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.

Illinois Passes Workplace Transparency Act and Other Legislative Changes Intended to Fight Workplace Harassment and Discrimination

In the latest of a series of major legislative development affecting Illinois employers, Governor Pritzker signed Public Law 101-0221 on August 9, 2019, which includes the new Workplace Transparency Act (the “WTA”) and also makes changes to the Illinois Human Rights Act and various other current laws. The WTA is an outgrowth of the #metoo movement and is intended to prevent harassment in the workplace and ensure incidents of harassment and discrimination are not kept buried from public disclosure, as allegedly happened for many years in the Harvey Weinstein situation. Most provisions of Public Law 101—0221 go into effect on January 1, 2020. The new legislation will impact what sorts of agreements can be put in place with employees, prospective employees, and former employees, how disputes relating to harassment and discrimination can be resolved, the training that must be conducted by employers, and what information about judgments and settlements must be disclosed to the government.

Restrictions on Agreements with Employees, Prospective Employees, and Former Employees

The WTA prohibits “[a]ny agreement, clause, covenant or waiver that is a unilateral condition of employment or continued employment” and that:

  • has the purpose or effect of “preventing an employee or prospective employee from making truthful statements or disclosures about alleged unlawful employment practices” or
  • “requires the employee or prospective employee to waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit related to an unlawful employment practice to which the employee or prospective employee would otherwise be entitled under any provision of State or federal law….”

The WTA clearly is targeting, in the first place, confidentiality and non-disparagement provisions that are imposed unilaterally by an employer and that purport to bar an employee from disclosing unlawful employment practices and, in the second place, mandatory arbitration agreements, jury waivers, and similar terms imposed unilaterally by employers that make it more difficult for employees to vindicate their rights.

The attempt to restrict the use of arbitration agreements by employers may run afoul of federal law which contains an expressed policy in support of such agreements as stated in the Federal Arbitration Act. This potential conflict between State and federal law likely will be sorted out in future litigation.

Certain Mutual Employment Agreements Qualify for Different Treatment

The WTA sets up two exceptions to the general prohibitions described above. First, an employer is permitted to enter into an agreement that would otherwise violate the WTA if the agreement “is a mutual condition of employment,” is in writing, is supported by “actual, knowing, and bargained-for consideration from both parties,” and does not prevent an employee or prospective employee from: (1) reporting good faith allegations of unlawful employment practices to appropriate federal, State, or local agencies enforcing discrimination laws, (2) reporting good faith allegations of criminal conduct to appropriate federal, State, or local officials, (3) participating in a proceeding enforcing discrimination laws, (4) making any truthful statements or disclosures required by law, regulation, or legal process, or (5) requesting or receiving confidential legal advice.

Settlement and Termination Agreements Also are Treated Differently

The second exception under the WTA involves “valid and enforceable settlement or termination” agreements that include promises of confidentiality related to alleged unlawful employment practices. To qualify for the exception, the following criteria must be met:

  1. “[C]onfidentiality is the documented preference of the employee, prospective employee, or former employee and is mutually beneficial to both parties”;
  2. The employer must provide notice, in writing, of the employee, prospective employee, or former employee’s right to have an attorney review the agreement;
  3. There must be valid, bargained for consideration “in exchange for the confidentiality”;
  4. There must not be a waiver of claims that accrue after the date of the agreement;
  5. The employee, prospective employee, or former employee must be given 21 days to review the agreement; and
  6. “[U]nless knowingly and voluntarily waived,” the employee, prospective employee, or former employee must be given 7 days to revoke the agreement.

It is worth noting that the WTA makes clear that employers can still require individuals to keep allegations of unlawful conduct confidential if they receive complaints or investigate them as part of their job or if they are a participant in an investigation.

New Training Requirements

Also part of Public Law 101-0221, a new provision has been added to the Illinois Human Rights Act that will require employers to provide annual sexual harassment prevention training to employees. The Illinois Department of Human Rights has been directed to produce a model training program, and employers will be able either to use that model program or one of their own that equals or exceeds the minimum standards. Beyond describing the subjects that must be part of the program, the legislation gives few details about how long the training must be, whether it must be participatory, and whether it must be in-person. One helpful part of the legislation is that employers who do not comply with the training requirement will be given a thirty-day period after being cited during which they can provide the training.

