Our Employment Team frequently works with our firm’s corporate lawyers to assist clients acquiring the stock or assets of another company. As part of the due diligence phase of such acquisitions, we ask questions and request documentation relating to the target company’s HR practices (employee benefit plans are also reviewed as part of this process). When looking at another company’s employment practices, what are the potential “red flags” that raise concerns over buying liabilities along with that company? Here is a list of some common problems encountered during the diligence process:

1. FLSA Misclassifications. We look for potential misclassifications where companies claim overtime exemptions for large numbers of employees on dubious grounds.

2. High Workers Comp Experience Modifiers. If the company’s loss experience significantly exceeds industry norms, this could indicate problems with health and safety practices or employee injury claims management.

3. Litigation Clusters. Almost every employer faces occasional claims from current or former employees. However, a significant number of recent claims with related facts and alleged violations can indicate compliance issues or widespread employee dissatisfaction.

4. Vague Commission or Bonus Plans. Ambiguous or incomplete compensation plans can result in disputes over payment of bonuses or commissions. We determine whether plans clearly explain when such amounts are earned and payable, as well as under what circumstances they can be modified or forfeited.

5. Out-of-Date Policies. When a company’s employee handbook has not been reviewed or revised for many years, this may indicate a lack of HR attention or resources.

6. Problematic Executive Employment Agreements. Do executive compensation provisions comply with deferred compensation and other tax rules? Have noncompetes and related restrictive covenants been written and updated in compliance with relevant state laws? Do the agreements’ termination sections provide a clear path for dealing with performance issues?

While these employment issues may not determine whether a deal closes, they can delay the process or raise questions with the buyer regarding the overall health of the target company’s attention to legal compliance concerns. Any company trying to position itself for acquisition should address these concerns prior to beginning the due diligence process in order to save time and avoid the need to answer the buyer’s concerns over exposure to future legal risk.

For more information, please contact me or your regular Parker Poe contact. Click here to subscribe to our latest alerts and insights.