Don’t Let Employment Issues Derail Your Accounting Firm’s Deal – Part 2

Authors Laura Friedel, Russell Shapiro

Partners Russell Shapiro and Laura Friedel recently spoke at the 2023 BDO Alliance USA Conference on employment issues that impact accounting firm deals. In Part 1 of our two-part article, we share insights and tips on avoiding potential diligence deal killers, restrictive covenants, and other potential issues to help accounting firms avoid situations where employment issues could derail – or devalue – a potential merger or acquisition. You can read Part 1 here, where we share tips on transferring employees.

Tip #1: Be aware of potential due diligence deal killers.

Three issues, in particular, can be potential “deal killers,” and even if the deal moves forward, they could have a material impact on the purchase price:

  1. Questions about the ownership of books of business. A seller can only sell something they own, so any question regarding whether the selling firm owns the client relationships can kill a deal (or at least result in a significant purchase price reduction). Look at the language in employee and partner agreements that reference “your” book or “your” clients. Even in the absence of language suggesting that an individual (rather than the firm) owns a book of business, as lack of explicit language indicating that all relationships are the firm’s property can have a material impact on the deal. The issue will also have a legal effect on which clients an individual can be prohibited from soliciting/working with.
  2. Misclassification of independent contractors. Misclassification of independent contractors (namely, treating someone as an independent contractor where they don’t meet the legal standards to be one) is a high-risk issue generally, and in the M&A context, it can have serious ramifications. Buyers should determine early in due diligence whether the seller engages individual independent contractors and, if so, work with counsel to determine if they are properly classified as such. If they aren’t, the buyer will likely require a significant special escrow or purchase price reduction to cover the associated risk.
  3. Exempt vs. non-exempt. The presumption is that all employees are entitled to overtime, and if the employer wants to establish that they are exempt (not eligible for overtime), they have to establish both that they meet the salary minimum and that they satisfy one of the job duties tests. This can create two issues in deals. First, misclassification of employees (by treating them as exempt when they should have been eligible for overtime) can lead to very significant liability. Where the buyer believes that this liability exists, it likely will insist on a significant escrow or purchase price reduction. Second and more problematic, where the buyer is going to “reclassify” employees post-closing (either because of perceived legal risk or to align to the buyer’s practices), there can be issues with employees who were previously treated as exempt and are suddenly required to track hours and be paid overtime. These employees are less likely to join and remain with the buyer because of a perceived “demotion.” In addition, having been reclassified, these employees are more likely to look back and realize that they should have been paid overtime during their time with the seller. To mitigate these risks, buyer and seller should pay close attention to how any reclassification is messaged and make sure that the purchase agreement is clear on who is liable if reclassified employees use their reclassification as evidence that they should have been receiving overtime pay in the first place.

To try and avoid these (and other) employment issues derailing your deal, firms considering selling should have an employment attorney conduct a review of employment law compliance at least 18-24 months before a transaction is anticipated so that the firm has time to correct any issues before due diligence begins. In addition, buyers should make sure to conduct adequate due diligence on employment compliance early in the process and prioritize obtaining meaningful responses from the seller.

Tip #2: Take care when assigning restrictive covenants.

The ability to enforce restrictive covenants (non-solicits and non-competes) is critical to accounting firm deals, but often insufficient thought is given to where covenants are set out, what covenants bind non-equity partners, whether covenants are assigned, and who will be responsible for responding to breaches.

Restrictive covenants are generally viewed with scrutiny – but the level of scrutiny depends on the circumstances under which the covenants are entered into. Covenants in purchase agreements, where the buyer is purchasing the goodwill of the seller’s business, are viewed with the least scrutiny and, thus, generally, can be broader and are the easiest to enforce. At the other end of the spectrum are covenants entered into with employees, which are viewed with the greatest scrutiny, need to be the narrowest, and are least likely to be enforced. Somewhere in the middle are covenants between equity partners in shareholders and partnership agreements. In the M&A context, this means that putting covenants in a purchase agreement (or layering the covenants in the purchase agreement over those in the shareholders, partnership or employment agreement) increases the likelihood of enforceability – which is in both parties’ interest if there is any kind of earn out, profit sharing or deferred compensation. For this reason, we strongly recommend that covenants be included in the purchase agreement or an exhibit to the purchase agreement rather than in an shareholders /partnership agreement or an employment-related agreement.

