While it is undisputed that a talented corporate transaction attorney is critical to the success of a deal, it is also imperative that an integral member of the transaction team include a seasoned employment attorney, particularly on the buyer-side of a merger or acquisition. This article addresses some of the top most costly employment issues that a skilled employment attorney will be able to identify during the diligence process.

Wage and Hour Issues

Wage and hour lawsuits can be very costly for employers. For example, if an employer misclassified an employee as exempt under the Fair Labor Standards Act (“FLSA”), a violation of same can result in, not only the amount of unpaid overtime due, but an equal amount of the unpaid overtime characterized as liquidated damages, as well as attorneys’ fees and costs. It is common for settlements and judgments related to FLSA violations to cross the seven-figure mark, depending on the class size. State laws may confer additional penalties as well. It is important for employment attorneys to review not only pay policies, but a company’s pay practices as well, in order to spot potential FLSA and state law violations. 

Misclassification of workers as independent contractors

Another common issue employers face is misclassification of a worker as an independent contractor, as the test for whether a worker is an employee or independent contractor is ever-changing. Should an employee be misclassified as an independent contractor, liability can quickly accumulate in the form of: tax liability, unemployment insurance payments, failure to pay overtime, violations of meal and rest break laws, paid sick leave laws, paid vacation laws, etc.

Incorrect pay practices

Even when employers properly classify employees as non-exempt, employers often fail to properly calculate the amount of overtime owed. For example, some employers provide quarterly bonuses, production bonuses or other types of bonuses to their employees. Should an employee bonus be deemed “non-discretionary,” such amount must be included in calculating the overtime rate. Failure to include these bonuses in the calculation of overtime can lead to a lawsuit, and often in such cases, a costly class action lawsuit.

Another pay issue involves sick and vacation leave benefits. State law varies greatly with respect to what is required to be offered to employees during employment, as well as what benefits must be paid out upon separation. It is important to determine how each jurisdiction that the company operates in treats employee benefits and whether the company is in compliance. Currently, there are at least nine states that require payout of Paid Time Off (“PTO”) upon separation from employment, and failure to comply can be an expensive mistake. Moreover, in the event payout of PTO is required and the company permits unlimited accrual of PTO, such practice could result in large PTO banks, which in turn, means a great liability to a buyer. 

“Change in control” provisions

Some employment agreements, typically executive employment agreements, include a “change in control” provision that dictates what should occur in the event of a business transaction. A change in control provision generally entitles the employee, often an executive of the company, to additional compensation, benefits or other rights. It is important to understand what triggers such a provision.

The above is by no means an exhaustive list of employment issues, rather, there are many employment issues that may come up during the due diligence process. Moreover, some violations can lead to very costly and time-consuming litigation. It is, therefore, imperative that a skilled employment attorney is engaged in the due diligence, so that buyers and sellers are properly informed of employment-related risks that may impact the purchase price or require the inclusion of specific indemnities or other alterations to  the purchase agreement.