Conversely, if a transaction is structured as an equity purchase, although there may be no withdrawal liability assessed as a result of the sale, the purchaser may be inheriting significant contingent withdrawal liability if it decides to sell the building in the future (or convert it to a different use).
With potential withdrawal liability continually growing as a result of the struggling financial markets and the accelerated funding requirements of the Pension Protection Act, it is essential that both sides address how they want to structure the sale and make clear what rights and obligations both parties are assuming with respect to multiemployer pension plans.
Displaced Building Workers Act
Purchasers of buildings in New York City have an additional concern, and that is compliance with the New York DBSWPA, passed in the aftermath of Sept. 11, 2001, to address the volatility and instability in the real estate industry.
The DBSWPA requires a successor building owner, manager or contractor to offer employment to the predecessor employer’s incumbent “building service employees,” subject to the existence of cause for termination, for a period of 90 days. At the end of the 90-day transition period, the successor employer is required to perform written performance evaluations and offer continued employment on its own terms to all employees who receive satisfactory ratings.
“Building service employees” are defined to include employees who regularly are assigned to a building on a full- or part-time basis for at least 90 days and perform work in connection with the “care or maintenance of an existing building and includes, but is not limited to, work performed by a watchman, guard, doorman, building cleaner, porter, handyman, janitor, gardener, groundskeeper, stationary fireman, elevator operator and starter, window cleaner and superintendent.” (This definition comes from New York state’s prevailing wage law.)
The DBSWPA excludes from coverage employees who earn more than $25 per hour, work less than eight hours per week or serve in a managerial, supervisory or confidential capacity.
The legislation exempts from coverage
(ii) commercial buildings of less than 100,000 square feet,
(iii) employers that have hired their employees pursuant to New York state’s preference for disabled workers, and
(iv) any government entity or individual or entity that manages property for a government entity.
However, the DBSWPA includes an opt-out provision that offers successor employers the opportunity to become exempt from the Act’s requirements. Successor employers that are already, or agree to become, bound by the terms of a CBA that includes provisions that address the discharge or lay off of building service employees will be exempt.
Successorship
Purchases of buildings with unionized employees create unique concerns, such as the issue of successorship.
Recognition of the incumbent union, but not assumption of the existing CBA, will be mandatory where the purchaser is deemed to be a legal successor to the seller. In determining whether a purchaser is a successor, obligated to bargain with the exclusive representative of the seller’s employees, the test employed by the National Labor Relations Board (NLRB or the Board) is whether there is “substantial continuity in the employing enterprise.” Aircraft Magnesium, 265 NLRB 1344 (1982), enf’d without op., 730 F.2d 767 (9th Cir. 1984).
The question of successorship is based on the totality of the circumstances including whether there has been substantial continuity in the following: (1) business operations; (2) plant; (3) workforce; (4) jobs and working conditions; (5) supervisors; (6) machinery, equipment, and methods of production; and (7) product or service. The essential inquiry is whether operations as they affect union members have substantially changed after the change in ownership. Id., see also Ready Mix USA Inc., 340 NLRB 946 (2003).
In New York City it is almost a certainty that a building purchaser will be a successor employer because of the DBSWPA requirement to retain the predecessor’s employees for 90 days following the sale. Outside New York City it is also difficult to escape a successorship finding as it is unlawful for a purchaser to refuse to hire the seller’s employees because of their union membership and, thus, a purchaser may have difficulty justifying a refusal to hire the seller’s employees who have the requisite skill and ability. See NYP Acquisition Corp., 332 NLRB 1041 (2000), aff’d 261 F.3d 291 (2d Cir. 2001).
Under Board precedent, a purchaser that is found to have discriminatorily refused to hire the predecessor’s employees may be forced to rehire them despite the presence of newly hired employees, and will be liable for damages, including an affected employee’s back pay, benefits, attorney’s fees and costs. See New Concept Solutions, LLC, 349 NLRB 1136 (2007).
To Recognize or Not to Recognize
The purchaser of a building that has employees already covered by a CBA must decide if it will recognize the union and assume the agreement of the former building owner, recognize the union but not assume the agreement, or refuse to recognize the union.
Recognize the Union and Assume the CBA. A purchaser that decides to recognize the union and assume the CBA of the previous owner will be bound by all of its provisions.
Most CBAs control almost every aspect of the employee-employer relationship at member buildings. Purchasers need to review all applicable agreements to understand their scope and how they will impact the purchaser’s bottom line and ability to direct and control its workforce. Particular attention should be focused on the economics of the agreement (including all wages and benefits), any restraints on future sales, subcontracting and work rules vital to operations.
Recognize the Union but Do Not Assume the CBA. A building purchaser that does not wish to assume the CBA may recognize the incumbent union but not assume the existing agreement. It is well settled that a new employer, even one that is determined to be a successor, is entitled to set new wages, hours and other terms of employment and/or negotiate its own agreement with the union. See Cora Realty Co., 340 NLRB 366 (2003).
However, if the seller plans to implement new terms and conditions upon taking possession of the building the changes must be announced prior to or simultaneously with the closing of the deal. Id. The NLRB has held that when a purchaser does not tell employees that it intends to change wages or benefits prior to making employment offers, the purchaser implies that it plans to retain the policies of the seller, and the purchaser will be prevented from unilaterally making any changes to wages or benefits in the future. See Windsor Convalescent Center of North Long Beach, 351 NLRB No. 44 (2007).
A common mistake is for purchasers to attempt to placate nervous employees by stating that “nothing will change.” By making such a statement, the purchaser may lose its rights to set new terms and conditions of employment.
In certain instances, a successor may even have an obligation to bargain before setting terms when it hires all or substantially all of its initial workforce from the ranks of a represented bargaining unit of its predecessor, if the purchaser is a “perfectly clear” successor. See Cadillac Asphalt Paving Co., 349 NLRB 6 (2007). This occurs when the successor retains all or substantially all of the predecessor’s employees. Id. In New York City building purchases, it is probable that the perfectly clear standard will be satisfied as a result of the requirements of the DBSWPA.
Do Not Assume the CBA and Do Not Recognize the Union. The last option for a purchaser of a unionized building is to not adopt the CBA and refuse to recognize the union. The general rule is that a purchaser of assets, such as a building, is not required to adopt the seller’s agreement and, where not otherwise restricted by a statute such as the DBSWPA, has the right to hire a new work force, as well as to set new terms of employment. See NLRB v. Burns International Security Services Inc., 406 U.S. 272 (1972).
While initially this option might appear to be the most appealing for a purchaser, it is full of potential legal problems. An employer must be confident that it is not deemed to be a successor and ensure that it is not taking any actions in its hiring process that may be determined to be discriminatory towards union members or activists. Finally, if the building is located in an area with high union density, such as New York City, actions by the unions in the area, such as picketing, leafleting, negative press coverage, etc., may occur.
Conclusion
By carefully reviewing labor and employment issues when conducting pre-purchase due diligence, a purchaser can avoid significant liabilities and costs related to the purchase of a building. By dealing with these issues before a sale is completed, a purchaser can ensure that any potential liabilities are reflected in the purchase agreement and that it is fully prepared for owning and/or managing the building.
Paul Salvatore is a partner and co-chair of Proskauer Rose’s labor and employment law department. Brian Rauch is a senior associate in the department and a member of its strategic corporate planning practice group. Steven Seidenfeld, an associate at Proskauer, assisted in the preparation of this article.