This is particularly true where a partner who had an ownership interest in the seller becomes an income partner with the buyer. Regardless of what an income partner is called or whether they sign the shareholders /partnership agreement, an income partner is generally considered an employee. That means that unless the covenants are in the purchase agreement (where they are given in exchange for the buyer’s purchase of goodwill) they will be viewed with the highest level of scrutiny and will need to be narrow if they are going to be enforceable.

Another key decision is whether or not the buyer assumes the seller’s existing restrictive covenants (in a shareholders/partnership agreement or an employment agreement). There are various reasons why the seller, the buyer, or both would want to rely on pre-closing restrictive covenants. For instance, they could want to enforce covenants against someone who left prior to or at closing, they could want to take advantage of the fact that the agreement was signed in the past (before new requirements for restrictive covenants were implemented), or they could prefer the language in the seller’s covenants to that in the buyer’s. If the covenants are not assigned to the buyer, the seller may have difficulty enforcing them. This is because courts often require that a firm trying to enforce a restrictive covenant show that it has a “legitimate business interest” in enforcing the covenant, and a seller which is no longer engaging in the business may have trouble establishing that their financial interest in an earn-out or deferred compensation is a “legitimate business interest.” For this reason, it is almost always to the parties’ advantage to provide for the assignment of restrictive covenants as part of the purchase agreement.

Finally, there is the question of which party – buyer or seller – should be responsible for enforcing restrictive covenants. If covenants are assigned, then the buyer would have the legal right to seek enforcement. If not, vice versa. But that doesn’t mean the buyer needs to call the shots or pay for the enforcement. In many situations what makes the most sense is to agree in the purchase agreement that the party that wants the covenant enforced pays for the enforcement and that the other will cooperate fully (including by filing suit if necessary). This approach serves to avoid disputes between buyer and seller down the road.

Tip #3: Don’t forget about other potential issues.

What happens to those partners who don’t want to join the buyer?

The best way to avoid this situation is to revise the shareholders/partnership agreement before the sale process begins to provide that partners who don’t sign on to the deal are deemed to voluntarily withdraw immediately before closing, and that the restrictive covenants in the agreement will continue to apply. If you don’t have that provision in your shareholders /partnership agreement, make sure that you consider and follow all of the requirements relating to partner separations – including especially notice and payments.

What happens if there are unexpected life events during the gap between signing and closing?

People can die, become disabled, and get divorced, just to name a few of the life events that can happen between signing and closing. Sellers should consider these possibilities in advance and make sure that the deal is structured so these events don’t disrupt closing. This includes being prepared in case key personnel announce that they are leaving the firm.

Should partners and employees have legal representation separate from the firm’s legal counsel?

When there are multiple tiers or levels of partners who will be treated differently under the terms of the deal, or where employees are being required to sign new employment agreements, it is often helpful for them to have separate legal counsel. Other situations where it makes sense to have separate legal counsel are when individual and firm interests don’t completely align and where separate legal counsel would put the buyer in a better position to enforce the agreement (for instance, where state law allows for certain provisions only if the individual had counsel). The bottom line is that if an individual’s interests differ from the firm’s, separate legal representation is probably appropriate.

If you are considering an accounting firm considering a sale or acquisition, please don’t hesitate to reach out. LP knows accounting firms. Our attorneys are trusted advisors for managing partners, executive committee members, key stakeholders, and HR professionals working in and for accounting firms.

Don’t Let Employment Issues Derail Your Accounting Firm’s Deal – Part 1

Authors Laura Friedel, Russell Shapiro

Partners Russell Shapiro and Laura Friedel recently spoke at the 2023 BDO Alliance USA Conference on employment issues that impact accounting firm deals. In Part 1 of a two-part series, we share tips on transferring employees from the seller to the buyer to help accounting firms avoid situations where employment issues could derail – or devalue – a potential merger or acquisition. You can read Part 2 here, where we share tips on potential diligence deal killers, restrictive covenants, and other potential issues.

Tip #1: Make sure your plan to transfer employees is consistent with your deal structure.

