No one likes surprises when buying a company, particularly when it comes to labor relations and union obligations. Unfortunately, surprises are all too common in the area of successorship—that is, how and when a buyer of a business inherits a duty to recognize and bargain collectively with a union that previously represented the seller's employees, or might even be required to abide by the actual union contract that existed between the seller and the union.
These have always been serious matters, but recently the General Counsel of the National Labor Relations Board upped the ante by taking what he termed a "particular interest" in them. In April, the General Counsel issued a memorandum instructing the NLRB's regional offices to submit all cases involving an alleged successor's refusal to bargain, as well as claims that a successor has discriminatorily refused to hire the seller's employees, to the NLRB's injunction litigation branch. This means that if there is a claim that your newly purchased business is a successor to a union contract or collective bargaining obligations, the NLRB might very well go to court and seek to stop the transaction in its tracks or force the seller and buyer to unwind it.
In light of this heightened scrutiny, prospective buyers need to be sure that they make appropriate inquiries regarding union issues as part of their due diligence. At a minimum, the acquiring firm will want to know answers to the following questions:
1. Does the seller have a collective bargaining agreement with a labor union?
If so, and if the acquisition is a "stock deal"—in which the stock of the predecessor corporation is purchased—the buyer essentially steps into the shoes of the selling company, and all contractual obligations, including union contracts, nearly always pass on to the purchaser. By contrast, if the acquisition is an "asset purchase," the purchaser will ordinarily not be bound to the terms of the seller's union contract, but it may be obligated to bargain with the union over terms and conditions of employment, depending on the circumstances.
2. If the seller has a union contract, does it limit the seller's right to sell or transfer its assets?
Some collective bargaining agreements include "successors and assigns" provisions. This language typically states in grandiose terms that the contract is binding on the signatory company and all entities that succeed to its interest. If the company is sold, the "successor clause" purports to require the seller to secure the buyer's agreement to assume the terms of the contract.
Such clauses are increasingly a top priority of unions. Although this language is not binding on the purchaser, it can create substantial confusion and delay in the purchase. In some cases, courts have enjoined transactions pending a labor arbitration between the seller and its union to determine whether the seller breached its obligations under the "successors and assigns" clause. If a buyer discovers that the seller's labor agreement contains such a provision, it should ensure that the seller has fully resolved all issues with the union to avoid any risk that this language would create problems after the deal has closed.
3. Even if there is no labor contract, is any part of the seller's workforce represented by a union?
If so, and if there is continuity between both the enterprises and in the workforce—that is, if a majority of the employees of the new enterprise were employed by the predecessor—then the buyer will be considered a successor and bound to recognize and bargain with the "old" union.
An asset purchaser is ordinarily entitled to set initial terms and conditions of employment before bargaining, including wages, benefits, work rules, and all other terms and conditions of employment until a new contract is bargained. This important privilege can be lost, however, if the successor is found to be a "perfectly clear" successor. The U.S. Supreme Court has held that a successor employer is not privileged to set initial terms and conditions of employment for its newly hired workforce if it is perfectly clear that the new employer plans to retain all the employees in the unit. Thus, if an asset buyer is found to be a "perfectly clear" successor, it will be bound to recognize all the existing terms and conditions of employment, including the preexisting contract's provisions, until a new contract is bargained with the union.
In applying the "perfectly clear" exception, the NLRB scrutinizes not only the successor's plans regarding the hiring of the predecessor's employees, but also the clarity of its intentions concerning existing terms and conditions of employment. In some cases, a bargaining obligation has been imposed under the "perfectly clear" exception based on the successor's silence as to changing or continuing the existing working conditions at the time it indicated that it would be hiring the predecessor's employees. The NLRB has also applied the "perfectly clear" exception when the new entity retained the entire predecessor bargaining unit, but also indicated that at some time in the future it would implement certain unspecified changes in terms and conditions of employment.
The lesson for an asset purchaser is "perfectly clear." To retain the privilege to unilaterally set initial terms and conditions of employment, the successor employer must clearly announce its intent to establish a new set of conditions before inviting former employees to accept employment. By contrast, an employer that promises to hire a predecessor's employees, but announces vague, undefined changes in their employment terms starting on some future date, likely will be obliged to negotiate those changes with the statutory bargaining representative.
In any "successorship" situation, early planning is essential. Even though an employer may be a "successor," it can still retain substantial flexibility. The opportunity to define the terms and conditions of employment, however, can be easily lost if appropriate steps are not taken in the transition process.