Have You Thought About ... COVID-19 Implications for Employment Issues in Corporate Transactions?

Brownstein Hyatt Farber Schreck

Brownstein Hyatt Farber Schreck

The prolonged impacts of COVID-19, and the legal complexities for workplaces and employee management, have particular relevance to corporate transactions. As we near the final quarter of 2020 and companies race to close deals before year-end, buyers and sellers must consider the implications of COVID-19 upon their standard employment-related diligence, representations and warranties, indemnification provisions and other deal terms.

WARN Act Considerations

The federal Worker Adjustment and Retraining Notification (WARN) Act and companion state laws create many nuanced issues in corporate transactions. These issues have become even more pronounced—and more complicated—in the past several months. In general, the WARN Act requires covered employers to provide 60 days’ advance notice to employees and government officials of a “mass layoff.” A mass layoff is the termination of 50 or more employees (comprising at least 33% of active employees) or at least 500 employees.

Critically, a furlough or reduction in hours constitutes a “layoff” for WARN Act purposes to the extent employees’ work hours are reduced 50% or more (including being fully furloughed) for six months or longer. In this circumstance, WARN Act notice is required at the time it becomes “reasonably foreseeable” that the reduction/furlough will last for six months or longer. And the “layoff” resulting from a reduction/furlough of six-plus months may be deemed to be retroactive to the start date of the employment action. (See our prior article on impending WARN Act issues here.)

To further complicate matters, in order to determine whether the various terminations, layoffs, furloughs and reduction in hours constitute a “mass layoff,” such actions are aggregated within a 90-day period, so staffing adjustments that were—or are being—made on a rolling basis may be combined to trigger the WARN Act. And many states have their own, slightly different versions of the WARN Act that must be considered. (See our prior article on potential WARN Act traps here.) All of this complicates legal compliance representations for sellers, and risk assessment for buyers.

In today’s COVID-19 world, furloughs, reduced hours and other nontraditional employment actions have become common, and the traditional approach to diligence must adapt to assess potential WARN Act liability. Specifically, in addition to employee terminations within the relevant time period, buyers should carefully review information regarding reductions in hours, furloughs and other “temporary layoffs,” and calendar any relevant dates (e.g., the six-month deadline when a reduction/furlough becomes a layoff for WARN Act purposes, and the 90-day aggregation period). Buyers also should closely scrutinize any WARN Act notices previously provided by sellers to determine compliance with the WARN Act with respect to content, timing and required recipients (e.g., state agencies, unions, etc.).

When negotiating the purchase agreement, the parties should carefully consider allocation of liability for WARN Act notice and monetary responsibility in all potential scenarios, and ensure that applicable provisions are clearly drafted. For instance, if employees were furloughed by the seller for 5.5 months and are not immediately put back to work by the buyer post-closing, it can trigger retroactive WARN Act requirements, and it is important for the parties to address whose responsibility it is to provide notice and/or who bears the cost of any failure timely to do so. This should include an allocation of liability for failure to provide notice promptly when the layoffs became “reasonably foreseeable” for WARN Act purposes (which is itself a nuanced analysis). Even in an asset sale, there may be successor liability, depending on the facts and circumstances.

Paid Sick Leave Issues

There has been a proliferation of coronavirus-related leave laws at the federal, state and local levels in the past several months. In making representations and warranties, sellers should work closely with legal counsel to confirm past and ongoing compliance with such laws. Buyers should assess post-closing liability for both the obligation to provide paid sick leave going forward, as well as liability for any prior failure to comply with paid sick leave requirements on the part of sellers. Successor liability for such obligations is built into many sick leave laws. For example, Colorado’s recently enacted Healthy Families and Workplaces Act expressly provides for successor liability, even in asset sales, and allows the successor to receive credit for paid sick leave already taken by employees. (See our prior client alert on documenting and tracking COVID-19-related leave here.)

Buyers also should consider how to identify and address issues of liability for compliance with respect to workers supplied to sellers by third parties, such as temporary staffing agencies or management companies. For example, the federal Department of Labor has issued guidance regarding the 500-employee threshold for coverage of the Families First Coronavirus Response Act (FFCRA), which can include temporary workers supplied by a third party, and the circumstances under which the contracting entity will be required to provide paid FFCRA leave to the temporary workers (e.g., where the staffing company has more than 500 employees, but the contracting entity does not and is therefore covered by the FFCRA).

Many state and local paid sick leave laws contain similar “joint and several liability” type provisions. Liability for such paid sick leave can be (but often is not) allocated in the relevant agreement, which makes it important to perform diligence with respect to contracts between the target company and any employee staffing or management organizations, particularly where the business relies heavily on third-party staffing agencies; this can be a significant unexpected expense.

Tax and Wage-and-Hour Law Implications

Additional diligence and drafting considerations involve tax issues. For example, has the seller sufficiently documented any FFCRA leave it provided to employees to allow the entity to claim the tax credit as provided under applicable law? (See our prior client alert on FFCRA tax credit documentation requirements here.)

Similarly, if employees are working remotely from another jurisdiction, have they been taxed appropriately, and has the entity complied with applicable laws regarding registering to do business, carrying appropriate insurance, etc., in that remote jurisdiction?

Wage and hour issues have become more prevalent as well with respect to remote workers. For instance, has the employer properly reimbursed expenses under federal and state law? California, for example, requires reimbursement of all expenses necessarily incurred in the performance of the duties; the list of reimbursable expenses for remote workers can include equipment, printer ink and paper, internet service, postage, mileage to and from the office, etc.

Ensuring that workers have been compensated correctly is also critical. The federal Department of Labor recently issued guidance on tracking working time for remote workers, which has been an issue for many employers. Likewise, employers have run afoul of wage and hour laws by making improper deductions from exempt employee compensation during reduced work periods, or not compensating exempt employees properly when they perform any substantive work during a furlough. (See our prior client alerts on tax and employment law applicability to remote workers linked here and here.) All of this can lead to exposure, and the risks should be considered, monetized or allocated, and addressed in the purchase agreement.

Other COVID-19 Workplace Matters

Entities that are—or hope to be—involved in a sale process should assess their COVID-19 policies and practices, including documents signed by employees (e.g., wellness attestations, acknowledgment of facility safety policies, etc.) to prepare for diligence requests. On the other side of the coin, buyers would be wise to expand their standard diligence requests to include coronavirus-related information such as, among other things, data regarding compliance with federal, state and local requirements and guidance (as each has been updated from time to time), safety audits, complaints (including internal complaints), OSHA complaints and citations, data regarding outbreaks and positive cases at the sellers’ facilities, reports made to public health agencies, etc. Diligence should also include any threatened litigation related to COVID-19, particularly including third-party/derivative cases (i.e., a non-employee, such as a household member or customer, claiming to have contracted coronavirus from an employee).

With a thoughtful, proactive approach, buyers and sellers can identify and navigate the COVID-19-related employment issues that are impacting transactions now and for the foreseeable future.

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Brownstein Hyatt Farber Schreck

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