Employment issues rarely drive the decision on whether a deal will be a stock sale or an asset sale, but the deal structure dictates what the buyer and seller need to do to transition the employees.

In an asset sale, the employment relationship is terminated and a new one is created. This means that the seller needs to do all the things that an employer would normally do when terminating an employee, including paying out final wages and vacation pay (where required by contract or state law). Notice of termination, stay bonus, and severance provisions may also be triggered by an asset sale, so it is important to be aware of those requirements and either terminate them (by agreement with the employee) or honor them.

On the other hand, in a stock sale or merger, there is a continuity of employment – whether you want it or not. This means that you don’t need to worry about things like payment of final wages and triggering severance provisions. But if a firm plans to change one or more employees’ employment terms or plans not to continue the employment of certain individuals post-closing, those changes will need to be implemented in the same manner they would have been at any other time during employment, taking into consideration relevant contractual or legal requirements.

Tip #2: Decide early how you will handle the logistics of transferring employees from the seller to the buyer.

Often overlooked as part of deals, the logistics of getting employees from the seller to the buyer is the greatest opportunity for error.

Documenting the transfer.

In almost all cases, it makes sense to provide employees with a formal document that notifies them of the deal and of how (if at all) it will impact them. What this document looks like will depend on a number of factors, including the deal structure and what is changing. In an asset deal, it is important to confirm whether it’s possible to assign any existing agreements or whether it’s necessary to enter new ones, as well as whether there are any provisions in the existing agreement that the buyer wants to make sure do not continue post-closing. In a stock deal, it’s even more important to understand existing employment terms, and if there are any the buyer does not want to take on, make terminating those agreements or provisions a closing condition. Finally, if the buyer is entering a new jurisdiction, be sure to confirm that the firm’s standard agreements comply with local requirements, or risk having important provisions (such as non-solicits) be unenforceable.

Payment of Wages.

If the deal is an asset sale, the closing triggers the requirement that employees be paid final wages. Depending on state law, payment may be required as early as the closing day itself, which can create logistical challenges, as payroll generally has to be run at least a few days in advance, and the closing date is often confirmed just the day before. If the transaction is a stock sale, there’s no legal requirement to pay final wages, but the purchase agreement may require payment of wages earned through the closing date.

PTO and Vacation Pay.

There are two primary issues relating to PTO/vacation time: whether it needs to be paid out and how to transition employee from the seller’s policy to the buyer’s policy.

As with final wages, pay out of PTO/vacation time isn’t an issue for stock deals but is an issue in asset deals. Whether a seller must pay employees the value of PTO/vacation time depends on state law and the seller’s policies. If either the law or policy requires payment for accrued and unused PTO/vacation on termination of employment, then it technically must be paid based on the transition to buyer’s employment, though there may be the opportunity to carry an employee’s PTO/vacation balance over with their agreement. When PTO/vacation is paid out, it is also wise to provide employees with a corresponding amount of unpaid leave with the buyer so that prearranged plans aren’t put in jeopardy.

Whether in a stock sale or an asset sale, moving from the seller’s paid time off approach to the buyer’s can also create confusion and concern for employees if the two approaches are different. For instance, where employees are moving from a traditional accrual policy to a flexible (sometimes called “unlimited”) time off policy, if there isn’t some type of compensation for the accrued time they had with seller, they are likely to feel that they are “losing” their accrued time. When employees are moving from a more generous accrual policy to a less generous policy, they are even more likely to feel that they are being harmed in the transition. To avoid (or mitigate) these concerns, it’s important to plan ahead and focus on messaging. In many cases, a transition period will help temper employee concerns.

Employee Benefits.

Open enrollments do not always line up between companies, and they rarely align with closing dates. When considering the impact of a change in benefits, both the buyer and seller should consider whether employees will be required to restart deductibles and out-of-pocket maximums and, if so, consider offering bonuses or other benefits to make up for the increased cost during the transition period. Also critical in the logistics of transferring benefits is how the seller’s 401(k) plan will be handled. In a stock deal, if the seller’s 401(k) plan is being terminated, it is far easier to do so before closing.

Immigration and Visa Transfers.

