Managing Employment Issues in M & A Deals

With the pace of mergers and acquisitions ("M & A") deals showing no signs of slowing, many businesses are finding themselves in a mode of perpetual "change management." Either you're thinking about a deal, doing a deal, or managing the fallout from your last deal. Sound familiar?

Most deals start out in the ether of business theory, driven by analyzing markets and crunching numbers. But as a deal takes shape, and as a buyer tries to deliver value from a deal after it closes, the operational details usually determine whether business reality lives up to the theory. And nowhere is that more true than in the area of human resource issues.

In any acquisition involving employees, buyers should develop a strategy for assessing and managing employment issues, not just for due diligence purposes, but in the context of the company's goals for the acquired business.

It's too easy, in the hustle to get a deal signed, announced, and closed, to postpone consideration of the nuts and bolts of how the merger will be implemented operationally.

But given the importance of a buyer's early moves with regard to the employees of an acquired company, it's critical to work out a strategy in advance, assess risks and liability, and allocate costs and responsibilities among the buyer and seller.

This means asking some fundamental questions:

  • How will the acquired employees fit into the buyer's business plans?
  • Does the buyer anticipate keeping the operation largely intact?
  • Will the new business be greatly consolidated or even shut down?

The answers will determine how employment issues should be managed.


If a buyer is looking at a target company for its value as an ongoing entity, then retention of employees is a critical issue. A promising acquisition will lose value if most of its thinkers and doers quit during or after the deal. Even buyers that anticipate substantial downsizing will likely be concerned with retention of certain key employees.

Buyers and sellers may wish to negotiate special bonus deals or options with key employees in the target company, specifically to retain them during the transition period of the sale (particularly if their positions will be eliminated at the time of or shortly after closing).

In addition, as part of its due diligence, buyers will want to assess any existing change-of-control agreements maintained by the seller. Such agreements may create significant financial liability, impact operational changes, or may simply be so lucrative that they encourage valued employees to leave.

One simple step is also among the most-overlooked: telling critical employees you want them to stay. As soon as rumors of a merger make the rounds, employees at both companies begin assessing their future and considering other options, out of fear that the deal will either cost them their jobs, change their responsibilities, or limit career opportunities. If they will have a job after the deal, reassure them.

If you want them to stay, tell them. And to avoid misunderstandings during a confusing and fast-moving time, clearly document any promises with written communications or, better yet, employment agreements. At the same time, be careful not to make promises you can't deliver on.

Many sellers also actively seek protections for their broad pool of employees, including representations from the buyer regarding the terms and conditions of employment and formal separation or severance plans covering employees whose jobs are eliminated in the deal or shortly thereafter.

Buyers must assess these demands in terms both of cost and the overall impact on the post-merger business plan. A buyer's willingness to accept employee protections may depend on the seller's willingness to cover all or a portion of the costs associated with them.

Workforce Reductions

If the first thing employees want to know is whether they will have jobs, the second is what severance they will receive if they lose their jobs. Any company considering an M & A deal should review and revise (or adopt) severance policies and plans in advance. Establishing or revising a policy in the middle of a deal may result in inconsistent communications, create liabilities for misrepresentations, and sabotage your attempts to build trust with employees.

If a buyer and a seller know up front that a deal will result in terminations or layoffs, then they should plan for those actions in a way that minimizes disruptions in the workforce or culture (including the buyer's own workforce and any workers remaining with the seller) and reduces legal and financial exposure. Buyers need to determine, usually in negotiation with the seller:

  • Who will handle the actual terminations (buyer or seller)?
  • At what point in the deal will the terminations occur?
  • Is prior notification required under the Worker Adjustment Retraining and Notification Act? If so, who provides notice, and who manages the process?
  • What severance packages will be offered?
  • Who pays for severance?

Will employees be required to sign a waiver of claims to receive severance? Such waivers usually must satisfy special requirements for "employment termination programs" under the Older Workers Benefit Protection Act.

In addition to the legal implications, there are also the public relations, cultural, and community or government relations issues that go along with any workforce reduction.

Labor Issues

When the company being acquired has union employees, labor issues obviously need to be addressed during and after the deal. Depending on the structure of the deal and the operational changes being contemplated, the seller and buyer may be required to negotiate with the union over the impact on union employees.

The buyer also may be obligated to comply with the seller's collective bargaining agreements; buyers should assess early on whether any agreements must be assumed and the extent to which they will restrict contemplated changes to business operations. If the buyer and seller have employees with similar job responsibilities, the scope of existing bargaining units may also become an issue.

As part of their due diligence, buyers will want to obtain and review any collective bargaining agreements and determine whether any union organizing activity is in process. In addition, the buyer will want to review the history of labor relations at the target company, including strikes or allegations of unfair labor practices.

If you are buying a contentious relationship with the union, it's good to know that so you have plenty of time to plan the transition process and deal with any obstacles the union may present.

Employment Policies and Procedures

Analyzing a target company's employee handbooks and policies is important both for due diligence and for developing a strategy to integrate employees into the buyer's own workforce. Many of these issues, while they may not cause a buyer to retreat from the deal, should be factored into the purchase price or be otherwise accounted for through allocation of potential liabilities among buyer and seller. Buyers should involve a core human resources team early on to review and assess critical areas and plan for transition details.

