Labor: 7 ways a company can protect its rights when working with a union contract

Strategies for the prospective purchaser when acquiring a business with a union contract

Buyer’s remorse often sets in when a purchaser realizes that a newly acquired business or facility comes equipped with a union contract that makes it both difficult and expensive to operate in the manner the purchaser anticipated. Frustration deepens when the purchaser realizes that it may take years and an uphill battle before meaningful changes can be made to the collective bargaining relationship. However, these types of situations can be substantially less cumbersome if the purchaser takes some simple steps prior to closing a deal. Below are the top seven ways a prospective purchaser can protect its right to begin operations on the most favorable labor and employment terms possible:

1. Consider the labor and employment aspects of the deal

In most acquisitions, the preclosing emphasis is on the financial aspects of the transaction; labor and employment matters are typically dealt with post-closing. However, by giving careful preclosing thought to these issues, important strategic advantages can be preserved. Serious consideration should be given to adding labor and employment counsel to the transaction team, not merely to review the collective bargaining agreement, but to assist in the strategic planning and help maintain leverage before closing.

2. Do labor and employment due diligence

Familiarize yourself with the terms of the union contract, as well as the history and relationship between the incumbent union and the employees by reviewing the demographics of the workforce, and specific information about the union (including past contract negotiations, strikes, organizing drives, employment agreements, benefit plans and grievances). Significant facts about the union not easily obtained from the seller can be compiled from other sources, such as the National Labor Relations Board, court records, union websites, newspapers and the contracts the union has with other employers.

3. Know the advantages of an asset purchase

Most acquisitions are either a purchase of the stock in the seller company (a stock purchase) or the purchase of designated assets (an asset purchase). A purchaser of stock generally must adopt the seller’s existing union contract and employ the seller’s workforce. A purchaser of assets has significant rights (and leverage) not available to the stock purchaser, including the right to establish its own initial terms and conditions of employment prior to closing, to hire or not hire the seller’s employees, and to accept, reject or renegotiate the seller’s union contract.

4. Review the seller’s union contract successorship clause

A “successors and assigns” clause purporting to require a purchaser to adopt the seller’s union contract is normally not binding on an asset purchaser unless the purchaser agrees to be bound. Therefore, the purchaser should not agree to adopt the union contract or hire the seller’s employees unless doing so would be advantageous. In response, the seller may refuse to sell or may make the purchase price prohibitive; however, such tactics are merely “deal points” subject to negotiation, rather than legal obligations. (Note: The one exception is where the seller’s union contract contains a clause making it a “condition of any sale” that the seller gets the buyer to agree to adopt the union contract, in which case the sale may be enjoined and/or the union may sue the seller for breach of contract).

5. Evaluate the seller’s union contract before closing, and tailor it to your needs as employer

Does the seller’s union contract contain significant restrictions on the right to conduct business in the most efficient and economical way possible? Restrictions on the ability to change, relocate, subcontract or discontinue operations may end up being more costly than direct labor costs. Analysis of the existing contract must be performed not from the vantage point of how the seller operated under that agreement but through the lens of how the purchaser intends to operate. Major changes essential to the success of the purchaser’s business are best achieved before closing.

6. Know your options and use them to accomplish the necessary changes

Generally, an asset purchaser has the following options: 1) assume the seller’s existing workforce and union contract, 2) do not assume the contract, operate with the same workforce under the pre-existing terms and conditions, then negotiate a new contract after closing, 3) set different initial terms and conditions, hire the seller’s workforce on the new terms, then negotiate a new union contract after closing, 4) set different initial terms and conditions, hire its own workforce, then perhaps recognize and negotiate with the union, or 5) meet with the union prior to closing and prior to hiring a workforce, and negotiate a new, less onerous agreement.

Knowing your options and being prepared to execute them is what provides a purchaser with the pre-closing leverage needed to persuade a resistant union to make necessary contract changes. Once the purchaser has done its hiring, it is only legally obligated to recognize and deal with the union if a majority of the employees the purchaser hired were formerly employees of the seller; if, on the other hand, a majority of the employees in the purchaser’s workforce came from other sources, the purchaser has no obligation to the union, rendering the purchaser’s workforce “union-free.” As most unions seek to avoid this, the union is more likely to agree to contract terms favorable to the purchaser.

7. Explore other—more favorable—options

Consider options such as relocating the business elsewhere, subcontracting all or part of the work or consolidating the purchased business with some of the purchaser’s existing businesses as part of your pre-closing strategy.

Keeping the above strategies in mind when purchasing a new business or facility can minimize the likelihood of suffering a severe case of “buyer’s remorse” when a purchaser inherits an unfavorable labor situation—particularly one that could easily have been changed or negotiated around prior to closing—and ensure that the purchaser begins its relationship with the seller’s union on a strong note. 

Contributing Author

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Howard Bernstein

Neal Gerber & Eisenberg Partner Howard L. Bernstein represents employers throughout the U.S. in labor relations and employment law matters and employment-related litigation, with...

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