Buyers need to analyze whether they want to rely on existing Form I-9s and eVerify searches or request new forms and searches. This analysis will be done in collaboration with legal counsel as part of the diligence process, with the ultimate decision depending on the sufficiency of the seller’s records and the buyer’s preference. In addition, in an asset sale, if any of the transferring employees is on a visa, their visa needs to be transferred to the new employer. Firms with employees on visas that are involved in an asset sale should consult with immigration counsel early in the process so there aren’t any last-minute surprises.

Synchronizing Employment Practices.

Beyond the legal aspects of moving employees, both the buyer and seller have an interest in making sure that employees transition smoothly to new policies. Human resources teams at both firms should spend time together discussing their respective policies and practices and identifying areas where they need to synchronize or educate and transition, including changes to standard policies, compensation (including commission and other incentive arrangements, overtime, and reimbursement limits), and roles (such as exempt status and independent contractors).

Transition Services Agreements.

There are some circumstances where either the buyer isn’t ready to accept the employees at closing, or there is a benefit to keeping the employees employed by the seller for a set period of time. In those cases, the parties should consider a Transition Services Agreement. A Transition Services Agreement allows the employees to stay on the seller’s payroll (and on seller’s employee benefit plans) until the buyer is ready to accept them. Transition Services Agreements can be helpful in a number of situations, including the following:

  • When payroll or employee benefit plans aren’t ready to be transferred
  • To avoid doubled social security deductions
  • To avoid new deductibles and/or out-of-pocket maximums on the new health insurance plan
  • When part of the seller’s business is continuing
  • When part of the team is needed only for a short-term basis

Firms considering a Transition Services Agreement should be sure to check with their insurance, benefits and payroll providers to make sure that such an arrangement is allowed under their agreements. If you are considering an accounting firm considering a sale or acquisition, please don’t hesitate to reach out. LP knows accounting firms. Our attorneys are trusted advisors for managing partners, executive committee members, key stakeholders, and HR professionals working in and for accounting firms.

5 Steps for Managing Layoffs and Workplace Reductions

Author Becky Canary-King

No one likes to think about layoffs and workforce reductions, but they are a reality from time to time, especially when market conditions are uncertain or unfavorable. Although workforce reductions are unfortunate, there are things that employers can do to facilitate a smooth transition and protect against legal consequences.

If your company is considering making a workforce reduction, following these steps will help you manage the process appropriately:

  1. Comply with state and federal WARN Act requirements. The federal WARN Act requires employers to notify the workforce of a mass layoff, a temporary shutdown, or a closure of all or part of a business. Many states, including Illinois, also have laws similar to the WARN Act. If your layoff is subject to the WARN Act or similar laws, be sure you comply with all notice requirements.
  2. Review employment contracts before making termination decisions. If any employees have an employment contract in place, you’ll want to understand the terms of that agreement before making any employment decisions or discussing termination.
  3. Determine appropriate severance packages. While severance is not required for at-will employees, a severance package can help ease the transition for departing employees and give the employer the protection of securing a release of claims. A common calculation is to provide one to two weeks’ severance for each year worked with the company.
  4. Draft compliant separation agreements. Consult with an employment attorney to ensure your agreements contain an effective release of all claims and comply with applicable law. Requirements vary based on factors such as location, age, and position of the employee.
  5. Handle dismissals compassionately. These conversations are difficult, regardless of the side of the desk you are sitting on. Take time ahead of the conversation to prepare what to say and how you’ll say it. Review our recommendations for handling these conversations compassionately.

If you have any questions regarding workplace reductions, please reach out. A member of our Employment & Executive Compensation Group would be happy to speak with you.

5 Ways Employers Can Avoid ‘Quiet Quitting’ and Boost Employee Engagement

Author Becky Canary-King

The concept of “quiet quitting”— the idea of only performing the bare minimum of the job – went viral this past year, sparking debate and taking over social media with hashtags and commentary. Yet despite its buzzword status, quiet quitting isn’t new. Employees “working for the weekend,” and the underlying issues of employee engagement, are an ongoing concern for employers. 

