As the economy changes, corporate restructures, mergers and acquisitions are on the rise. There is a plethora of employment-related issues that should be heavily vetted in advance of a corporate transaction as the target company’s employment-related obligations and liabilities may, depending on the structure of the transaction, become the obligations and liabilities of the buyer/new business entity. It is also legally possible for the buyer to be held liable for employment-related claims as a successor employer even if the deal is structured as a sale of assets if there is significant continuity between the buyer and seller entities. As such, it is of paramount importance that the parties conduct a thorough evaluation of the target company’s employment policies and practices and pending employment claims prior to the acquisition to avoid potential liability. This is particularly true if the target company has employees in California.
It is more common than expected to find companies that are seeking to be purchased with employment policies in their Employee Handbook (if they even have one) that are not compliant with California law. Prior to the acquisition, it is important to carefully review employment policies and practices as well as employment records belonging to the target company to assess potential noncompliance with the law that could lead to significant liability down the road.
Below is a non-exhaustive list of a number of the key policies that should be in the target company’s employee handbook or other work rules based on recent changes in California law. This is based on the assumption that the seller’s Employee Handbook has been updated sometime in the past three years, as many of these policies are based on new California legal requirements.
CALIFORNIA EMPLOYEE HANDBOOK POLICIES
No Discrimination for Off-Duty Cannabis Use
AB 2188, effective on January 1, 2024, amends California’s Fair Employment and Housing Act (“FEHA”) and makes it unlawful for an employer to discriminate against an applicant or employee for using marijuana “off the job or away from the workplace” and for requiring a drug screening test that finds the employee/applicant to have nonpsychoactive cannabis metabolites in their system. California companies should revisit their drug screening policies, particularly as they pertain to marijuana screening in hiring, discipline, and termination to ensure compliance. For more on this topic please see CDF’s recent blog article on this topic New Rules For California Employers Testing for Marijuana Use Are Approaching Fast.
No Discrimination Based on Reproductive Health Decisions
SB 523, effective January 1, 2023, makes it unlawful for employers to discriminate against applicants and employees based on reproductive health decision-making. SB 523 also makes it unlawful for an employer to require applicants or employees to disclose information related to reproductive health decision-making. Thus, “reproductive health decisions” have been added to the list of protected classes under FEHA and California companies’ Employee Handbooks should be reflective of this addition.
No Discrimination Based on Natural Hair
In 2019, California was the first state to ban racial discrimination based on hairstyles. See California’s SB 188. This should also be reflected in the Employee Handbook.
Extended Bereavement Leave
AB 1949, effective January 1, 2023, requires employers to provide upon receipt of an eligible employee’s request to take up to five days of unpaid bereavement leave upon the death of a family member. A family member is defined as a spouse, child, parent, sibling, grandparent, grandchild, domestic partner, or parent-in-law. The employee must take the leave within 90 days of the family member’s death. The employer must allow the employee to use vacation, personal leave, accrued or available sick leave, or compensatory time off that is otherwise available to the employee. Most bereavement policies allot less than five days of leave, and therefore, should be reviewed for compliance.
Employee Does Not Have to Report to Work if Worksite is Believed to be Unsafe
SB 1044, effective January 1, 2023, prohibits an employer from taking or threatening adverse action against an employee for refusing to report to the workplace or leaving the workplace because the employee has a reasonable belief that the workplace is unsafe in the event of an emergency condition.
CFRA Leave for “Designated Person”
AB 1041, effective January 1, 2023, adds “designated person” to the definition of “family member” for whom an employee may take unpaid, job-protected medical leave under the California Family Rights Act (“CFRA”). “Designated person” is defined as any individual related by blood or whose association with the employee is equivalent of a family relationship. An employer may limit an employee to one designated person per twelve-month period and may request the employee to identify the designated person at the time of the CFRA leave request. The Employee Handbook should reflect this change.
Accrued Paid Time Off
In California, employers are not required to provide a set amount of paid time off (PTO) or paid vacation days. However, most if not all companies, do provide some sort of vacation time as a perk or benefit of employment. Once vacation or PTO is accrued, it is owed to the employee upon termination. The target company’s policies regarding vacation and paid time off should be reviewed carefully to determine if there is an obligation to pay all accrued and unused paid time off at the time of the acquisition or if they can be transferred to the buyer. The balances of paid time off for the target company’s current employees should be evaluated for the financial impact if a payout is required, which is likely.
Classification of Employees
A list of all employees, including their compensation level, status as exempt or non-exempt, and status as an employee or independent contractor, should be obtained and assessed to ensure compliance with the Fair Labor Standards Act as well as California law, which is much more restrictive. It is important to note that in California, most positions do not qualify as exempt unless the employee is making a salary that is at least two times the minimum wage (currently $64,480 annually).
OTHER POLICIES TO CONSIDER
Employee Data Privacy Rights
The California Consumer Privacy Act (CCPA) took effect on January 1, 2020. The CCPA provides rights and protections to California consumers regarding their personal information. The CCPA had a few exemptions, such as, whether the personal information being processed was for human resources or was collected in a business-to-business transaction. However, as of January 1, 2023, the exemptions have expired.
Arbitration Agreements Regarding PAGA
The landscape for arbitration agreements is constantly changing in California. In 2021, the Ninth Circuit Court of Appeals in U.S. Chamber of Commerce v. Bonta found that the Federal Arbitration Act (FAA) did not supersede California law, which meant that agreements to arbitrate had to be voluntary. In June 2022, the United States Supreme Court in Viking River Cruises, Inc. v. Moriana, found that California law is superseded by federal law, which meant that employees can bring individual claims through the Private Attorney General Act in arbitration and once the individual claims are compelled to arbitration the employee no longer has standing to bring the representative claims on behalf of the aggrieved employees for violations of the California Labor Code. Then, in July 2023, the California Supreme Court rejected the U.S. Supreme Court’s analysis of PAGA standing in Adoph v. Uber Technologies, Inc., finding that a plaintiff compelled to arbitration of his or her individual claims brought under PAGA retains standing to pursue representative (non-individual) PAGA claims in court.
In the context of a business restructuring, it is important to consider whether the acquired and remaining employees should re-sign an arbitration agreement and the specific language of that arbitration agreement given the changes in the law surrounding representative actions.
CURRENT CLAIMS BY SELLER’S EMPLOYEES
It is important to review all legal claims that have already been asserted against the target company, which includes all active litigation filed in state and federal courts but also any complaints filed with the Equal Employment Opportunity Commission (“EEOC”), the California Civil Rights Department (formerly known as the Department of Fair Employment and Housing), California Department of Industrial Relations, and the California Labor Commissioner. It would also be wise to review any demand letters threatening to sue as well as the target company’s worker’s compensation history and health and safety complaints.
CONCLUSION
In advance of a transaction or restructuring it is important to engage in a robust evaluation of the companies’ workforces and investigate the target company’s employment policies and practices. If some or all of the above policies are not included in the seller’s Employee Handbook and do not exist elsewhere, the buyer should consider including a holdback provision in the transaction documents and should re-evaluate its insurance needs for the transaction.
