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A corporate merger or acquisition generates a plethora of labor and employment issues and problems for the companies involved. Careful advance planning is required to avoid a minefield of additional or unanticipated costs and liabilities that can result from a merger or acquisition, and also to allocate those costs between the parties to the transaction as those parties would want or intend. Unfortunately, such matters are often overlooked entirely in the planning process, or left for last — after tax and other consequences have been considered and the transaction has already taken shape. While this seems particularly true for transactions involving small business, even large companies have been known to neglect these aspects of a merger or acquisition. This article pinpoints several aspects of labor and employment law where advance business planning is particularly important. UNIONIZED FACILITIES — HIRING AND SETTING INITIAL TERMS A purchasing employer can determine whether or not it will have to deal with the seller’s incumbent union and, if so, from what position; i.e., whether it will be bound by the seller’s collective bargaining agreement or can bargain its own. To exercise control over these decisions, the purchaser must consider whether it expects to retain the seller’s unionized work force or hire a new one, and how it will go about doing so in either event. The nature of the transaction — stock purchase or asset purchase — can also influence the outcome. It is black-letter law that, in the absence of discriminatory intent, a new employer is not obligated to hire the employees of the predecessor. NLRB v. Burns Int’l Security Service Inc., 406 U.S. 272 (1972); Fall River Dying and Finishing Corp. v. NLRB, 482 U.S. 27 (1987). The new employer is free to set the initial terms and conditions of employment, and to hire whom at will. However, in some instances, it will be “perfectly clear” that the employer intends to hire all of the predecessor’s bargaining unit employees (in some cases, of course, it will only be “perfectly clear” to the NLRB when it examines the employer’s behavior with the benefit of hindsight). In those cases, it must bargain before setting initial terms and conditions. To avoid application of the “perfectly clear” doctrine, the new employer must not mislead employees into believing that they will be retained without change in terms and conditions. It can avoid doing so by clearly announcing initial terms prior to extending offers. See Spruce Up Corp., 209 NLRB 194 (1974), enf’d, 529 F.2d 516 (4th Cir. 1975); Canteen Co., 317 NLRB 1052 (1995), aff’d, 103 F.3d 1355 (7th Cir. 1997). But at the same time, it must not declare at the outset that there will be no union or it will forfeit its rights to set initial terms, even if it does not engage in discriminatory hiring. Advanced Stretchforming Intern. Inc., 323 NLRB 529 (1997). Even if the new employer does set initial terms, it will become a “successor” if there is “substantial continuity” of operations between the old and new enterprises and its workforce consists of a majority of the original employer’s employees who were represented by a labor organization. NLRB v. Burn Int’l Security Service Inc., supra; Fall River Dying and Finishing Corp. v. NLRB, supra. It will then have a duty to bargain with that labor organization. However, in many instances — particularly with stock sales, as opposed to asset sales, where there is no termination of operations or corporate identity — the purchaser will be considered a “continuing employer” rather than a successor, and bound by the collective bargaining agreement of the seller, just as it would be bound to any other corporate contract or agreement . See NLRB v. Rockwood Energy and Mineral Corp., 942 F.2d 169 (3d Cir. 1991) (four-year hiatus in operations). Further, a purchase of assets is not essential to the application of the successorship doctrine. An employer may become a successor where, instead of purchasing the assets of a predecessor, it leases those assets ( Harter Tomato Products Co. v. NLRB, 133 F.3d 934 (D.C. Cir. 1998)), or where it terminates a subcontractor and takes the operations “in house” with the same employees performing the same work . See Cablevision Systems Development Co., 251 NLRB 1319 (1980). WITHDRAWAL LIABILITY One of the most frequently overlooked aspects of a corporate sale is the possibility of liability for termination of a corporate pension plan, or for withdrawal liability to a multi-employer plan. Those employers who think of it at all may mistakenly believe that well-performing stock markets have eliminated the plan’s unfunded vested liabilities. Or they may wrongly believe that withdrawal liability cannot occur if their purchaser will continue to have an obligation to contribute to the plan. The fact is that an employer may have withdrawal liability to a multiemployer pension plan that is currently fully funded because of the various ways in which unfunded vested liability can be calculated under ERISA. RXCD Inc. v. Oil, Chemical & Atomic Workers Industry Pension Fund, 781 F. Supp. 1516 (D.C. Cir. 1992); Wise v. Ruffin, 914 F.2d 570 (4th Cir. 1990), cert. denied, 498 U.S. 1126 (1991); See also ERISA �� 4201, 4211, 4213; 29 U.S.C. �� 1381, 1391, 1393. Further, the seller in an asset sale can avoid triggering liability only if it plans for this contingency well in advance in its contract negotiations with the purchaser. Specifically, the seller can avoid liability only if: (1) the purchaser contributes to the plan for substantially the same contribution base units as the seller; (2) the purchaser provides a five-year bond or escrow equal to seller’s average contribution for the three years prior to sale or the seller’s contribution in the year before the sale (this bond is forfeitable if the purchaser withdraws from the plan or fails to make a required contribution payment within five years of the sale); and (3) the contract of sale provides that the seller will be