Quiet quitting can arise when employees feel underpaid, overworked, unappreciated, or unfulfilled in their professional role. There are many ways to foster a positive workplace culture that encourages employee engagement, promotes productivity, and prevents quiet quitting. Here we offer five suggestions for doing so:

  1. Create Clear Job Descriptions. Employees should have clear expectations for their position, even if they are expected to have some flexibility and jump in as needs arise. If their job duties change significantly, their job description – and title and compensation – should also be updated.
  2. Give Consistent Feedback. Performance reviews should not be limited to the end of the year. Instead, check in with employees to address performance concerns as they arise, so there is no hiding from responsibilities. For instance, at LP, we recently transformed our process for giving and receiving feedback via casual “check-ins” and annual reviews to “F2=Feedback + Future” conversations, which are intentional discussions between group leads and their team members to share feedback and discuss future plans and goals. For more information on our revamped feedback process, see Feedback Is a Vital Tool of Lifelong Learning—How We’ve Revamped the Process.
  3. Reward High Performers. Employees who don’t see upward mobility or their role in the company’s future may struggle with motivation, thinking there is no point in working hard. Creating a work environment where high performers are rewarded with promotions or increased compensation motivates employees to continue putting their best foot forward.
  4. Don’t Ignore Social Connections. Particularly in remote or hybrid work environments, workplace “silos” can become prominent, and employees can feel disconnected from their teams. Conversely, employees who are integrated into their work teams are more motivated to not let their team members down with poor performance or missed deadlines. Social connections within the workplace can also foster a sense of camaraderie and fulfillment. 
  1. Foster a Compassionate Workplace. The hustle culture often ignores mental health and can lead to burnout or quiet quitting. By paying attention to employees’ well-being – physical and mental – employers can reduce absenteeism, boost productivity, and improve morale. A compassionate workplace also helps employees feel respected and recognized.

Building an engaged workforce isn’t a one-size-fits-all formula; it’s an ongoing process that is tailored to each employer’s work environment.  LP’s employment and executive compensation attorneys can help you develop a strategy for boosting employee engagement and preventing quiet quitting. If you have questions, please don’t hesitate to reach out.

Reminder: Chicago Employers Must Complete Annual Anti-Harassment Training Requirement by July 1st

Author Becky Canary-King

The recently amended Chicago Human Rights Ordinance requires all Chicago employers to provide the following anti-harassment trainings on an annual basis:

  • One hour of sexual harassment prevention training for all employees
  • One additional hour of sexual harassment prevention training for supervisors and managers
  • One hour of bystander training for all employees

The amended ordinance took effect July 1, 2022, which means that Chicago employers must provide these trainings by July 1, 2023.

LP offers a training program that meets Chicago and Illinois requirements. Alternatively, employers can use Chicago’s template training materials.  If you would like to schedule a training, please reach out. A member of our Employment & Executive Compensation team would be happy to speak with you.

How the Secure Act 2.0 Affects ESOPs, 401(k)s, and Other Retirement Plans

Authors Kevin Burch, Kristy Britsch, Kenneth Kneubuhler

The Secure Act 2.0 of 2022, enacted in the closing days of 2022, makes a substantial number of changes to tax-qualified retirement plans, most of which are intended to increase plan coverage and retirement savings. Although we continue to digest the hundreds of pages of new law, here we summarize certain key changes that affect ESOPs, KSOPs, and 401(k) plans:

