Employment and Labor Issues

This section provides an overview of the main differences business leaders should be aware of when handling the labor and employment aspects of cross-border transactions. The first thing a labor and employment law specialist will want to do is understand the deal structure. If there are deal documents that have been concluded, such as a Letter of Intent or term sheet, review them carefully. Regardless of the deal type, be sure to inspect the terms of the transaction, including the indemnification clauses, which determine who assumes liability in the event of employment lawsuits and other post-closing complications. Determine what labor and employment risks might fall within unacceptable thresholds and flag them.

Whether you represent the buyer or seller, you will want to conduct an initial due diligence review in order to get an accurate picture of the target’s workforce demographics and culture. If you represent the seller, you will want to mitigate any compliance issues to the extent possible prior to going to market. If you represent the buyer, you will want to conduct a mini-labor and employment audit during the due diligence phase in order to assess any liabilities. The scope of the mini-labor and employment audit will depend on the materiality threshold. The deal structure will dictate how you run the due diligence review.

In a stock purchase, the buyer is acquiring the shares of ownership of the target company and becomes the controlling or sole shareholder of the target. In other words, the buyer acquires ownership of the target company’s assets by acquiring ownership of the target itself, and thus indirectly of everything owned by the target. With a stock purchase, all employees of the target automatically transfer to the buyer at closing. The most frequent turn of phrase among practitioners is that “the buyer steps into the shoes of the seller”. From an employment law perspective, the buyer assumes all of the target’s assets and liabilities with respect to the target’s employees. Therefore, the buyer-side employment due diligence review should be as comprehensive as possible.

In an asset purchase, the buyer is acquiring either some or all of a target company’s assets. In this case, the buyer only assumes those liabilities related to the assets it acquires. The employees will not automatically transfer to the buyer as they do in-stock purchases. The buyer must expressly assume all or some of the employees. Thus, the employment due diligence review will focus on which employees are transferring and how.

Labor and Employment Due Diligence Request List

Request the documents you need to review by sending your client or the seller, as the case may be a document request list. For the employment attorney, the place to start is with the target’s organizational chart and an employee census. An employee census is a detailed schedule of all employees, including salaried, non-salaried, full-time, part-time, and temporary employees, as well as any employees on leave, furlough or subject to a temporary layoff. It should include detailed information about their employment such as their job title, start date, work location, rates of pay, including salary, hourly rates of pay, overtime rates, and commissions, exempt or non-exempt classification, employment benefits, visa status, and legal employer.

In addition to the employee census, the employment-related due diligence request should include identifying the presence of works council, trade unions and other employee representative groups; reviewing employment policies and practices; personnel records; employment and independent contractor agreements; restrictive covenant agreements; termination documents; and notice and severance obligations among others. All of these components will influence various business decisions, including timing particularly where works council consultations are required. A review of these employment-related groups, policies and/or practices, and agreements can help identify potential trouble spots early in the process

Identify Unions, Works Councils, and Other Employee Representative Groups

One core difference between purely domestic transactions and cross-border transactions lies with employee representative groups. The US has unions. US unions are third-party organizations that represent non-management workers in many industries and act as intermediaries between them and their employers with the goal of negotiating better terms and conditions in the workplace. They derive their authority from and are governed by the National Labor Relations Act (“NLRA”).

In the European Union, employees could be represented by trade unions, works councils and collective bargaining agreements, whether at the industry, company, or workplace level. Works councils are organizations representing workers within a company and can act as a complement to trade unions but, are independent of these in some European Union countries. At the European Union level, companies with more than 1,000 employees and at least 150 employees in each of the two member countries must establish a works council.^[1] However, the law in each member country will dictate the minimum employee threshold that triggers the employee representative requirements. For example, in Germany and Austria if a company has more than 5 employees, it must set up a works council, also called a Betriebsrat. In the Netherlands, it is 50 (see chart below)^[2].

Country/Local	Employee Representative Body	Employee Threshold	Rights
Austria	Betriebsrat works council	5 employees	1. Notification and Information. Notification of intended significant operational changes and access to information related to economic, social, health-related or cultural staff interests. 2. Supervision. Supervision of the employer’s compliance with certain CBA or statutory requirements. 3. Consultation. Consultation on general employment related issues. 4. Co-determination. Certain employer decisions require works council consent.
Belgium Flanders Wallonia	Works council Ondernemingsraad Conseil d’entreprise	100 employees (However, companies with 50 or more employees must establish a committee for prevention and protection at work.)	1. Information. Economic, financial and social information. 2. Consultation. Consultation rights on matters that affect the company, employment policy, and/or the labor organization. 3. Co-determination. Certain employer decisions require works council consent.
France	Social and economic committee Comite Social et Economique	11 employees	1. Information 2. Consultation 3. Co-determination
Germany	Works council Betriebsrat	5 employees	1. Information 2. Consultation 3. Co-determination
Netherlands	Works council Ondernemingsraad	50 employees	1. Consultation. Consult on important considerations such as mergers, transfers of undertakings, changes to the company structure and collective dismissal. 2. Co-determination. Consent on decisions about introducing, amending or withdrawing social policies affecting the employees.
Spain	Employee Representatives Works council Comite de empresa	6 - 49 employees: employee delegates 50 employees: works council	1. Information 2. Consultation
Switzerland	Employee Representatives	50 employees	1. Information 2. Consultation 3. Co-determination. Consent related to very limited, special issues

