US merger and acquisitions activity had another busy year in 2019, with total domestic M&A transactions at USD 1.1659 trillion, almost equal to 2018's momentous year, according to reports from the fifth annual global transactions forecast by Oxford Economics Ltd. and Baker McKenzie.
With these transactions, many companies have been looking to acquire businesses with unionized facilities. Purchasers unfamiliar with operating unionized sites, though, can sometimes move too quickly, potentially triggering a host of legal problems and employee relations headaches. To protect against these issues, companies will want to take care and evaluate the following subjects when acquiring a unionized facility.
1. The structure of the acquisition matters
Whether the acquisition takes place as a stock transaction or an asset transaction could have a significant impact on the status of the existing union as well as the company's obligations with the union. If the acquisition is structured as a stock transfer, the acquiring company steps into the shoes of the target and is obligated to abide by the terms of the existing collective bargaining agreement.
This means that the acquiring company is not able to change the terms and conditions of employment for the employees covered by the existing CBA during the term of the contract without the union's agreement. Moreover, the National Labor Relations Board has held that it is a violation of applicable labor laws for employers to apply economic pressure to force a union to reopen negotiations mid-contract.
On the other hand, if the acquisition is structured as an asset transfer, depending on a number of factors discussed below, the acquiring employer may not be obligated to assume the existing CBA, or in some cases, even recognize the union.
2. Early strategic planning is important in asset deals
In an asset deal, the purchaser is obligated to recognize and bargain with the predecessor's union if the purchaser is deemed a labor successor. In general, a company is deemed a labor successor when: (1) the majority of the company's workforce was previously employed by the predecessor and (2) there is substantial continuity of the two companies' business operations.
With this, if the purchaser is not acquiring the employees as part of the transaction, or if the previously union-represented employees will be merged with a larger group, there may not be any continued obligations between the purchaser and the union.
Likewise, if the business of the purchaser is substantially different than the predecessor's business and the employees are performing different jobs, there also may not be an obligation for the purchaser to recognize the union. The purchaser should therefore carefully analyze how it intends to operate well before the company takes over the operations, so it can potentially make strategic decisions and not inadvertently waive any rights.
Even in situations in which the purchaser is a labor successor, the purchaser generally has the right to not adopt the CBA that was in place between the predecessor and the union. Instead, the purchaser may set different initial terms and conditions of employment and then bargain with the union for a new CBA. Doing this can be important because, as discussed in more detail below, the CBA is the contract that governs the terms and conditions of the bargaining unit employees' employment. Companies will want to craft the applicable CBA specific to their business and operations, not the predecessor's.
Importantly, the purchaser can lose its right to establish terms and conditions different from those contained in the predecessor's CBA if the purchaser is deemed a perfectly clear successor. The purchaser can be deemed a perfectly clear successor if it misleads the predecessor's employees into believing they will be retained or hired after the acquisition without changes to their wages, hours, or terms and conditions of employment.
If deemed a perfectly clear successor, the purchasing company waives its right to establish new terms and conditions of employment and is obligated to follow the predecessor's CBA as the status quo until the company can potentially negotiate new terms. To avoid being considered a perfectly clear successor, the purchasing company should make clear that it will not be adopting the existing CBA, but instead that any offers of employment post-acquisition will be under new terms and conditions.
Special care should be taken at every step of the transaction, including in the transaction documents, in all announcements and employee communications and in any offer letters or hiring documents provided to the employees.
3. Strongly weigh negotiating a new CBA
Even if not obligated to do so, companies can be tempted to simply adopt the predecessor's CBA. After all, the facility's employees and supervisors are likely familiar with the CBA, and negotiating a new contract can take up to a year or more to finalize. However, before adopting the predecessor's CBA, companies should take a very careful look at the CBA's provisions and consider the impact over time from a financial and an operations perspective.
An important starting point is to evaluate the CBA's economic provisions, including wages, bonuses and benefits. Even if the employees' current wages are not higher than what the company is willing to pay, many CBAs include automatic annual increases with little or no consideration for employee performance.
There can be significant costs associated with medical benefits and other benefits, too, especially if the company does not have the ability under the CBA to change those benefits mid-contract. If there is an existing pension plan, the employer also would be responsible for any required contributions thereunder.
Possibly even a larger liability relates to multiemployer pension plans. Many multiemployer pension plans are underfunded, and employers that withdraw can be responsible for significant withdrawal liability costs. This alone would be reason to not adopt the predecessor's CBA.
A company should also strongly weigh whether the CBA's noneconomic provisions fit with its own specific business and operations. Important provisions to consider include the CBA's procedures regarding how employees are promoted, how overtime is assigned, employee hiring and layoffs, employee grievances and arbitration, company neutrality provisions, no strike clauses, subcontracting and management rights provisions.
Once a CBA is in place, it establishes all of these items for the term of the CBA, which is typically three to five years. What's more, the provisions then serve as the starting point for the next CBA negotiation, and it can be extremely difficult to reduce or pull back on provisions once they are established. Because of this, most companies will want to invest the resources to negotiate a new CBA at the time of the acquisition rather than adopting the predecessor's CBA.
4. Operating under a CBA can be very different
If a company has never operated a facility that has a unionized workforce, it may not fully appreciate the stark differences in everyday operations as they relate to interactions with the bargaining unit employees.
One of the main differences in operating a unionized facility is that often, the company has less flexibility with a number of matters. For instance, in a non-union setting, the company has wide discretion in hiring, promotions and employee terminations. In union facilitates, though, hiring decisions can be limited by recall rights of previously laid off employees or by requirements to first offer the position to an existing bargaining unit employee.
Similarly, many CBAs have strict procedures on how employees may be promoted. Where the company otherwise might be able to promote based on merit, many CBAs rely on seniority. Employee terminations also are typically limited. Generally, in the non-union setting, employees are at will, and the company has wide discretion to act as it sees fit. Most CBAs, though, restrict terminations to those for cause and violations of established work rules. This can make it difficult to dismiss underperforming employees.
Although there are many unionized facilities with excellent employee-management relationships, it is not uncommon for an adversarial "us versus them" culture to arise, especially during contract negotiations, in situations of discipline and terminations and even with larger business decisions.
Depending on the worksite, employee grievances can be commonplace, and the handling of these grievances often requires multiple steps of management involvement and review, written responses and appeals. Failure to correctly follow the steps can result in a decision against the company and in favor of the employee. Companies also have to be mindful of the precedent created by grievance and arbitration decisions, as final decisions can arguably govern similar matters in the future.
When acquiring a unionized facility, a company must be mindful of these differences. Even outside the terms of the CBA, operating with a union can affect how the company communicates, interacts and even motivates its workforce. Ignoring these difference could unnecessarily cause rifts in the workforce that have long-lasting effects on the successful operation of the business.
Article first published in Law360 on 6 January 2020.