secondarily liable if the purchaser withdraws (completely or partially) within five years of the sale and fails to pay the withdrawal liability due. ERISA � 4204; 29 U.S.C. � 1384. If the seller distributes all or substantially all assets or liquidates within the five years, it must post bond equal to the present value of the withdrawal liability it would have had. COBRA Most employers are familiar with their obligations under COBRA to provide qualified beneficiaries under group health insurance plans an opportunity to elect continued coverage in certain instances where their coverage would otherwise be terminated. Internal Revenue Code � 4980B. Nonetheless, employers often neglect the opportunity to consider COBRA obligations in the purchase and sale of a business. In the sale of a business, employment may be terminated or may shift to the buyer. However, if the buyer does not continue the seller’s plan, the former employees of the seller may be entitled to COBRA continued coverage from the seller even if the buyer continues their employment and provides them coverage under the buyer’s own plan. The IRS has issued lengthy regulations describing COBRA obligations of buyer and seller in both asset and stock transactions. Treas. Reg. � 54.4980B-1 et seq. (as amended in 2001). While COBRA obligations will rarely, if ever, be significant enough to affect the structure of a sale, the failure to meet those obligations could result in significant liabilities. The parties may, therefore, want to consider them in planning their transaction. COBRA regulations provide that parties to a transaction involving the sale of a business are free to contractually allocate COBRA coverage obligations. In such cases, however, the party who would be responsible in the absence of a contractual agreement remains liable if the party that owed the responsibility under the contract defaults on its contractual obligation. In the absence of agreement, the seller remains liable to provide COBRA coverage to existing qualified beneficiaries, regardless of whether the transaction is a stock sale or an asset sale. Treas. Reg. � 54.4980B-9 (as amended in 2001). Employers with fewer than 20 employees may be excluded from COBRA coverage. 29 U.S.C. � 1161(b). They are, nonetheless, likely to be covered under analogous New York state law. N.Y. Labor Law � 217. WARN The sale of a business can trigger employee notification requirements under the often overlooked Worker Adjustment and Retraining Notification Act (WARN). In broadest terms, WARN requires that employers with 100 or more employees provide 60 days’ advance notice to employees who may suffer an employment loss due to a plant closing or mass layoff. Employers must also notify the employees’ union, the state dislocated worker unit and the chief executive of the local government unit. Parties to a planned merger or acquisition often need to maintain confidentiality about the transaction until the last possible moment. This interest, of course, can conflict with their WARN obligations. Accordingly, WARN provides limited exceptions under which the notification period may be reduced to less than 60 days. These exceptions include situations where: (a) the closing or layoff is caused by business circumstances that are not reasonably foreseeable or (b) the employer was seeking capital or business to avoid or postpone the need for closing. 29 U.S.C. � 2102 (b). These exceptions, however, have been narrowly construed and do not impose a WARN obligation on the seller in an ordinary sale of a business. 20 C.F.R. � 639.9 ; Burnsides v. MJ Optical, Inc., 128 F.3d 700 (8th Cir. 1997), cert. denied, 523 U.S. 1119 (1998); Int’l Alliance of Theatrical and Stage Employees v. Compact Video Svcs., 50 F.3d 1464 (9th Cir. 1995). Rather, after the effective date of the sale of part of all or an employer’s business, the purchaser becomes responsible for providing notice required by WARN. 29 U.S.C. � 2101 (b) (1); 20 C.F.R. � 639.4 (c). Where a plant closing or mass layoff is incident to the sale of part or all of an employer’s business, WARN contemplates the protection of the employees throughout the process. In an attempt to fairly apportion the notice duties between the seller and purchaser, the act states that, until the sale is completed, the seller has the duty to give notice. If the seller is made aware of any definite plans on the part of the buyer to carry out a plant closing or mass layoff within 60 days of purchase, the seller may give notice to affected employees as an agent of the buyer, if so empowered. 20 C.F.R. � 639.4 (c) (1). However, because the buyer becomes obligated to provide notice to affected employees immediately upon completion of the sale, the responsibility for notice remains with the buyer even if the seller gives notice as the buyer’s agent. Once again, since both parties to the transaction likely share an interest in its confidentiality, they may want to be clear about who is terminating the employees, or more importantly, they may want to allocate the WARN obligations or costs (e.g., 60 days’ pay in lieu of notice and other potential liabilities) between them in their contract of sale. Of course, in a unionized setting, the purchaser must ensure that these contract provisions are consistent with its intentions regarding the hiring of the seller’s work force, discussed previously. THE BOTTOM LINE While labor and employment lawyers are familiar with many of these issues that arise in the purchase or sale of a business, this is less-familiar territory to the accountants and corporate lawyers who frequently are more directly involved in these transactions. We need to educate our colleagues about the need to address the significant cost and operational consequences associated with these decisions. These issues should be addressed at the earliest planning stages of such transactions. Bruce R. Millman is a member of the ELP board of advisors and a partner at Rains & Pogrebin, P.C., in Mineola, New York.

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