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Ask the Hotline | Acquisitions Raise HR Issues

April 9, 2017
Q. We are acquiring another business for the first time and are not sure of the HR issues. Any insights?
A. Many HR-related issues arise when purchasing a business. Apart from compliance issues, HR may need to assess the current practices of the acquired company, then determine best practices for both the geographical area and nature of the business. 
Here are some initial steps to assess the HR function from a new business owner’s perspective:
Are the purchased company’s policies and practices compliant with the law and with your policies and practices? 
HR or an outside expert should review the target company’s HR practices during the due diligence process: 
  • I-9 Files - Review I-9 files to ensure thoroughness, accuracy and compliance with retention requirements.
  • Sexual harassment policy – Did the target company issue the sexual harassment policy to all employees at the time of hire and annually thereafter? Did it provide any training? 
  • Exempt-nonexempt classifications - Are employees properly classified under the Fair Labor Standards Act (FLSA) white-collar regulations?
  • If the employer has 50 or more employees, is there a Family and Medical Leave Act (FMLA) policy in place?
  • Is there a handbook in place that will need to be combined and changed? Are the polices within the handbook practiced by the company?
  • What is the current total compensation strategy of the organization and what is the plan moving forward? 
  • Medical Benefits – Does the acquisition change the employer from fewer than 50 employees to 50 or more employees subjecting it to the Affordable Care Act’s requirements for employee eligibility and employer reporting?
People issues
Are there any employment agreements, non-compete agreements or non-disclosure agreements in effect? These need to be reviewed so the company may determine what if any responsibilities and options exist. Do the agreements expire with the change in ownership? Can they be included in the deal and still enforced?
The issue is an important one since some employees may leave or be discharged because of the purchase. 
At the same time, the buyer should make sure that it moves quickly to assure key employees from the target company that they will be retained after the sale. That may mean updating employment agreements, offering promotions and retention bonuses, and redefining those key employees’ roles. 
Is there any pending or ongoing litigation? What issues are involved? Can the cases be settled prior to the sale? If not, will the cost of litigation be included in the price of the sale. 
For those employees that may not be retained, certain steps must be followed:
  • Determine whether any notification requirements under the Worker Adjustment and Retraining Notification (WARN) apply. (i.e. does the employer have 100 or more employees and will the number of employees being let go trigger notification liability. Details about the WARN act are available here. 
  • Are you going to consider an early retirement program? 
  • Inform those employees scheduled to be released as quickly as possible.
  • Determine who is responsible for the payment of final wages, including accrued but unpaid vacation time. (Some courts have ruled that the purchasing employer may be liable for these payments, if not resolved in advance) 
  • Will you provide separation agreements with severance for affected employees?  If so, the Age Discrimination in Employment Act establishes requirements for group severance agreements, including time periods during which an affected employee may review the agreement (longer time periods for groups and those over 40), time periods during which an employee may revoke his or her agreement and disclosures about employees in affected positions indicating the age, race and gender.
  • Establish a process to determine which employees will be retained and which ones let go. 
  • Establish a process to govern how to distribute work among those retained after the acquisition. 
Once the deal is announced, employees from both companies will have questions about how the deal impacts them. HR should be part of the communications effort. The acquiring company may want to establish multiple routes of communication (e.g., one-on-one meetings, group sessions, newsletters, intranet updates) to deliver the message as consistently and clearly as possible.
Compensation and Benefits 
Acquired companies often have different pay scales and benefit programs than the acquiring company.
Resolving those differences early promotes integration of people and functions.  Programs to review include payroll cycles, annual performance and salary review (process and timing), medical and dental plans, 401k plan, and other health and welfare plans.
Honesty matters
People from both companies want the truth. Once the deal is announced, employees should be told as much as possible about what is going to happened to them. Don’t’ make false promise such as “Everything will be just like before,” because for many employees it is unlikely to be so. Treat people who are being let go with respect. This is good for them and lets retained employees know how they may be treated by the new owner. 
Many mergers and purchases fail due to the inability to recognize HR-related problems in advance.
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