Like unions, works councils act as a direct line of communication with management. However, where unions are run by outside third parties, works councils are inside the company. At the European level, works councils consult with management on the progress of the business and any significant decision that could affect the workers’ employment or working conditions and keep the workers informed of the same. At the member state level, in addition to informational rights, these employee representative groups may have consultation or even co-determination rights. Each member state has different rights for its employee representative bodies and works council. Information rights could include economic, financial and social information and/or health-related or cultural staff interests. Consultation rights may include general employment matters that affect the company, employment policy, and/or the labor organization or be limited to only extremely important business decisions that affect all employees such as mergers, transfers of undertakings, changes to the company structure and collective dismissals. Co-determination rights are similarly diverse across member states in that they may require the consent of the works council more broadly or more narrowly.

Japan and Korea both have employee representatives. In China, companies can have internal employee representatives, but they also have strong external unions. Latin America, generally speaking, has unions. In each jurisdiction, the rights these groups have differ and all can have implications for a transaction. Even though works councils do not have a veto right on the sale or purchase, they can delay the transaction until the consultation process is completed.

In light of the above, a leader’s labor and employment counsel should build into the closing contingencies a compliance requirement with any and all information and consultation processes.

Similarly, a post-close implication, but one a buyer should understand early in the transaction, is whether the target’s employees when combined with the buyer’s employees will trigger any requirements to establish an employee representative body, works council, or trade union where there previously was none.

Sometimes buyers make public announcements about the transaction as though final decisions have been made before completing their consultation obligations. These types of errors can put a stop to the entire transaction and lead to poor employee relations before the transaction is even complete. All communications should be carefully vetted for compliance with applicable law.

Employee Transfer Methods

At closing, the transferring employees may transfer in three different ways depending on the deal structure and jurisdiction. In the US, in an asset transaction, at closing seller terminates the transferring employees and buyer hires them. In a US stock transaction, there is no change of employer, and the employees simply move over automatically.

Transfer methods in the European Union may include automatic transfers under the Acquired Rights Directive in the European Union (“ARD”) (asset sales); termination and rehire; and no change of employer (stock sales). The Acquired Rights Directive essentially protects all transferring employees’ contractual and statutory employment rights by transferring those to the buyer. In the EU, to determine whether an asset transaction will trigger the ARD, as opposed to termination and rehire, you must look at how each member state has implemented it. The analysis will require input from deal team members in labor and employment, tax, and various other areas of law. In those transactions where the Acquired Rights Directive does apply, careful documentation and communication with employees is required in order for the transfer to be valid under local law. For example, the ARD as implemented into German law by section 613a of the German Civil Code, requires that the parties inform the employees of the transfer before it takes place, and they have the right to object to the transfer. If an employee objects, that employee will remain employed by the seller.

In addition to the EU, Brazil, Colombia, India, Singapore, South Africa and South Korea have laws similar to the ARD that require the buyer to provide to the transferring employees the same terms of employment and to maintain their years of service. In Mexico, for example, an “employer substitution” or automatic transfer is required if (i) there is a change from one employer to another, due to an agreement, sale, transfer or any other cause, (ii) the business continues, and (iii) the employees provide the same services they were providing with the seller. Employer substitutions do not require employee consent but do require notice.

Likewise, in Korea, if there is a “business transfer”, the employees will automatically transfer to the buyer with the terms and conditions they had immediately preceding the closing, unless the parties agree otherwise. If the parties agree to “similar” but not the same benefits, a less advantageous change requires the consent of the labor union or a majority of the employees. If the change in benefits is the same or advantageous, then no consultation or consent is required.

Generally, in Latin America, a sale of assets that do not meet the employer substitution requirements will often require the seller to terminate all the employees associated with the business to be acquired. Unlike United States terminations, terminations without just cause in Latin American countries and countries around the world typically require various legally required notices, severance, and other types of payments to employees.

