Don’t Let Employment Issues Derail Your Accounting Firm’s Deal – Part 1

Partners Russell Shapiro and Laura Friedel recently spoke at the 2023 BDO Alliance USA Conference on employment issues that impact accounting firm deals. In Part 1 of a two-part series, we share tips on transferring employees from the seller to the buyer to help accounting firms avoid situations where employment issues could derail – or devalue – a potential merger or acquisition. You can read Part 2 here, where we share tips on potential diligence deal killers, restrictive covenants, and other potential issues.

Tip #1: Make sure your plan to transfer employees is consistent with your deal structure.

Employment issues rarely drive the decision on whether a deal will be a stock sale or an asset sale, but the deal structure dictates what the buyer and seller need to do to transition the employees.

In an asset sale, the employment relationship is terminated and a new one is created. This means that the seller needs to do all the things that an employer would normally do when terminating an employee, including paying out final wages and vacation pay (where required by contract or state law). Notice of termination, stay bonus, and severance provisions may also be triggered by an asset sale, so it is important to be aware of those requirements and either terminate them (by agreement with the employee) or honor them.

On the other hand, in a stock sale or merger, there is a continuity of employment – whether you want it or not. This means that you don’t need to worry about things like payment of final wages and triggering severance provisions. But if a firm plans to change one or more employees’ employment terms or plans not to continue the employment of certain individuals post-closing, those changes will need to be implemented in the same manner they would have been at any other time during employment, taking into consideration relevant contractual or legal requirements.

Tip #2: Decide early how you will handle the logistics of transferring employees from the seller to the buyer.

Often overlooked as part of deals, the logistics of getting employees from the seller to the buyer is the greatest opportunity for error.

Documenting the transfer.

In almost all cases, it makes sense to provide employees with a formal document that notifies them of the deal and of how (if at all) it will impact them. What this document looks like will depend on a number of factors, including the deal structure and what is changing. In an asset deal, it is important to confirm whether it’s possible to assign any existing agreements or whether it’s necessary to enter new ones, as well as whether there are any provisions in the existing agreement that the buyer wants to make sure do not continue post-closing. In a stock deal, it’s even more important to understand existing employment terms, and if there are any the buyer does not want to take on, make terminating those agreements or provisions a closing condition. Finally, if the buyer is entering a new jurisdiction, be sure to confirm that the firm’s standard agreements comply with local requirements, or risk having important provisions (such as non-solicits) be unenforceable.

Payment of Wages.

If the deal is an asset sale, the closing triggers the requirement that employees be paid final wages. Depending on state law, payment may be required as early as the closing day itself, which can create logistical challenges, as payroll generally has to be run at least a few days in advance, and the closing date is often confirmed just the day before. If the transaction is a stock sale, there’s no legal requirement to pay final wages, but the purchase agreement may require payment of wages earned through the closing date.

PTO and Vacation Pay.

There are two primary issues relating to PTO/vacation time: whether it needs to be paid out and how to transition employee from the seller’s policy to the buyer’s policy.

As with final wages, pay out of PTO/vacation time isn’t an issue for stock deals but is an issue in asset deals. Whether a seller must pay employees the value of PTO/vacation time depends on state law and the seller’s policies. If either the law or policy requires payment for accrued and unused PTO/vacation on termination of employment, then it technically must be paid based on the transition to buyer’s employment, though there may be the opportunity to carry an employee’s PTO/vacation balance over with their agreement. When PTO/vacation is paid out, it is also wise to provide employees with a corresponding amount of unpaid leave with the buyer so that prearranged plans aren’t put in jeopardy.

Whether in a stock sale or an asset sale, moving from the seller’s paid time off approach to the buyer’s can also create confusion and concern for employees if the two approaches are different. For instance, where employees are moving from a traditional accrual policy to a flexible (sometimes called “unlimited”) time off policy, if there isn’t some type of compensation for the accrued time they had with seller, they are likely to feel that they are “losing” their accrued time. When employees are moving from a more generous accrual policy to a less generous policy, they are even more likely to feel that they are being harmed in the transition. To avoid (or mitigate) these concerns, it’s important to plan ahead and focus on messaging. In many cases, a transition period will help temper employee concerns.

Employee Benefits.

Open enrollments do not always line up between companies, and they rarely align with closing dates. When considering the impact of a change in benefits, both the buyer and seller should consider whether employees will be required to restart deductibles and out-of-pocket maximums and, if so, consider offering bonuses or other benefits to make up for the increased cost during the transition period. Also critical in the logistics of transferring benefits is how the seller’s 401(k) plan will be handled. In a stock deal, if the seller’s 401(k) plan is being terminated, it is far easier to do so before closing.

Immigration and Visa Transfers.

Buyers need to analyze whether they want to rely on existing Form I-9s and eVerify searches or request new forms and searches. This analysis will be done in collaboration with legal counsel as part of the diligence process, with the ultimate decision depending on the sufficiency of the seller’s records and the buyer’s preference. In addition, in an asset sale, if any of the transferring employees is on a visa, their visa needs to be transferred to the new employer. Firms with employees on visas that are involved in an asset sale should consult with immigration counsel early in the process so there aren’t any last-minute surprises.

Synchronizing Employment Practices.

Beyond the legal aspects of moving employees, both the buyer and seller have an interest in making sure that employees transition smoothly to new policies. Human resources teams at both firms should spend time together discussing their respective policies and practices and identifying areas where they need to synchronize or educate and transition, including changes to standard policies, compensation (including commission and other incentive arrangements, overtime, and reimbursement limits), and roles (such as exempt status and independent contractors).

Transition Services Agreements.

There are some circumstances where either the buyer isn’t ready to accept the employees at closing, or there is a benefit to keeping the employees employed by the seller for a set period of time. In those cases, the parties should consider a Transition Services Agreement. A Transition Services Agreement allows the employees to stay on the seller’s payroll (and on seller’s employee benefit plans) until the buyer is ready to accept them. Transition Services Agreements can be helpful in a number of situations, including the following:

• When payroll or employee benefit plans aren’t ready to be transferred
• To avoid doubled social security deductions
• To avoid new deductibles and/or out-of-pocket maximums on the new health insurance plan
• When part of the seller’s business is continuing
• When part of the team is needed only for a short-term basis

Firms considering a Transition Services Agreement should be sure to check with their insurance, benefits and payroll providers to make sure that such an arrangement is allowed under their agreements. If you are considering an accounting firm considering a sale or acquisition, please don’t hesitate to reach out. LP knows accounting firms. Our attorneys are trusted advisors for managing partners, executive committee members, key stakeholders, and HR professionals working in and for accounting firms.