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Mergers and Acquisitions: WARN and the NLRA

Many employment-related issues demand attention during the course of planning and implementing an M&A transaction, including several statutes that can complicate the transaction. Fortunately, the effects of these statutes can be easily managed with proper planning and foresight.

Worker Adjustment and Retraining Notification Act

A goal of many M&A transactions is to create synergies by combining operations and eliminating duplicated effort. Often, such restructuring results in personnel layoffs or plant closings, implicating the Worker Adjustment and Retraining Notification Act (WARN), which Congress enacted in the mid-1980s to require employers to provide advance warning of certain mass layoffs and plant closings. WARN requires any employer with more than 100 employees (excluding part-time employees — anyone employed, on average, for less than 20 hours per week or “for fewer than 6 of 12 months preceding the date on which notice is required”) to provide written notice to affected employees or their union representatives and to government officials at least 60 days prior to any “plant closing” or “mass layoff.” Only pursuant to a very few, narrow exceptions, such as a natural disaster or other unforeseen business circumstance, can employers avoid this obligation.

A plant closing is any “permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment,” which results in an employment loss during any 30-day period of 50 or more full-time employees. A mass layoff is defined as any reduction in force at a single work site which results in an employment loss, during any 30-day period, for: (1) at least 33% of the workforce and at least 50 full-time employees, or (2) at least 500 employees at the site. To constitute an “employment loss,” a layoff must exceed six months. If the layoff does last longer than six months and triggers WARN, then notice will have been due 60 days before the layoff originally began. This can result in significant after-the-fact liability.

Many people find the mass layoff provision confusing because it is not clear whether the threshold is 33% of the employees or 50 employees. In fact, the threshold is both — at least 33% of the workforce at the site must be laid off, and the actual number must be 50 or more. The simple way to remember the WARN thresholds is to think of 50 as the magic number. If less than 50 employees lose their jobs at a single site of employment, it is not a mass layoff or plant closing within the meaning of WARN.

If WARN notice is required, the employer must give it to the union representatives of affected employees or, if there is no union, to each affected employee. Notice also must be given to the applicable State Dislocated Worker Unit and to “the chief elected official of the unit of local government within which such closing or layoff is to occur.” The U.S. Department of Labor currently maintains a list of all State Dislocated Worker Units on its website, (

Any plant closing or mass layoff occurring as part of or contemporaneously with a business sale must be preceded by WARN notice. The seller is responsible for providing such notice up to and including the effective date of the sale. Accordingly, if a seller is aware that a threshold number of employees will be terminated at the time of the sale, it must provide timely, appropriate WARN notice. After the effective date of the sale, the purchaser is responsible for providing required notice. Further, any employee of the seller is considered an employee of the purchaser immediately after the effective date of the sale.

Thus, any terminations or layoffs contemplated as part of an M&A transaction should be discussed carefully during negotiations. The parties must determine whether the WARN notice requirements will be triggered by the transaction and, if so, when the notice will be given and by whom. Depending on the timing of the planned workforce reduction, notice may be required well in advance of the closing date. Further, if it intends not to hire some or all of the seller’s employees, the buyer should ensure that the seller terminates the employees (with appropriate notice, if required) prior to the effective date of the sale. Given the statutory presumption that the seller’s employees automatically become the buyer’s employees, it behooves the buyer to communicate its intentions to the seller and to the seller’s employees in a timely way to avoid any unpleasant surprises.

Many states have their own WARN-like laws that may differ in some respects. Minnesota, for example, merely requires an employer giving notice under WARN to also report the names, addresses and occupations of the employees who will be or have been terminated to the Commissioner of Economic Security. Wisconsin, however, imposes WARNlike notification requirements but with reduced thresholds — 25 affected employees rather than 50.

Successorship Under the National Labor Relations Act (NLRA)

For many years courts, arbitrators and the National Labor Relations Board (the “Board”) have struggled to define the respective rights and obligations of buyers and sellers of businesses that have unionized workers. In many circumstances, the buyer must take on the obligations of the seller with respect to an organized workforce; sellers nearly always must bargain with union representatives regarding the effects of a proposed deal. Consequently, in any transaction involving unionized employees, it is imperative that buyers and sellers understand their rights and obligations and act accordingly.

Upon the request of a union representative, a seller must bargain regarding the effects of any decision to terminate part or all of its operations. As a part of this obligation, the seller may be required to provide the union with information relevant to the sale. In addition, the union has a right to seek benefits for its members, including favorable terms in the M&A agreement and severance benefits in the event of terminations. Indeed, many collective agreements already provide severance benefits in the event of a sale or merger. Buyers always should review such agreements during due diligence.