Transaction “Measures”

The timing of any “measures” (i.e., terminations or redundancies) must be charted from the closing date backwards. In an asset transaction in the United States, the transferring employees will be terminated by the seller and hired by the buyer. In the E.U., a transaction that results in a change of employer, such as an asset purchase or merger, will likely require the application of the ARD, as discussed above. The ARD imposes obligations on employers and protects certain employee rights. It essentially tells employers what they can and cannot do with respect to employees’ terms and conditions of employment, including terminations.

Obligation to Inform

At a very high level, the ARD requires the seller and buyer to inform each and every employee or, depending on the country the employee representatives, of the date of transfer, the reason for the sale, the consequences of the sale, and any redundancies that are planned (whether before or after close). Employees may even have a short time period (usually 1 month) during which they can object to being transferred. Each European Union member state’s local law determines the implication of an employee deciding not to transfer, ranging from the UK allowing termination to Germany requiring the seller to retain the employee.

Obligation to Consult

If the transaction contemplates “measures” that affect employees, then both parties must consult with employee representative groups. The employee representative groups must be given a meaningful chance to express their opinion before any measures can be implemented. The consultation process must take place well enough in advance of the close such that meaningful negotiations can take place.

Codetermination

Co-determination goes a step further than consultation, it requires consent of the employee representative groups or works council before any measure may be implemented. Co-determination is used greatly in Germany, but some member state does not recognize this concept.

Furthermore, local law can limit the parties’ ability to terminate the employees. Typically, in many jurisdictions, the fact of the transaction alone will not constitute cause for dismissing employees for economic reasons. Instead, if the terminations (i.e., measures or redundancies) constitute a collective dismissal under applicable law (e.g., The United States WARN Act is triggered when 50 or more employees . . .____ and requires 60 days’ notice or pay in lieu), then additional notice and severance may be required.

Successor liability

In some countries, including the United States, even though a transaction is structured as an asset purchase, the buyer may still be held liable for employment liabilities as a successor when:

1. a court determines it is “fair and necessary” in the totality of the circumstances;
2. there exists a continuity in operations and the workforce; or
3. the seller is unable to provide relief to the employees.
   1. Employee benefits

When preparing to integrate employees post-close, even if the transaction structure did not trigger notification and/or consultation obligations, any change in benefits just might.

Benefit transfers can cause significant delays. It is important to understand early on what benefits may need to be transferred, realigned, or even terminated. Benefit plans sponsored by the parent or another company in the group may stay behind and thus may need to be replicated or replaced prior to the spinoff. The replication process can be time-consuming and require negotiation with providers, which should be factored into the transaction’s timelines. Further, issues of funding and any related liabilities also need to be considered.

It is important to consider how equity awards (e.g., restricted stock units, stock options, restricted stock, etc.) and plans will be impacted. Global equity issues and considerations should be analyzed from the date the transaction has begun until closing. These issues will need to be addressed both pre and post-close.

Immigration

A buyer will need to review all transferring employees’ immigration statuses. Just as in the United States, many labor laws across the globe require employers to maintain proof from each employee of authorization to work. Foreign nationals may be on work visas that are tied to a specific employer, location, and/or position. If the transaction will result in a change of any of these potentially, requisite factors, among others, action must be taken long before closing to ensure there is no loss of work authorization.

If a foreign national is a key employee and his or her immigration issues were not timely addressed, the buyer may lose a valuable part of the business. Furthermore, a buyer could be assessed penalties and fines if it is not able to show proper authorization to work for all its new employees.

An employer’s failure to file amendment petitions, where required — or failure to do so timely — can result in loss of work authorization. Given this, a prudent company will audit its I-9 and other relevant worksite compliance records, as well as its population of foreign national workers who hold temporary authorization to work, to determine what steps must be taken to ensure compliance post-closing.

What to do with employment liabilities uncovered during due diligence

Uncovering employment-related issues sooner, rather than later, will allow time to either mitigate the same or account for the same during the negotiation process whether by addressing it directly in the purchase agreement or negotiating the price.

The seller needs to know what disclosures it must make in the disclosure schedules Buyer wants to know whether it should adjust the purchase price, obtain indemnities, or exclude such liabilities

Cultural Considerations

Post-integration issues will necessitate understanding what each location’s employee benefits norms are – not just what is legally required (statutory benefits), but what is market standard (supplemental benefits).

Employees in Latin America receive far more employment benefits than United States employers are used to providing. Employers are expected (and often required) to provide a wide variety of benefits. To reinforce these cultural norms, most countries in the region have intricate labor laws and pro-employee courts. For foreign buyers, knowing what to expect and how to navigate the expectations of newly acquired employees can go a long way to help create productive relationships and avoid expensive missteps.