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Four Potential Issues for Purchasers Exploring the Acquisition of a Unionized Business

By Bradley G. Kafka

Experienced business people and lawyers are aware of the thorough due diligence necessary during the acquisition of any business. When a purchaser is exploring the acquisition of a business whose employees are represented by a union or by multiple unions, the purchaser is confronted with risks and financial exposure that require additional and sometimes complex due diligence.

The first document that a purchaser must explore when considering the purchase of a business that has employees who are represented by a union or unions is the collective bargaining agreement or agreements (“CBAs”) by which the potential seller may be bound. CBAs detail the wages, hours and working conditions covering employees represented by a union or unions. However, because the National Labor Relations Act (“NLRA”) governs the interactions between unions and employers, a CBA is different from other contracts. As an example, a CBA does not expire when the term of the CBA is over. Absent a specific provision in the CBA, it continues indefinitely and an employer may not change its terms without first bargaining with the union to impasse.

Second, a purchaser should determine whether the prospective seller is obligated to contribute to multi-employer pension plans. The CBAs will reflect whether the potential seller is so obligated, but the details of the employer’s obligations are set out in separate pension plan trust documents. Multi-employer pension plans are defined benefit contribution plans to which many employers contribute on behalf of their union employees. Most multi-employer pension plans are underfunded; this means that they have insufficient assets to cover the defined retirement benefits they have promised to pay employees. If an employer that contributes to a multi-employer pension plan ceases to make pension contributions or ceases to have an obligation to make contributions, then it is assessed “withdrawal liability.” The calculation of withdrawal liability is complex, and requires the use of an independent pension actuary. In many instances, the actuarial calculations result in significant liability that may have a material effect on the potential purchase of a business.

Third, a purchaser must determine whether it is prepared to adopt the CBA or CBAs already in place between the potential seller and its union or unions. If the purchase is a stock purchase, assumption of the CBAs is automatic. If the purchase is an asset purchase, then the purchase agreement must reflect whether or not the purchaser is assuming the CBA, or any of the obligations under the CBA, and must detail which of the contract obligations, including the pension obligations, are the responsibility of the purchaser and which are the responsibility of the seller. 

Fourth, the purchaser should determine whether it wishes to hire the existing workforce, but not adopt the CBA. A purchasing employer may hire the existing workers, but not assume the existing CBA, although the process for achieving this result has become more difficult due to recent National Labor Relations Board (“NLRB”) decisions. If a purchaser announces in advance of closing that it does not intend to adopt the existing CBA, sets forth in detail the initial terms and conditions of employment that it intends to put in place, and offers to bargain with the union about possible changes to those terms and conditions after it acquires the business and begins operations, then, based on traditional interpretations of the NLRA, it would not have an obligation to adopt the existing bargaining agreement. However, recent memoranda by the NLRB’s General Counsel have left open the question of whether an employer may be required to adopt the CBA when it is “perfectly clear” it intends to hire all or substantially all of the existing workforce. Because this is a dynamic area of the law, employers should take particular care before attempting to hire an existing workforce but not adopt the existing CBA.

The above discussion outlines only some of the potential issues facing purchasers who wish to acquire a business that is bound by union agreements. Purchasers must undertake careful due diligence, with the assistance of experienced labor counsel and pension actuaries, to analyze the risks associated with purchasing a unionized business.