Closing the Deal: FLSA Due Diligence with Mergers & Acquisitions at Record Highs
Over the past week, I’ve read a spate of stories about the boom in mergers and acquisitions around the world. In the U.S., we’re in the biggest boom in M&A activities since the 2008 economic crisis. Israel has already set a record. So has South Korea. However, as the global M&A market heats back up, there is always a risk that corporate marriages that seem blissful and prescient in good financial times can end in lawsuits, recriminations, and considerable debts. Of course, that can happen with many pieces of any deal, but with the aggressive enforcement by the DOL that we have discussed, companies large and small cannot afford to overlook FLSA and general wage and hour due diligence in advance of a closing, regardless of whether the acquiring company will take on employees from the seller. Taking these steps gets more difficult in a hot deal environment like this one. The pressure to close quickly and minimize obstacles to closing the deal can mean pressure to leave wage and hour issues until the last minute, if they get a real analysis at all. Rushing through wage and hour compliance, though, is a recipe for liability for buyers and sellers.
Having been at the closing table both as a lawyer and as a business owner, I have learned that you can take some straightforward steps to prevent or at least minimize FLSA and wage and hour liability without jeopardizing your deal’s timetable:
Sellers: tighten up internal controls post-closing. Just like cleaning up your house before the realtor shows it, sellers should clean up FLSA and wage and hour issues before closing, too. Particularly if not all employees will move to the acquiring company, sellers need to double check whether they have adequate internal controls in place to prevent, detect, and address potential FLSA and state wage and hour violations. For instance, spot check for off-the-clock issues, independent contractors, salaried employees, hourly employees who never receive overtime, everyone in a department being classified as “exempt,” missing records, and other common issues. Ensure that job descriptions are not only up to date, but that they reflect actual job duties. Don’t simply rely on existing processes, but test them. Buyers, too, should test these controls post-closing. It is not enough to trust representations and warranties from a seller, particularly because objectionable practices may not stop just because you signed a closing document.
Buyers: Determine the potential for risk. The first step in any due diligence review is to identify potential risks–tax, corporate structures, market, regulatory, ongoing litigation, IP, etc. In the rush to complete due diligence, don’t forget to specifically assess wage and hour risks. Look for potential hot buttons issues–contractors, exempt/non-exempt classifications, potential for off-the-clock work, commissions, bonuses, WARN Act, and even termination procedures. With any luck, your investigation will only turn up minor issues (if any), but buyers should make a specific assessment of wage and hour risk in every deal. The most effective way to do this is to ask the right questions. Look for FLSA and other wage and hour “red flags” like the ones I outlined above for sellers. There’s no secret formula, just putting in the work to do a reasonable assessment given the risks involved. Be thorough and accurate, too, and don’t rely solely on what the target has to say about their wage and hour practices. Put your own team to work.
Tomorrow On Wednesday, we’ll discuss what buyers and sellers should do both before and after closing when they uncover FLSA and other wage and hour issues.