To Terminate Or Not Terminate, That Is The Question.
Whether selling, acquiring, or restructuring a business, the complex issue of employment relationships and what to do with them should be considered as early in the process as possible. There are often sound business and legal reasons, affecting all sides of a deal/restructure, for the selling entity to formally terminate employment relationships with its employees prior to the close of a transaction. This is true even where the parties anticipate that the universe of the seller’s employees will seamlessly commence employment with the acquiring entity. On the other hand, there are also competing and equally compelling reasons not to terminate those relationships, making the risks of doing so “not worth it.”
Terminating the employment of a seller’s employees can mitigate risks of exposure to liability for employment-related claims and provide a bright-line date of termination from employment by one entity before employment commences with another entity. This is particularly beneficial if the subsequent employment will likely be with the entity acquiring the business, and the seller’s former employees will continue to work in the same facility post-acquisition, performing the same functions, using the same equipment and reporting to the same management. A formal and clearly documented employment termination protects both the seller and the buyer.
On the other hand, the costs of terminating employment relationships can be significant. At termination, employees must be paid all wages owed, accrued vacation time, and potentially severance pay. These costs may render employment separation unattractive. In addition, there are practical implications of employment separation that can complicate the buyer’s transition and create unwanted delays in setting up operations, payroll, and benefits. A seller may also decide not to terminate its employees in the interest of maintaining confidentiality about the transaction and avoiding uncertainty about retaining the necessary personnel to promote a smooth transition in ownership.