Hidden Legal Risks of Merger and Acquisition Events


The recent uptick in mergers and acquisitions has been widely reported in the press. While this is good news for companies looking for an exit and their counterparts looking to make an acquisition, California and federal employment laws and regulations create many risks for companies in transition.

Acquired companies must be mindful of their obligation to comply with wage and hour laws relating to termination of employees, whether in connection with a corporate sale or otherwise. Under California Labor Code Section 201, companies must pay discharged employees all accrued wages and benefits immediately at the time of termination. While certain industries, such as the motion picture, agricultural, oil drilling and other industries, face payment deadlines that differ from the standard “immediate payment” deadline, companies in every industry face this obligation to pay employees what is owed them. Acquired companies should not rely on the acquirer or successor entity to arrange for and handle this obligation unless it is specifically outlined in the transaction documents.

Regardless of whether an acquired company pays its employee’s wages at the time of the transaction, no employees of an acquired company become actual employees of the acquirer or successor entity unless and until that relationship is formalized. As with all other hiring decisions, acquiring companies must be careful not to violate laws that are designed to avoid discrimination against members of “protected classes”. If an acquiring company is not going to hire all of the acquired company’s employees, it must be careful not to unintentionally act in a discriminatory manner in connection with its hiring decisions. Disabled employees of the acquired company must be afforded all rights due them under laws designed to protect the disabled. Companies should be mindful of wage parity issues, and make decisions about wages in a fair and non-discriminatory manner. It is recommended that the acquiring company document its hiring decisions with respect to the acquired company’s employees, including pursuant to offer letters and/or employment contracts, NDA’s and confidentiality agreements, and the acquirer or successor entity should also provide its new employees with an employee handbook.

Acquired companies must also be mindful of obligations owed to employees under health, dental, disability and other benefit programs. Companies should consult with their benefits providers or agents to ascertain what impact, if any, the acquisition will have on the rights of employees. Flexible spending accounts (“FSA”) are often terminated after termination of employment. Companies must also mindful of their obligations to comply with COBRA.

Finally, an acquiring company should be sensitive to the manner in which it integrates new employees into its existing workforce. Employment decisions in any transition period should be made carefully and according to well articulated policies and procedures. Haphazard treatment of “acquired company employees” who are sensitive to their changing work environment can lead to unnecessary and costly litigation. Companies with a sizeable number of employees should consider working with a consultant well versed in integration issues.

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Lisa Chapman

Lisa is an experienced employment attorney and litigator. In her employment law practice, she helps startup and mid-size companies navigate and comply with Federal and state employment laws and regulations. This includes laws related to wage and hour requirements, sexual harassment and retaliation, worker classification (independent contractor vs. employee status), and overtime laws, among others.
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