Expansion of IDHR Coverage

Besides the new training provision described above, Public Law 101-0221 also expands the Illinois Human Rights Act by adding protection based on perceived membership in a protected class, adding a new definition of “harassment,” providing protection from harassment for nonemployees (i.e., contractors and consultants) who provide services to an employer, and making clear that an employer’s “work environment” is not limited to the physical location to which an employee is assigned. The legislation also makes clear that an employer will not be liable for the harassment carried out by non-managers and non-supervisory personnel unless the employer becomes aware of the conduct and fails to take reasonable corrective measures. This mirrors the treatment under federal law for non-managers and non-supervisory personnel.

New Reporting Requirements

Beginning in July of 2020, employers who have experienced an adverse judgment involving sexual harassment or workplace discrimination in the prior calendar year will be required to make certain reports to the Illinois Department of Human Rights. The Department of Human Rights also will have expanded powers to request settlement information as part of an investigation of a charge. Information shared with the Department of Human Rights will not be subject to Illinois’ FOIA law.

Expansion of VESSA

Finally, Public Law 101-0221 also amended Illinois Victims’ Economic Security and Safety Act (VESSA). This statute protects victims of sexual and domestic violence and certain family and household members from discrimination and gives them certain leave and accommodation rights. With the changes recently enacted, VESSA now also protects victims of gender violence, which is defined as “(A) one or more acts of violence or aggression satisfying the elements of any criminal offense under the laws of this State that are committed, at least in part, on the basis of a person’s actual or perceived sex or gender, regardless of whether the acts resulted in criminal charges, prosecution, or conviction; (B) a physical intrusion or physical invasion of a sexual nature under coercive conditions satisfying the elements of any criminal offense under the laws of this State, regardless of whether the intrusion or invasion resulted in criminal charges, prosecution, or conviction; or (C) a threat of an act described in item (A) or (B) causing a realistic apprehension that the originator of the threat will commit the act.”

What Should Illinois Employers Do Now?

Faced with the above provisions, Illinois employers likely will want to take several steps.

First, because it will be difficult to show that an agreement is “mutual” for purposes of the WTA, employers will want to assume that most agreements signed by employees as a standard condition of their employment are going to be “unilateral.” For these agreements, the safest route will be to carve out an employee’s right to make truthful statements or disclosures about unlawful employment practices and to remove any provisions that might diminish an employee’s right to pursue employment-related claims.

Second, for certain agreements with high-level executives that are truly the product of bargaining and for settlement and termination agreements, to the extent terms are included that otherwise would violate the WTA, employers will want to make sure that the agreements contain appropriate recitations demonstrating that one of the exceptions in the statute would be applicable.

Third, employers will want to make sure they revise their policies and handbooks to reflect the protection of nonemployees from harassment and the changes to VESSA.

Fourth, employers will want to begin planning to conduct annual anti-harassment and discrimination training.

To the extent you have more questions about the WTA and the other provisions of Public Law 101-0221, you should feel free to contact us.


Google stops requiring arbitration of employment claims

It was less than a year ago that the Supreme Court ruled that employees could be required to individually arbitrate claims (and waive their right to participate in a class action), but arbitration agreements aren’t a silver bullet.  In fact, some employers are responding to local legislation and employee resistance by pulling back from arbitration requirements.

Just last week, Google responded to employee protests and announced that it would no longer require its workers to arbitrate employment related claims.  Read more about Google’s decision here.

Whether or not employee arbitration agreements make sense is a very company-specific decision.  Think carefully about what you’re trying to accomplish with these agreements and talk to your legal counsel about the risks and benefits.

New California Law Bans Choice Of Law Provisions In Employment Agreements

signing-contractCalifornia has passed a new law prohibiting employers from requiring workers to litigate claims under other states’ laws.

The law, which applies to agreements entered into, modified or extended beginning January 1, 2017, states that any agreement to pursue employment-related claims, including arbitration, outside of California or under the laws of another state violates public policy and is “voidable by the employee.” The new law codifies existing case law finding such choice of law provisions invalid.

This new law serves as a great reminder for California employers to review their employment agreements to make sure that they do not choose another state’s law. Likewise, multi-state employers with operations in California should make sure that the documents being signed by California employees either choose California law or are silent on what state’s law applies.