Employment Law Issues in Mergers and Acquisitions

Employment Law Issues in Mergers and Acquisitions

Last week, Microsoft announced its purchase of LinkedIn for $26.2 billion.  This acquisition is interesting for a number of reasons, and is very likely to affect the future of professional social networking. It also got us thinking about the employment law issues that arise when two (or more) companies join forces, whether through a merger or an acquisition. 

Here are some employment law issues that come up frequently:

Compensation.  Most companies try to pay the going “market rate” for employees, but  different companies have different salary scales for all kinds of reasons, and chances are slim that two combining companies will have matching compensation for all jobs. That means somebody’s pay is going to change. As a part of preparing for a merger or acquisition, compensation differences need to be identified and compensation changes explained to those who will be affected.  In addition, all employers, whether recently merged or not, need to be ready to provide the EEOC with new pay information on the EEO-1 when new requirements go into effect in a little more than a year.

Benefits.  As with wages, changes in benefits that occur when two employers merge, or one employer is acquired by another, can have a significant impact on workers. Differences in health care benefits, retirement benefits, and paid leave, among others, need to be identified and changes communicated to affected employees.  Obligations created by benefit plans, including stock plans, will require particular attention during the pre-merger process. 

Policies.  From discipline to social media to leave, policies represent the workplace culture that is particular to an organization.  Merging policies as a part of a merger or acquisition means human resources will have to work closely to identify differences and create policies which reflect the new culture of the combined entity. As policies are created and adopted, compliance should be a focus, particularly in organizations that have multiple locations spread across several states.

Contractual obligations.  In addition to contractual obligations related to benefits, noncompetition, nonsolicitation, and confidentiality agreements need to be revisited when organizations combine.  Depending on the nature of the merger or acquisition, such agreements may or may not be enforceable after the combination occurs, and the combined entity may be required to enter into new agreements.  A merger or acquisition is an opportunity to consider whether or not such agreements are necessary and what, if any, cost will be incurred to put them in place.  In addition, in light of the new Defend Trade Secrets Act, revisions to existing agreements may be required. 

Employee overlap & reductions.  Merging employers often have some overlap in staffing, particularly in the areas of human resources, finance, accounting, and information technology.  In some cases, entire departments or divisions are redundant.  In either case, employees will lose their jobs. Combining employers must be mindful of laws that govern reductions in force, including the Worker Adjustment and Retraining Notification Act (WARN) and its state counterparts.  If an employer wants to enter into severance agreements, the Older Worker Benefit Protection Act will also come into play. 

Liabilities.  Employment law issues arise in nearly every organization.  As a part of due diligence, combining organizations must examine and fully understand internal complaints, agency investigations or charges, and pending or threatened litigation that could result in liability. It’s also helpful for combining organizations to review compliance programs generally to identify systemic problems that could give rise to litigation.  Wage and hour and employee classification issues, for example, are the focus of enforcement agency attention.  Also, organizations should look at compliance as a whole to see if there is any potential for litigation.  Common compliance issues, like wage and hour and employee classification, deserve particular attention.

Mergers and acquisitions can produce stronger and more prosperous entities, but they are often  incredibly scary for employees.  To keep morale high and avoid unnecessary worry and disruption, we recommend transparency and lots of communication. When employers share as much information as possible, communicate frequently about upcoming changes, and are prepared to deal with employees’ questions, affected employees are more trusting, less fearful, and better able to concentrate on their jobs during times of change.


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