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Merger and Acquisitions Due Diligence and Employee Classification

Author

Phil Britt

More by Phil
Author

Phil Britt

More by Phil

While it's not surprising that merger and acquisitions due diligence needs to go deep to uncover financial matters clearly stated in the books and to properly account for hard-to-value items such as goodwill, inventory and existing contracts, they also need the input of HR in order to properly classify any workers that will be performing duties for the successor business.

Protecting Your Organization Against Potential Liabilities

There are strict rules in place regarding the classification of workers, according to the IRS. If a firm provides workers with employee-type benefits, provides certain job-related tools and exerts certain control over the performance of an employee's job duties, workers may very well be considered employees.

The costs of misclassifications can run into the millions of dollars. In addition to federal and state legislators paying closer attention to violations, workers themselves can also filedirectly to the IRS to complain if they feel they've been misclassified.

Understanding Your Responsibilities

When it comes to M&A negotiations, the successor organization should ensure that the business being assumed doesn't have state wage or hour violations; however, such assurances shoudn't be taken at face value. So any organizations looking at a merger or acquisition should make sure HR is consulted during merger and acquisitions due diligence to protect against misclassification of employees and the potential resulting liabilities.

According to law firm Epstein Becker Green, organizations should use strong contractual language about what liabilities — including worker liabilities — the successor organization will accept as part of the transaction. The language should include ways to recover any previously unknown liabilities uncovered in an M&A audit, including a lower purchase price or the ability to walk away from the transaction.