Closing the Deal: Strategies to Address FLSA and Wage and Hour Problems during Due Diligence

In Monday’s post, I highlighted some of the steps buyers and sellers should follow when conducting due diligence on FLSA and other wage and hour-related issues.  The next obvious question, of course, is what to do when your initial due diligence review uncovers potential or actual wage and hour violations.  Here are a couple of tried-and-true strategies that you can employ no matter whether you are acquiring or being acquired.

Buyers and Sellers: Do no harm. The days, weeks, and months before closing are not the time to hide anything.  If either or both sides uncover potential issues, treat them like you would as codefendants in litigation (if for no other reason than you could be someday). Follow litigation hold protocols and preserve all relevant documents. Consider how data protection or employee privacy laws in the relevant jurisdictions may impact your next investigative steps, and be prepared to actually conduct an investigation.  If either party is publicly traded, they may have disclosure requirements under the Securities and Exchange Act. In other words, do no harm and don’t act hastily, even under the pressures of outside deal timelines.  Getting things right is worth the slight delay in the long run, particularly if the issues are serious.

Buyers and Sellers: Take action to address all FLSA and wage and hour issues you identified. Once you have identified potential or actual issues and prepared an investigation plan, take steps (before closing, if possible) to address them.  Conduct your own full-scale audit and fact finding.  The goal of this approach is determine what action you can take and whether payments to employees, set asides in purchase agreements, or other remedial steps are necessary to mitigate or eliminate potential liability. Sellers may want to commit to specific steps by set deadlines (and buyers may request the same).  The buyer and/or seller may find it prudent to broaden investigations in employment practices and to allocate responsibility for the costs of those investigations or any delays in closing the deal.  Most importantly, whatever you have uncovered should be resolved, one way or the other, before closing.  Buyers have the toughest decision in this regard, since they ultimately must decide whether to delay, renegotiate, or even scuttle a deal  based on the nature and severity of what is uncovered.

Buyers: Retain strong audit rights. Buyers have some specific successor liability concerns that can leave them on the hook for whatever violations they have acquired.  Even if you ultimately have success impleading the seller, you can spend hundreds of thousands of dollars in litigation (if not more, in a class or collective action) to get there.  As a buyer, if any FLSA or other wage and our violations pop up during due diligence, work to retain strong, clear audit rights.  Buyers should reasonably expect to inspect a seller’s financial and employee records.  Depending on the nature of the potential liability, buyers can maintain the right to terminate the deal or be indemnified and/or reimbursed for costs, fees, and damages arising from any violations uncovered during the due diligence phase.

Buyers: Build protections into the final purchase agreement. A seller should be able to provide assurances that it does not have any FLSA or state wage and hour violations or disclose what those violations are and how the parties agree that they may affect the final deal.  In this sense, I often look at the purchase agreement as a mini-settlement agreement.  Closing the deal, if possible, is the ultimate goal.  Try not to leave issues open, unresolved, or unquantified, even if that means coming up with a creative solution or structure.  Given the state of case law around the country, buyers have to assume that they will be liable as successors and act accordingly.

Upshot for Employers

These are some general steps to consider in the due diligence process when you encounter issues, but every situation is different.  Make sure that your deal team considers wage and hour issues (and labor and other employment issues, for that matter) early in the due diligence process and before you get close to a final agreement.  Your investment of time and resources in the due diligence process will pay dividends both before and after your deal closes, no matter which side of the table you’re on.

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