  • Cash-Out Limits. The limit for involuntary distributions to a participant prior to attaining normal retirement age is increased from $5,000 to $7,000 for distributions after 2023.  The current maximum cash-out limit in ESOPs, KSOPs, and 401(k) plans is $5,000 and generally applies to participants that terminate employment with a vested account balance lower than the cash-out threshold in the plan.
  • RMD Age. The age to start taking “required minimum distributions” increases to age 73 in 2023 for participants who reach age 72 in 2023 through 2032 and to age 75 for participants who reach age 74 in or after 2033. Also, beginning in 2024, plans will not be required to include Roth contribution balances in required minimum distributions prior to the participant’s death.  This represents a further change from the increase to age 72 under the first Secure Act, which took effect January 1, 2020, for distributions to participants born after June 30, 1949.
  • Deferral of Gain on Stock Sales to ESOPs. The rule allowing C Corporation shareholders to defer gain on the sale of shares to an ESOP is expanded to cover S Corporation shareholders, but only for sales to an ESOP after 2027 and only for up to 10% of the gain. 
  • Standards for FMV on sales to ESOPS. The Department of Labor, in consultation with the Internal Revenue Service, is directed to provide guidance on acceptable standards and procedures for establishing the “good faith fair market value for shares of a business” to be acquired by ESOP. We will provide additional information on this topic as it is released.
  • Mandatory Automatic 401(k) Enrollment. Starting in 2025, new KSOPs and 401(k) plans (those adopted after the December 29, 2022 enactment date) will be required to automatically enroll eligible employees, at a contribution rate of at least 3%. Thereafter, these new plans must increase a participant’s automatic contribution rate by 1% each year until the participant’s contribution rate reaches at least 10% (but the plan may provide for increases up to 15%). As under the current law, participants may stop contributions or change their deferral rates.
  • Coverage of Part-Time Employees in KSOPs and 401(k) Plans. Current law requires part-time employees who worked at least 500 hours in three consecutive years beginning after 2020 and reach age 21 be allowed to make 401(k) contributions.  January 1, 2024, is the first date that this provision could require a part-time employee be eligible. The new law reduces the service requirement to two years effective for plan years beginning after 2024. Neither the prior law nor the new law requires that the part-time employees be allocated employer contributions.
  • Vested Employer Contributions may be treated as Roth Contributions. Beginning with contributions made after the December 29, 2022 enactment date, plans may allow participants to elect to have employer-matching contributions and nonelective contributions that are fully vested when made to be treated as Roth contributions.
  • Catch-up Contributions by Highly Compensated Participants must be ROTH. Beginning in 2024, 401(k) catch-up contributions by a participant who had compensation over $145,000 (adjusted for cost of living) for the prior calendar year must be treated as Roth contributions. Participants earning no more than $145,000 in the prior year must be allowed to elect Roth treatment for their catch-up contributions (assuming at least one participant eligible for catch-up contributions earned over $145,000 in the prior year).

If you have any questions about Secure Act 2.0, please reach out to a member of LP’s ESOP Team.

2023 Compensation Check Up: Legal Updates

Authors Laura Friedel, Becky Canary-King

Compensation is always a top-of-mind issue for employers, but on the heels of the “Great Resignation,” and amidst ongoing labor shortages, economic uncertainties and evolving legal requirements, many employers are reassessing their compensation practices.

In addition to compensation best practices to assist with attracting and retaining talent, employers must make sure to comply with state-specific legal requirements. Here we share new legal requirements for employers.

  1. Prepare to Apply for Illinois Equal Pay Registration Certificate. Employers with 100 or more employees in Illinois must apply for the Certificate between March 24, 2022, and March 23, 2024, and recertify every two years after that. Companies will be notified by the Department of Labor when it is time for them to register and will be given at least 120 days’ notice of their individual deadline. Employers will need to provide certain pay, demographic, and other data as part of the application process. If you have not received the notice from the Department of Labor yet, get started now by considering how you will answer the questions in the compliance statement and report the necessary information.
  2. Ensure Job Postings Comply with New Pay Disclosure Requirements. California, New York City, and Washington State have joined Colorado in requiring some or all employers to disclose wage ranges in job postings. Notably, these requirements include jobs that may be performed remotely in these states. Additionally, Rhode Island joins a growing list of states that require disclosure of the salary range for a position upon request. Employers must understand what information needs to be included in job postings to avoid inadvertently violating these laws. Employers that don’t currently practice pay transparency should also think about how they might get in front of requirements as pay disclosure laws continue to spread. Companies should also consider wage transparency and equal pay laws’ impact on the due diligence process in M&A transactions
  3. Be Aware of Minimum Wage and Minimum Salary Increases. 2023 brings minimum wage increases in many states and localities, as well as increases to the minimum salary that employees must receive to be eligible to be exempt from overtime requirements. Make sure that you are aware of – and complying with – the minimum wage and minimum salary requirements in the jurisdictions where your employees perform work, including the requirements in the locations where you have any remote employees.

For additional information on employment-related best practices, refer to LP’s 2023 Employment Law Checklist.

2023 Compensation Check-Up: Four Questions to Ask About Your Compensation Practices

Authors Laura Friedel, Becky Canary-King

Compensation is always a top-of-mind issue for employers, but on the heels of the “Great Resignation,” and amidst ongoing labor shortages, economic uncertainties, and evolving legal requirements, many employers are reassessing their compensation practices.

