Employers considering selling their business spend large amounts of time preparing the books, improving EBIDTA, fine-tuning marketing strategies, and reducing redundancies, among many other tasks, to improve the sale price. Yet six skeletons in the employment closet, discussed below, could cause serious problems during due diligence and halt an impending sale-of-business transaction:

1. Does your handbook present a healthy company? A company’s employee handbook is often the first place the employment law specialist looks to assess the health of a company writ large. For example, if the company does not have a harassment policy, an equal employment opportunity policy, an immigration compliance policy, or a disability accommodation policy, questions arise regarding whether these laws and related best practices have been followed by the company. Further, a company may have policies that are unlawful, which could cause the buyer’s specialist to request additional information and documents to further investigate the company’s practices. Accordingly, the company should review and update its handbook on a regular basis, especially if there is a significant change in the law that should be reflected in the company’s policies.

2. Are your workers properly classified? The on-going struggle of whether to classify a worker as an employee or an independent contractor remains a highly litigated area in employment law. With a larger workforce, problems in this arena could implicate significant monetary liabilities. Companies should ensure they have carefully reviewed and determined whether workers are properly classified as employees or independent contractors. This area of law is a current target of U.S. Department of Labor investigations, and improper classification could result in civil money penalties. 

3. Are employees properly classified as exempt or nonexempt? Similar to the above misclassification problem with independent contractors, misclassifying employees as exempt can have expensive repercussions including back wages, liquidated damages, and attorneys’ fees that could scare a potential buyer away. Companies should examine job descriptions, which should be up to date and accurate, to confirm that the company’s exempt employees are performing exempt duties, and ensure that that company is satisfying the salary basis test and the required salary threshold.

4. Do your employee-related agreements have key provisions? Depending upon the structure of the company and the importance of certain key employees, “change in control” provisions and related severance consequences in executive employment agreements may be important for the company’s continued viability post-closing, which is of importance to any buyer. If the ability to enforce the restrictive covenants binding the company’s employees is an important asset to a buyer, ensure such agreements are in place, and have proper assignment clauses (to the extent permitted under applicable state laws). In addition, companies should review current employment agreements and consider other tools, such as retention agreements, to keep key employees in place.

5. Beware of systemic issues! Potential exposure to a class action suit claiming systemic violations of law will impact the sale of a business because of cost considerations and the potential for pubic notoriety. Companies should address and resolve current and former employee complaints and perform periodic employment audits to avoid being blind-sided by class action claims. 

6. Do you have a collective bargaining agreement with a labor union? In most cases, if the selling company is subject to an existing relationship with a labor union, the National Labor Relations Act requires the selling company to notify the union concerning the transaction and to provide a meaningful opportunity to bargain with the union over the effects of the sale. The “decision” to sell is oftentimes described as being within management’s prerogative. However, sometimes the “decision” to sell is limited by contractual language contained within the parties’ collective bargaining agreement. To avoid any surprises, companies should determine whether the agreement contains a “successors” clause, which provides that the agreement is binding on successors. Although a successors clause does not automatically bind a purchasing employer to the terms of an existing collective bargaining agreement, a union could seek a preliminary injunction enjoining the employer from selling its business pending arbitration over the employer’s duty to assure that the purchaser would assume the terms of the collective bargaining agreement.