume the terms of the contract. Although
this language is not binding on the purchaser, it can create substantial confusion
and delay in the purchase. In some cases, courts have enjoined transactions pending
a labor arbitration between the seller and its union to determine whether the
seller breached its obligations under the "successors and assigns" clause.
If a buyer discovers that the seller's labor agreement contains such a provision,
it should ensure that the seller has resolved all issues with the union fully
to avoid any risk that this language would create problems after the deal has
closed.
Due Diligence
Successorship
issues require purchasers to conduct careful due diligence to ensure a thorough
understanding of any obligations or liabilities that accompany the acquisition.
Prospective purchasers should carefully review all relevant collective bargaining
agreements as part of the due diligence process. In
addition, the purchaser should review all other employment documents. The purchaser
should ask to see such documents as affirmative plans, employment agreements,
OSHA-mandated hazard communications programs, pending discrimination claims and
pending unfair labor practice claims.
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For more information about the issues covered in this report, please contact Linda S. Husar in our Los Angeles office at 213-576-8017 or at lshusar@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2002 Thelen Reid Brown Raysman & Steiner LLP
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