While a seller always must bargain with its unions, a buyer may or may not be obligated to recognize the existing union and/or assume the obligations of existing collective agreements. Buyers must assume some or all of the union-related obligations of the seller in three situations:
  • Where the buyer and seller are “alter egos”
  • Where the transaction is a merger or stock purchase
  • Where the buyer in an asset purchase is a “successor employer”
Alter Ego Employers

When the “old” and the “new” employer are, in reality, the same or substantially identical, the two generally will be considered “alter egos,” and no change in the employment relationship will be deemed to have occurred. In determining whether entities are alter egos, the Board considers (1) whether common ownership exists, and (2) whether the same or substantially identical management, business purpose, operations, equipment, customers and/or supervision will be in place after the transaction. Generally, common ownership alone will not result in alter ego status. If substantially identical management or other elements of the second factor are found, however, the existence or non-existence of common ownership may be irrelevant. Examples of an alter ego relationship include ostensibly separate businesses that, in fact, are operated as one, and new employers that are merely the old employer, or its agents, in another guise. In such a case, all existing union-related obligations are imposed upon the new employer. The obligation to recognize and bargain with the union and abide by the terms of the collective agreement continues as though no change occurred.

Mergers and Stock Purchase Transactions

Union-related obligations also typically survive the transfer of ownership following a merger or stock purchase, with the surviving firm standing in the place of the original employer. Where there is a sale or transfer of stock and substantial continuity of operations and employment, there is no effective change in employers. Similarly, the surviving corporation in a merger generally is liable for the obligations of the disappearing firm. Consequently, it will be obligated to recognize and bargain with the union and abide by the terms of the collective agreement as though no change occurred.

Asset Purchase Transactions and Successor Employers

Asset sales generally produce greater change than alter ego relationships, mergers and stock purchases. Thus, the notion of successorship becomes an issue. When a change in ownership occurs as a result of an asset sale, the buyer will assume some of the seller’s union-related obligations if the buyer becomes a “successor employer.” Generally, a successor employer will not be required to assume any existing collective agreement but will, in most circumstances, have a duty to recognize and bargain with the union.

Successorship is based upon the totality of the circumstances surrounding the ownership change, including continuity in the work force and the enterprise. The Supreme Court has stated that if “the new employer makes a conscious decision to maintain generally the same business and to hire a majority of its employees from the predecessor, then the bargaining obligation [remains].” Fall River Dyeing & Finishing Corp. v. N.L.R.B., 482 U.S. 27, 46 n. 12 (1987). The Board generally will not find successorship, based upon continuity in the work force, unless the new employer has a “substantial and representative complement” of employees, the majority of whom were hired from the predecessor. See, e.g., Fall River, 482 U.S. at 47-52. A new employer will be deemed to have hired a substantial and representative complement of employees based on the following factors:
  • Whether the job classifications designated for the operation are substantially filled
  • Whether the operation is at substantially normal production
  • The size of the complement of employees on the date of normal production
  • The length of time before a substantially larger work force may be required
  • The likelihood of an expansion to a significantly larger work force.
A union demand for bargaining made prior to establishment of a “substantial and representative complement” continues in effect until the buyer reaches that status. While a buyer has no duty to hire the seller’s employees (unless otherwise agreed), it cannot refuse to hire the seller’s employees based upon their union status.

In determining whether there is substantial continuity in the business enterprise, the following factors are considered:
  • Is the work force the same or substantially the same?
  • Is there substantial continuity of the business operation?
  • Is the work being performed in the same plant?
  • Do the jobs exist under similar working conditions?
  • Does the new employer utilize the same supervisors, machinery, equipment and methods of production?
  • Does the new employer manufacture the same products or offer the same services?
A new employer generally may set the initial terms and conditions of employment for all of its new workers, including those that are unionized. To protect this right, the new employer must make it clear that it will offer employment only on its own terms and conditions. After establishing these initial terms, and upon becoming a successor employer, the new employer likely will be obligated to bargain with the union over ongoing employment issues.

In some situations, the buyer may want to approach an incumbent union to discuss its plans or to obtain concessions. The buyer must be careful that such an approach not be viewed as recognition of the union and an agreement to bargain. To avoid this, the buyer must disclaim any intent to recognize the union or assume the collective agreement. The buyer also can meet with the seller’s employees prior to the sale to inform them of initial terms and conditions of employment, so long as the purpose is related to their continued employment.

The existence of a successors and assigns clause in an existing collective agreement (dictating that the agreement will be binding upon any buyer) also may create issues for buyer and seller. Although such a clause is not, in fact, binding on the buyer, it may have a significant impact upon the seller, including the potential assessment of damages or even injunctive relief blocking the sale.

Various Employment Laws

Setting aside consequent terminations, most M&A transactions do not implicate non-discrimination and other employee-protection statutes. These laws can, however, have an impact upon the value of the deal. For example, a buyer may be obligated to remedy a predecessor’s unfair labor practices, or may be held liable for its statutory violations. If the culture of the target has allowed inappropriate conduct to go unchecked and unpunished, the liability for conduct occurring after the effective date of the sale may inure to the buyer. These risks can be managed (although not eliminated) by careful due diligence.

©2004 Dorsey & Whitney LLP. This Employment Law Update is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by sending and receiving this Employment Law Update. Members of the Dorsey & Whitney LLP Labor and Employment Group will be pleased to provide further information regarding the matters discussed in this Employment Law Update.
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