November 1, 2022

Due Diligence: Top 10 Labor & Employment Issues in M&A

This Akerman blog reviews the top 10 labor & employment law issues that need to be on a potential buyer’s radar screen during the due diligence and negotiation process. This excerpt addresses issues associated with misclassification of workers:

Assessment of worker misclassification is commonly at the top of the issues list for labor and employment diligence. There are two main types of misclassification: (i) misclassification of employees as exempt from overtime and minimum wage requirements under the Fair Labor Standards Act (FLSA) and state law; and (ii) misclassification of employees as independent contractors. With respect to the first, employees must meet the salary level, salary basis, and duties tests under both the FLSA and applicable state law to be properly treated as exempt. As to the second, there are a variety of tests for independent contractor status at the both the federal and state level for purposes of wage and hour, immigration, tax, unemployment compensation, workers’ compensation, benefits, and other areas of compliance.

Either misclassification mistake can result in exposure to material liability, including unpaid wages and benefits, unpaid taxes, penalties, liquidated damages, attorney’s fees, and costs. Further, such liability can go back up to three years under the FLSA, or even longer under certain state wage and hour laws (like New York, which is six years), and for similar periods under other applicable federal and state enactments. In addition, there is also a need to ensure that joint employer liability for wages, benefits, and other matters for temporary/leased employees is adequately addressed in the governing contracts. For all these reasons, misclassification is a major issue that should be vetted heavily in due diligence.

Some of the other issues addressed in the blog include successorship under union contracts, overtime and break pay, immigration, and employee background checks.

John Jenkins