NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided. This article does not include California's WARN act effective January 1, 2003. Click here for information about CAL WARN published by the California Employment Development Department. Also click here for one of the Buy/Sell Newsletter articles dealing with CAL WARN
Employee issues play a major role in dealership buy-sells. Buyers need to be protected from unforeseen liability for the employee-related obligations of the seller. Sellers need to isolate themselves from postclosing employment matters without creating additional complications in the process. Buyers and sellers need to work together to minimize disruption to the workforce both before and after closing. And, as recent court battles remind us, employee privacy rights need to be observed throughout the buy-sell process.
One of the few hard-and-fast rules in buy-sells is that the seller is responsible for all pre-closing employment obligations. The buyer must obtain assurance–usually by means of warranties, covenants, and indemnities from the seller–that all pre-closing employment obligations will be satisfied at or prior to closing.
But these assurances, as helpful as they are in filling in any gaps, place a distant second to actual, verified payment of all major employment obligations at or prior to closing. Prudent buyers require proof that the seller has paid or properly discharged all employment taxes, pension benefits, health benefits, long-term employment agreements or severance pay obligations (if any), vacation benefits, and, of course, compensation owing to employees.
Unless the buy-sell involves the purchase of corporate stock, the seller should terminate all employees of the dealership at closing, and provide all notices normally required upon termination to each employee, such as COBRA notices. A form is often prepared prior to closing for purposes of requesting employees to acknowledge their receipt of the termination and related notices, and to also acknowledge that no additional compensation or other benefits remain owing to them.
These formal, written terminations at closing clearly establish the fact that pre-closing employment relationships are not being carried forward, whether or not the employees are hired by the buyer after closing. This “clean-break” helps the buyer deflect successor liability claims for pre-closing liabilities made by employees, government agencies, and, sometimes but not always, unions. A clean-break also gives the seller a clear point in time after which all employment relationships become the exclusive responsibility of the buyer.
Sellers must take care, of course, when terminating their employees in the course of a buy-sell. Sale of the business offers no cloak of immunity to disregard the rights or obligations owing to employees upon termination. In the rush to close the buy-sell, sellers must take time not only to ensure compliance with all bureaucratic aspects of termination, but to also observe any special rights that may be held by individual employees, whether pursuant to employment agreements, benefits packages, problematic language in employee handbooks, or, in some cases, union contracts.
Besides the general issues surrounding terminations, even more rules come into play when dismissal of the entire work force is involved. For one, the final Employment Development Department tax return needs to be prepared sooner than generally is the case (so that tax clearances can be issued), and should be prepared with extreme care to properly address any open issues.
In addition, attorneys for the parties will have to determine the applicability of the Worker Adjustment and Retraining Notification Act of 1988 (WARN Act). WARN generally requires 60 days’ prior written notice to employees and to the EDD when 50 or more employees are to be dismissed. WARN applies to those who employ 100 or more full-time employees, or 100 or more employees (whether full or part-time) who in the aggregate work at least 4,000 hours per week. Legal opinions from the Court of Appeals for the Ninth Circuit give buyers and sellers of on-going businesses some options to avoid full WARN Act notices, but careful review is essential to fit into these exceptions.
Union agreements add complexity to terminating the workforce. In addition to possible breach of the agreement by the seller for early termination, the buyer has to operate under the not-so-simple rule of “perfect obviousness; ” the buyer can hire existing union employees on terms less favorable than they originally enjoyed, so long as it was not “perfectly obvious” that the buyer intended to hire most of the seller’s employees. These and other problems make it mandatory that both buyer and seller consult their own labor counsel prior to signing the buy-sell agreements in the event of any union activity.
Despite the legal help offered by the clean-break of formal termination, buyers and sellers worry about the morale of the employees, especially after word of the buy-sell leaks out. There is a tendency to want to assure the employees that the buyer will hire them all, or to offer some kind of raise or bonus to those willing to weather the storm of the buy-sell. These temptations must be avoided, unless the parties are willing to risk having their assurances transformed by a deft plaintiffs attorney into alleged contracts of continued employment or, worse, alleged fraudulent statements.
Letting the buyer quietly obtain information about the workforce from the seller behind the scenes pending close of escrow was the preferred modus operandi for many years – it allowed the seller to avoid discussing the buy-sell with employees until the day of closing, when pink-slips were also handed out. But in this age of increasing concern about personal privacy, adjustments may need to be made to this approach, as borne out by recent litigation in California courts.
For example, in the case of Acevedo vs. Watkins-Johnson Company, pending in the Santa Clara Superior Court, employees have sued their employer for disclosing employment files and information to a potential purchaser of the business. The employees maintain that it was a violation of their right to privacy for the seller to disclose to the buyer without the employees’ consent their personnel records, performance reviews, incidents of discipline, and compensation history. In addition to emotional damages caused by the loss of privacy, the employees claim they have suffered economically because they lost the bargaining power they would have had if the buyer had been in the dark about their compensation histories.
Whether the right to employee privacy guaranteed by the California Constitution extends to disclosure of compensation records to buyers is questionable. But it would be a mistake to ignore the issue of employee privacy in buy-sell agreements. Without each employee’s written consent, sellers should avoid providing personnel files to buyers on a wholesale basis. While allowing review of employment applications, resumes, and similar non-sensitive information (and, perhaps, name removed payroll data) without employee consent may be permissible, the buyer should be asked to agree in writing to preserve the confidentiality of any information so obtained, a matter often covered by the general confidentiality clause of the buy-sell agreement. One method of seeking the consent of the employees to release of other information in their personnel files would be to include that consent in employment applications that the buyer makes available to those employees wishing to be considered for employment.
This article provided some basic background concerning the impact of employment law issues on the buy-sell process. There are many more details to the topics raised here, and several related topics that have not been discussed. Watch for more coverage of this topics in future editions of this newsletter.
This article was written in 1997.