Here we share some questions to help guide you.

  1. Is Our Compensation Competitive? Pay isn’t the be-all, end-all to employee recruitment and retention, but it’s important. Employees who feel that they are underpaid are far more likely to entertain another opportunity. If you haven’t done so recently, look closely at how you compensate your employees to ensure that they are being paid appropriately – both inside the company and in the industry/marketplace. If you cannot offer higher salaries, there are other ways to remain competitive. Many employers offer new hire signing bonuses, home office allowances, bonus opportunities, paid professional development opportunities, and generous paid time-off policies.
  2. Are Our Compensation Practices Fair? Employers should ensure that they have a solid rationale for compensation determinations and that there aren’t inappropriate pay disparities that appear to be linked to gender, race, ethnicity, or other protected classes. If a self-audit uncovers any areas for concern, employers should make necessary changes. This is particularly important for Illinois employers preparing to apply for their Equal Pay Registration Certification.
  3. Does Our Compensation Boost Retention? Research shows that helping employees feel valued and part of something bigger is vital to boosting retention. While there are non-monetary ways employers can do this, employers should also consider different compensation arrangements that help put the company’s proverbial “money where its mouth is.” Some examples of ways to help employees feel more invested in their work aside from salary increases are profitability-based bonus pools, phantom equity programs, and long-term bonus programs that allow employees to share in the company’s growth, or transaction bonus programs that enable employees to share in sale proceeds if the company is sold. These kinds of deferred compensation programs can present potential complications so they must be documented in writing with clear terms and crafted with the help of an attorney who understands the applicable tax requirements. When done properly, such programs can create a stronger link for employees between their work and the success of the company.
  4. Are our Compensation Practices Compliant? Many states have new compensation based legal requirements. Employers should ensure they are complying with any state-specific laws that may impact minimum wage and overtime compliance, equal pay reporting, and pay transparency in recruiting/hiring.

For additional information on employment-related best practices, refer to LP’s 2023 Employment Law Checklist.

M&A Diligence Considerations Related to Wage Transparency Laws and Equal Pay Act

Authors Kevin Slaughter, Becky Canary-King

Several states – including ColoradoCaliforniaNew York, and Washington – have wage transparency laws that require employers to post wage ranges in their job postings. Additionally, a growing list of states require disclosure of the salary range for a position upon request and prohibit an employer from requesting an applicant’s salary history. 

These laws seek to promote transparency and fairness in the workplace. By requiring employers to disclose salary information,  these laws aim to reduce the gender pay gap and promote greater equality in the workforce.

Though the specific provisions of these laws vary from state to state or apply only to specific industries, for the most part, these requirements apply to jobs that may be performed remotely in these states. This means that, even if an employer’s home state doesn’t have wage transparency laws, if the job could be performed remotely, the wage transparency laws of other states will likely apply.

Accordingly, all employers must understand what information should be included in job postings to avoid inadvertently violating these laws. The penalties for non-compliance vary depending on the applicable law and the jurisdiction where the violation occurs, but penalties could include fines, loss of business license, public disclosure of violation, and possible legal action.

These state requirements are in addition to the federal Equal Pay Act, which prohibits employers from discriminating against employees based on gender in the payment of wages or benefits for substantially equal work. It also prohibits retaliation against employees who assert their rights under the law. 

Not only do employers need to be aware of equal pay requirements with their own employees and concerning their own compensation practices, but the laws can also impact M&A transactions. 

When conducting M&A due diligence, it is important to assess the target company’s compliance with wage transparency laws and the Equal Pay Act. This involves reviewing the company’s policies, procedures, and records related to compensation, as well as any applicable state and federal laws governing wage transparency.

Here are some steps to consider when conducting M&A diligence related to compliance with wage transparency laws:

  • Review the target company’s compensation policies and procedures to determine if they have established guidelines for wage transparency and pay equity.
  • Review the target company’s past job postings to confirm compliance with wage transparency laws. 
  • Review the target company’s job application and interview process to confirm compliance with laws prohibiting requests for salary history.
  • Review the target company’s records related to compensation, such as employee pay stubs, time records, employment contracts, and any internal compensation audits, to assess whether there are any discrepancies in pay between employees doing similar work.
  • Assess the target company’s compliance with federal and state laws related to wage transparency, including the Equal Pay Act and state laws requiring employers to provide information about employee compensation upon request.

