Michael Marra
Michael Marra (Courtesy photo)

On the (high) heels of the July 25 announcement that New York-based Michael Kors Holdings will acquire luxury shoe brand Jimmy Choo Plc for $1.2 billion, which followed other recent U.S. fashion and apparel deals, media interest in industry acquisitions and potential consolidations of brands is heating up. Indeed, the Michael Kors CEO made headlines by telling CNBC that he hoped the company was not done, and hoped to eventually achieve the status of a luxury group. The recent headline-grabbing announcement is just the latest in a string of fashion acquisitions across the market spectrum. Luisa Zargani, “Global M&A Activity Up 30% in 2016,” Women’s Wear Daily, March 10, 2017. Whether driven by challenging macro-economic conditions and uncertain financial markets, the rise of e-commerce and m-commerce, the desire to re-brand, and/or other strategic aims of expansion, it appears we are in for a period of persistent, significant acquisition and investment in the industry—and attorneys should be prepared for the influx.

As with any deal, buyers and sellers/targets (especially those planning to shop on their own for maximum returns) will engage attorneys and bankers to assist them throughout the high stakes and complex M&A process. The buyer’s attorneys and agents engage in a diligence to assess the target’s assets, current and potential liabilities, and anything else that bears significantly on the value and strategic fit of the deal. Although deals differ in emphasis, labor and employment (L&E) issues tend to receive less attention than big-ticket items like financial statements, material contracts, intellectual property, etc. However, ignoring the impact of L&E issues comes with meaningful risks, not only for buyers, but also for prospective targets thinking about “cleaning up” their profile prior to seeking acquisition partners. Buyers in fashion and apparel should be especially mindful of the following issues during the diligence process (and for sellers, in advance of that process, so as to not raise red or yellow flags for buyers, their counsel, bankers and transaction insurers).1

Wage and Hour Compliance

Labor & employment attorneys know that wage and hour compliance has become the greatest source of potential liability within our practices, most notably through class and collective actions, but also pursuant to governmental audits. Some of the issues most relevant to the fashion industry include:

• The mischaracterization of employees as exempt from overtime laws

• The mischaracterization of workers as independent contractors, consultants or temps instead of regular employees, and the related issue of how the business treats employees of third-party staffing agencies (Beyond minimum wage and overtime, these mistakes can lead to liability for employment taxes, unemployment contributions and employee benefit eligibility.)

• Loose or undocumented time-keeping practices

• Leave and vacation policies and practice

• Undocumented or poorly documented commission arrangements (It is especially important to be aware that some state laws—most notably those in California and, to a lesser extent, New York—require complex layers of compliance and are hotbeds for wage and hour class and collective actions. Buyers must seek information about recent, pending and threatened litigation and government investigations/audits in this area, and should also request information regarding the target’s policies, including state-specific policies, internal audits, decision-making processes and support for its worker classification decisions, unemployment claim history and settlement of employee claims and threatened claims.)

Employment Agreements

It is crucial to understand the contractual arrangements of key executives. Do they contain expensive “change in control” clauses? Are necessary personnel under contract if needed to transition or lead the business into the future? The information provided during the diligence process will help a buyer understand transaction costs as well as any obstacles to running the business smoothly post-transaction. In addition, assets may be at risk if the target does not enter into agreements meant to protect confidential information, trade secrets or intellectual property, and a buyer should insure the effectiveness of those agreements and the scope of their implementation.

Employment Claims, Investigations and Litigation, Insurance Coverage

The buyer should get a sense of potential challenges in managing the business and near-term litigation costs by understanding the frequency of employee litigation, the types of issues raised in legal complaints, and litigation results, whether through summary judgment, verdict or settlement. For example, if the target has frequent claims related to the Family Medical Leave Act and/or disabilities, the buyer is on notice both pre-and and post-acquisition.

Some buyers fail to request detailed information regarding internal employee complaints, investigation files and records of resolution; this is an invaluable way to understand the workforce by analyzing detailed allegations. How complaints are handled provides great insight into the effectiveness and quality of the human resources function as it relates to an environment of compliance; if 100 complaint files exist, and only 30 show evidence of meaningful investigation without a single finding of any improper conduct, a prospective buyer is on alert. A target should be aware that buyers will have interest in how professionally and objectively complaints are processed and resolved.

Employment Policies and Procedures

While handbooks and policies may not comprehensively help a buyer identify liability, employment policies and processes may evidence the seller’s dedication to compliance. For example, is the handbook outdated or updated annually? Does it appear completely off-the-shelf or is it tailored to the particular business? Are there supplements for all states in which the target has employees?

Certain policies also provide meaningful insights regarding personnel issues: Are employees subject to a dress code? Are there business ethics policies? Are flex-time and telecommuting issues addressed? Buyers must remember that upon completion of the transaction, these will become the buyer’s employees, and the expectations of the incoming employees will be real world issues, especially if the buyer has markedly different rules and expectations.


The recent (and growing) mergers and acquisitions activity of fashion and apparel companies is a good reminder for buyers to consider all potential liabilities and assets, including labor and employment issues. Not only will thorough employment law diligence help organizations value the business and assets under consideration, but it will have a material impact on expectations and post-acquisition plans, ensuring the company is a good fit.


1. This article is not exhaustive. For example, employee benefit plans are a significant, often paramount, issue in connection with employment-related diligence, and immigration compliance (and Form I-9 compliance) has become a routine area of inquiry in deals, but I will leave those areas to the experts in Executive Compensation/ERISA and immigration law.