Accrued Vacation

If the deal is structured so that the seller terminates all employees, and the buyer immediately hires most or all of them (as is the case in many asset purchase deals), the parties will inevitably need to decide how to address employee accrued vacation or paid time-off. Because their employment will technically be terminated by the seller, employees may be entitled to payment for accrued vacation, even though they still have a job.

This potential liability, often a significant one, can be handled one of several ways but must be carefully thought out before the deal is closed. Will the buyer accept employee vacation balances under its own policy? Will the seller pay out the vacation in cash, and will the buyer assume some of the cost?

In some cases, it may be prudent to get employees to consent to the transfer of vacation balances and/or to waive any rights to vacation pay.

Transition of Benefits and Policies

Someone must plan and be prepared to communicate with employees about changes they should expect in the details of their benefits and perquisites. The more a buyer can communicate early on to employees about what will happen during the transition, the more successful it will be in retaining employees and creating loyalty with them.

In stock purchase deals, watch out for risk areas in policies that may create contractual liability, or may make it difficult or impossible for a buyer to implement its own policies. Some companies, in an earnest desire to create a quality workplace, may make written promises in policies that a buyer will find difficult to keep.

Some other areas that can create significant liabilities and should be reviewed as part of due diligence include:

  • Wage-and-Hour Classifications
    • Many employers have been hit with large fines and overtime damages in class action litigation and Department of Labor investigations for mis-classifying non-exempt workers as exempt. Don’t take it on faith that the target company has made the right decisions in classifying its staff.
  • Independent Contractors
    • Similarly, many businesses rely heavily on independent contractors. The financial exposure for tax withholding and benefits can be significant if the contractors aren’t sufficiently independent.
  • Employment Claims
    • Buyers should obtain information on threatened claims and outstanding litigation and review the target's history of employment-related litigation to look for trends that may suggest habitual non-compliance in areas such as discrimination, harassment, safety violations, etc. And of course, the deal should include representations from the seller regarding compliance with federal and state employment laws.


Two converging trends have made immigration an essential due diligence item. First, the labor shortage has led many companies to hire and sponsor work visas for foreign workers, particularly highly skilled personnel such as engineers and key executives.

Second, the changing dynamics of the markets and trends toward consolidation have left many companies either shopping for a buyer or looking to expand through acquisitions. As a result, buyers may find that their target companies employ a substantial number of foreign nationals.

Temporary work visas, such as the H-1B, L-1 and O-1, almost always limit employment to the petitioning employer. While the goal of an M & A deal may be a seamless transition, changes of control are rarely seamless under immigration law. Changes in corporate structure, job duties, geographic location, and other factors may invalidate a foreign worker's employment authorization and delay (or make obsolete) any pending application for permanent residency.

As part of its due diligence, buyers need to assess the number of foreign workers in the target company and their current immigration status, and determine the role of those workers following the deal. The buyer may need to file new or amended petitions with the INS to avoid unauthorized employment of foreign workers.

Non-Compete Agreements

For many buyers, solid non-compete agreements are essential to protecting the value of the acquired business, by preventing key employees and intellectual property from crossing the street to a competitor. However, the act of changing control of a company may call existing non-compete agreements with employees of the seller into question.

Buyers should carefully examine whether non-compete, non-solicitation, confidentiality, and intellectual property agreements exist with key employees and whether the details of the agreements complicate the deal or are sufficient to protect the buyer's interests. For example:

  • Do the agreements prevent the buyer from hiring employees, as may be the case if the buyer and seller are competitors?
  • Can the agreements be transferred at all? In particular, do the agreements even address whether the seller can assign to the buyer its right to enforce the agreements?
  • Will the scope of the agreements be sufficient or effective after closing, taking the buyer's business operations into account?

Obviously, if the effectiveness of non-compete agreements ends up in doubt, the buyer may be left negotiating new agreements or losing key people to competitors. If new or amended agreements are deemed necessary, the time to address the issue is before closing so that acceptance of the agreement can be made a condition of new employment with the buyer.


As with any asset that is impossible to quantify, culture may sometimes be forgotten in considering the operational implications of the deal. But it may also be one of the elements of a company most prized by employees.

Buyers need to take the time to understand the policies and attitudes that define a target company, and specifically develop a strategy to address cultural issues in the wake of the deal.

Regardless of whether a buyer wishes to preserve an existing culture, replace it with its own culture, or merge the two, the process should not be left to chance.


Any merger deal has a disruptive effect on both organizations. It's impossible to join two complex entities without at least some degree of confusion, fear, and uncertainty. For employees of a company being acquired, these emotions are intensified by a legitimate concern for the future of their jobs.

Whether a buyer wishes to preserve the value of a target by leaving it intact, or absorb the new company into its own organization, the successful acquirer will involve its human resources team, assess employment issues in the earliest stages of the deal, and communicate honestly with existing and new staff.

The alternative is increased liability and a diminished value for the asset you have worked so hard to acquire.