The attorneys in LP’s Corporate and Employment & Executive Compensation Groups are available to answer any questions regarding wage transparency laws or the Equal Pay Act, whether in the ongoing management of your business or in connection with M&A transactions. If you have any questions, please don’t hesitate to reach out.

NLRB Rules that Standard Confidentiality and Non-Disparagement Provisions in Severance Agreements Violate Federal Law

Authors Peter Donati, Laura Friedel

On February 21, 2023, the National Labor Relations Board (NLRB) issued its decision in McLaren Macomb [1], overturning recent precedent and finding that giving an employee a severance agreement containing commonly used confidentiality or non-disparagement provisions violates the employee’s rights under the National Labor Relations Act (NLRA). This decision means that employers that use severance agreements with non-supervisory employees need to review – and likely revise – their standard forms.

This case arose after a unionized hospital in Michigan furloughed nearly a dozen employees in June 2020, offering each of them a severance agreement in exchange for releasing employment claims. The severance agreements contained broad confidentiality and non-disparagement provisions that prohibited the employees from disclosing the terms of the severance agreement to any third parties and from making statements to other employees or to the general public which could disparage or harm the hospital or those affiliated with it.

The NLRB found that the confidentiality provision would prohibit an employee from discussing the agreement with union representatives and other employees and thus unlawfully restricted the employees’ right to communicate with others about their employment and to assist co-workers and former co-workers with workplace issues.

Similarly, the NLRB found that the non-disparagement provision was impermissible because it would prohibit statements beyond the “disloyal, reckless or maliciously untrue” statements by employees that the Supreme Court has found can be limited by an employer.

Because these provisions “interfere with, restrain or coerce employees’ exercise” of their rights, the NLRB found that giving an employee an agreement containing them violates the NLRA.  The NLRB’s decision in this case overturned recent precedent that looked to the circumstances of the severance agreement, rather than just to its text, to assess permissibility.

Who the Decision Covers – and Doesn’t Cover

The NLRB’s decision impacts all US employers that use severance agreements with non-supervisory employees – whether their workforce is unionized or not. It is important to note, though, that because the NLRA only applies to employees in non-supervisory roles and doesn’t cover supervisors, managers, and executive-level roles, severance agreements with these employees are not affected by the McLaren decision.

What does this mean for Severance Agreements going forward?

In light of the McLaren Macomb decision, it is critical that employers revisit standard separation agreements and adjust confidentiality and non-disparagement language.  However, what exactly employers choose to do in response will depend on their risk tolerance.  Employers wishing to avoid a potential violation altogether should remove confidentiality and non-disparagement provisions from their separation agreements with non-supervisory employees.  However, it remains to be seen whether adding a clear disclaimer that nothing in the agreement limits the employees’ rights under the NLRA (which the agreements in McLaren Macomb did not include) will suffice to avoid a violation.   As such, and until the NLRB speaks further, employers may choose to take some risk and use limited confidentiality and non-disparagement clauses together with a clear disclaimer rather than removing them all together.

Next Steps

The NLRB’s decision is subject to appeal, but, going forward, the NLRB is likely to closely scrutinize any severance agreement that includes confidentiality or non-disparagement provisions. In the wake of this decision, employers should consider taking the following steps:

  • Reviewing and updating form severance agreements that are used with non-supervisory employees.
  • Removing confidentiality and non-disparagement provisions from severance agreements if they restrict employees’ rights under the NLRA or (depending on risk tolerance) carefully tailoring such provisions to be as narrow as possible and adding a clear disclaimer that nothing in the agreement restricts the employee from assisting co-workers or former co-workers with workplace issues, from communicating with others about their employment, or from engaging in other protected concerted activity.
  • Including severability language in the severance agreement so that the remainder of the agreement remains intact even if the confidentiality or non-disparagement provision is deemed impermissible.

If you have questions about the NLRB’s decision, severance agreements, or other employment matters, do not hesitate to reach out to LP’s Employment & Executive Compensation Group.

[1] 372 NLRB No. 58.