Wage And Hour Due Diligence Solutions In The M&A Context

by Franczek Radelet P.C.

As I mentioned yesterday, in order to avoid costly lawsuits or DOL enforcement actions, FLSA and state wage and hour due diligence should be a substantial part of the overall due diligence process in any deal involving a company with employees, regardless of whether those employees will be employed by the buyer.

Here are my insights on the steps you can take to prevent or at least minimize FLSA successor liability:

Determine the FLSA risk level involved in the deal. The first step in any FLSA due diligence review is to recognize that you can uncover at least one wage and hour violation at any company if you search hard enough. Accordingly, any buyer should assess whether the FLSA risks presented by the deal are low, medium or high. Categorizing the risk level will dictate the amount of time, energy and resources that need to be spent on the FLSA due diligence process. Depending on the level of risk presented, build in enough time to do a sufficient wage and hour risk review before the deal closes – no matter how attractive the returns or anticipated profits! While there are certainly time pressures involved in many acquisition, particularly of distressed companies like the ones Lindsey and I have discussed, FLSA due diligence is not an area you should gloss over or ignore. Get competent wage and hour counsel with experience handling acquisitions (and here’s a tip on where you can find some) involved early to advise you on how to properly handle any FLSA red flags that may be present.

Conduct a reasonable risk-based FLSA due diligence review pre-acquisition. In order to know what FLSA risks are involved, it is important to ask the right questions. Look for any FLSA “red flags” like independent contractors, salaried employees, hourly employees who never receive overtime, everyone in a department being classified as “exempt,” missing records, etc. Thoroughly investigate and resolve any FLSA violations that you and your employment counsel uncover. Your due diligence team and your employment counsel should keep detailed documentation of all due diligence efforts when evaluating potential violations. Your due diligence review documentation should be timely, accurate and thorough. Remember, it is not enough to rely on information provided solely by the target company about their wage and hour practices. You must get your own, independent verification of critical information.

Take appropriate action for all FLSA issues identified. Establish all relevant facts relating to any apparent, actionable FLSA or state wage and hour violations. Determine whether payments to employees or a change in wage and hour practices is advisable. Early identification of these issues and corrective actions can mitigate or eliminate successor liability, or at least account for it in the structure of the deal. To the extent practicable, all wage and hour-related investigations should be concluded and any violations resolved prior to closing. When faced with existence of possible FLSA or other wage and hour violations, you as a buyer must decide whether to delay, renegotiate or even walk away from the deal. Depending on the nature and extent of the violations you uncover, they may have a significant impact on the purchase price and your willingness to acquire the assets or business from the target company. Other remedial steps may include requiring the seller to take specific actions by set deadlines, broadening the investigation into employment practices, and/or for the seller to pay any costs associated with investigating and remedying the violation(s).

Preserve relevant documents and do no harm. If the buyer uncovers potential issues, treat them like you would in litigation. Follow litigation hold protocols and preserve all relevant documents. Take immediate action to ensure that the seller’s employees do not destroy documents. Take into account any data protection or employee privacy laws in the relevant jurisdictions and create an investigation plan. Be prepared to ask for interviews with affected employees. As a seller, be prepared to take disciplinary action against responsible employees if necessary. If the seller or prospective partner is a publicly traded company, the parties may have disclosure requirements under the Securities and Exchange Act. In other words, do no harm. Involve knowledgeable counsel. Making hasty decisions or covering up information can further complicate the deal and invite unintended liability.

Ask for FLSA related representations and warranties from the target company. The seller should be able to provide assurances that it does not have any FLSA or state wage and hour violations. If the seller does have potential or actual violations, additional representations or certifications may be required in the final deal.

Retain audit and termination rights. If any FLSA violations are uncovered in the pre-acquisition due diligence process, you should retain audit rights to inspect the books and records of the seller as well as the right to terminate the deal or to be reimbursed for expenses relating to the resolution of any wage and hour violations uncovered between signing the purchase agreement and closing the deal. While these contractual protections are all negotiable, you should also consider having the seller indemnify you for any FLSA or state wage and hour violations that are uncovered.

Tighten up internal controls post-closing. Just because the seller didn’t pay close attention to wage and hour issues does not mean you, the buyer, should continue that lax oversight. In order to ensure no FLSA or state wage and hour problems crop up post-closing, assess whether you have internal controls in place that are adequate to prevent, detect and address potential FLSA and wage and hour violations.

These are just some steps to consider in the due diligence process. In any merger or acquisition, acquiring companies need to assume that successor liability will apply to them and that a simple disclaimer of liability will have no effect. Take the time to do the FLSA and wage and hour due diligence before you agree on a deal. Of course, even in non-union environments, the NLRB’s recent outreach means you shouldn’t stop with employment law due diligence, either. Get labor and employment counsel with M&A experience involved early. The investment will pay off no matter what becomes of your deal.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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