Employee Classification and M&A

By: Mark Tarallo

A Massachusetts Superior Court judge recently held up the sale of The Boston Globe (and related entities) to Red Sox owner John Henry, as a result of a restraining order filed against the Worcester Telegram & Gazette, part of the New England Media Group along with The Boston Globe. While the injunction was eventually dissolved and the sale completed, it did create some tense moments in the process. The suit was filed by a class of newspapers carriers, claiming that they were misclassified as independent contractors when they should have been treated as employees. While the actions that gave rise to the suit happened several years ago, employee classification issues are back in the spotlight. The United States Department of Labor budget for 2014 includes a line item of $10 million for grants to the states to investigate worker misclassification and recover additional taxes. States that are looking to generate additional tax revenue will be quick to take advantage of these grants.

While most M&A transactions include representations from the seller regarding employee classification issues, parties considering an M&A transaction must place a renewed emphasis on spotting and dealing with any issues prior to the closing. Liabilities for misclassified workers can travel with the target, leaving the buyer to pay taxes and penalties that it did not anticipate, and indemnity claims may not completely resolve the problem. Sellers that cannot properly document their classification of employees run the risk of seeing their purchase price reduced, or deals fall apart completely, if buyers cannot get comfortable with the classification of the seller’s workers. Both sellers and buyers must work to identify and fix these issues prior to closing, to avoid having an unwanted third party (the DOL or a corresponding state agency) in their transaction.

For more information on this topic, please feel free to contact Mark.

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