Key Employment Liabilities to Consider in Business Transactions – Employee Benefits and Compensation

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When preparing for a business transaction, sellers and buyers want to know about significant potential employment liabilities so they can negotiate accordingly. This checklist summarizes key employment law issues for buyers performing due diligence on mergers and acquisitions.

When preparing for a business transaction, sellers and buyers want to know about significant potential employment liabilities so they can negotiate accordingly. We carry out seller or buyer due diligence to find out about these liabilities, with a view to the transaction itself and/or post-closing integration and harmonization exercises.

Our lawyers around the world have summarized some key employment issues buyers should focus on – in terms of cost and risk – in any M&A due diligence exercise.

Note: This list is not intended to be exhaustive and regional and national differences should also be taken into account.

1. Compliance issues

Certain professional obligations may give rise to criminal or civil liability in the event of non-compliance. They may include:

  • Registration with the competent tax and social security authorities, mandatory declarations and deductions at source of required social security and tax contributions

  • Non-compliance with minimum conditions such as minimum wage, working time, annual leave, etc.

  • Health and safety obligations

  • Discrimination

  • Control of the right to work and non-compliance with immigration requirements

  • Compliance with staff representation rules and information and consultation obligations

  • Responsibility for the obligations of service providers

  • Privacy and data protection

2. Compensation, pension and benefit plans

Ensure that salaries, bonuses, cost allowances, vacation pay, overtime and variable compensation have been paid correctly. Check what bonuses, benefits, occupational pensions and stock award schemes are in place, whether these schemes are transferable and can be easily changed. In particular, occupational pension plans may give rise to significant financial liabilities in the event of underfunding or non-affiliation of certain employees.

3. Employment contracts, service agreements and policies

Review employment contracts, service agreements, and policies to check if they are appropriate and if the terms and conditions can be easily changed. Pay particular attention to employment contracts or service agreements of key individuals and whether they include non-compete obligations, retention payments, or enhanced severance payments in the event of termination or change of control. These can result in large payouts.

4. Periods of continuous employment and reinforced social plans

Attendance periods often have an impact on the calculation of notice periods and severance pay. High levels of seniority and/or enhanced redundancy plans could prove costly in any future restructurings.

5. Atypical workers

Working with third-party employees such as agency workers, employee leasing, and outsourcing can be heavily regulated, resulting in civil and criminal liabilities for non-compliance. The same applies to the “false” self-employment of entrepreneurs or commercial agents which can lead to employment rights, social security and tax claims. Review existing terms of employment and underlying facts to establish true employment status.

6. Collective Agreements (CC)

Check which corporate SCCs are in place, their terms and conditions or additional obligations and under what conditions they can be terminated.

7. Collective questions (unions and employee representative bodies)

Ensure that the necessary staff representative bodies (such as the Works Council, the Health and Safety Committee, etc.) are in place and that the seller has complied with its information and consultation obligations and/or its trading obligations. Members are generally strongly protected against dismissal.

8. Litigation

Obtain information from the vendor regarding any employment-related labor complaints or disputes, legal actions, investigations, settlement agreements, and judgments or awards against the company.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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