Hospitality Labor and Employment Law Blog

Hospitality Labor and Employment Law Blog

Workforce Management Issues in Mergers and Acquisitions

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With the financial crisis and recession behind us, mergers and acquisitions have picked up dramatically over the past several years. In 2015, more than 25,000 M&A deals were announced in the United States, valued at trillions of dollars, primarily involving companies in the hospitality, health care, pharmaceuticals, energy, and technology industries. This year and next, most financial experts foresee an increasing number of these transactions taking place.

In an M&A transaction, the buyer must determine whether it will acquire only the assets of the target company or acquire both the assets and liabilities of that company. Based on that determination, the transaction can be structured as an asset acquisition or a stock acquisition. In a stock transaction (including the typical merger), there is no technical change other than pure ownership. The new owner merely steps into the shoes of the selling shareholders and inherits all assets and liabilities of the business.

In an asset deal, however, a new owner may accept or reject specific assets and liabilities. While this structure typically leaves the buyer free to terminate many of the seller’s employees and bring in its own management team, there are circumstances under which an asset purchaser may nevertheless be liable if care is not taken.

Buyers and sellers alike should carefully consider the labor and employment implications of a proposed transaction and not merely focus on business and financial issues. Otherwise, the parties may walk into multimillion dollar class and collective action lawsuits, incur serious benefit plan obligations, and create unnecessary employee morale issues.

Some of the more serious issues facing hospitality entities might include employee misclassification (as independent contractors or as exempt white-collar employees not entitled to overtime pay), non-compete and trade secret agreements, union collective bargaining agreements, immigration matters, discrimination in employee layoff and retention, individual employment agreement issues, executive compensation plans, and federal and state facility closing and mass layoff laws.

When an M&A transaction is contemplated, in-house counsel and outside corporate counsel must consider all employment and labor implications of the transaction early in the planning process. As part of their due diligence, counsel for the buyer should solicit and acquire copies of, among other things, all of the target company’s individual employment contracts, executive compensation plans, employee handbooks and personnel manuals, union collective bargaining agreements, benefit plan documents, and information with respect to all of the target’s pending federal, state and local governmental employment lawsuits, administrative proceedings, and other matters.

From a hotel buyer’s perspective, all of the employment and labor implications should be considered quite early in the transaction process, while the buyer still has the opportunity to withdraw from the transaction. A buyer must decide whether it is willing to assume the target business’s labor and employment-related liabilities and union obligations (if any), and how these considerations might impact the purchase price. To accomplish its objectives, the buyer will have to carefully negotiate with the seller and then draft the necessary purchase agreement language to identify the significant assets.

Whether to buy a unionized hotel or restaurant will depend upon the strength and weaknesses of the unions involved, language in the collective bargaining agreements, and collateral obligations that might arise under any currently outstanding orders or from pending proceedings before the National Labor Relations Board (“NLRB” or “Board”). Further, in some locations, with respect to certain industries (e.g., the building service and maintenance industry in New York), local governments have enacted laws, rules, and regulations requiring an acquiring company to continue to employ the seller’s employees for 60 or 90 days. Pursuant to those laws, prospective buyers might not legally be able to bring in their own workforce to take over the acquired operations for many months, if at all.

The Employee Retirement Income Security Act (“ERISA”) creates significant potential liability upon an acquiring company with respect to multi-employer pension plans that have been created and maintained pursuant to the Taft-Hartley Act. For example, upon a hotel or restaurant shutdown or mass layoff, ERISA imposes upon buyers in some circumstances the obligation to absorb a withdrawal liability that normally would attach to a seller. Buyer’s counsel in these cases must carefully consider whether the buyer wishes to assume such liability and whether to insist upon a reduction in the purchase price to cover the potential cost of that liability. And, counsel for the seller, of course, will want to insure that any such liability is shifted to the buyer. In a stock transaction on the other hand, aside from the change in ownership, there is no legally cognizable change in the business. Thus, a withdrawal liability will not be triggered (although the new stock owner will inherit ongoing pension fund obligations). Once the decision has been made with respect to whether the transaction will be a stock or an asset transaction, labor and employment law counsel for both seller and buyer must pay careful attention to the drafting of the purchase agreement, its representations and warranties, indemnities, disclosures, and related matters.

Additionally, employers intending to downsize a workforce after an acquisition must pay particular attention to obtaining a census of employees to avoid allegations of selective discrimination in the process. Once the dust settles after an acquisition has been implemented, housekeeping and front-desk employees, managers, and others may find themselves facing a brave new world. The consequences of a restructuring often are unintended as to employee morale and employment policies. Employees treated with dignity are less likely to become class action plaintiffs than those quickly shown the door. In any subsequent litigation, jurors tend to be less sympathetic to employers that fail to consider the impact of the transaction upon employees and their families. Many of these issues should be dealt with upfront early during the sale and acquisition process.

As the U.S. economy rebounds and corporations pick up the pace of restructuring, acquisitions and mergers, it is essential that complex and subtle labor and employment implications of these transactions be considered and dealt with at an early stage, so as to avoid or limit potential liabilities.

What Hospitality Employers Should Do Now

As part of the due diligence process in any acquisition or merger, hospitality employers should do the following:

  • Have your employment counsel request from the company to be acquired or merged with:
  • all individual employment and union collective bargaining agreements, confidentiality and non-compete agreements, employee handbooks and personnel manuals, executive compensation plans, and benefit fund documents, including summary plan descriptions;
  • all files pertaining to any currently open or pending federal, state, and local governmental employment lawsuits and administrative proceedings, as well as to recently closed matters;
  • a complete census of current employees, their job titles, compensation levels, and, to the extent available in company records or by visual observation, their ethnicities, ages, disabilities, and other legally protected characteristics; and
  • information regarding the economic valuation of different properties, facilities, and related assets in order to target asking prices if a decision were to be made to dispose of any.
  • Assemble a team of legal and human resource professionals to focus on the details of the acquisition or merger.
  • Consult with outside labor and employment law counsel with respect to any or all of the above matters.

A version of this article originally appeared in the Take 5 newsletter “Five Key Issues Facing Employers in the Hospitality Industry.”

NLRB Multiplies Impact of Expanded Joint Employer Test: Requires Bargaining in Combined Units Across Multiple Employers

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Our colleagues Adam C. Abrahms and Steven M. Swirsky, attorneys at Epstein Becker Green, have a post on the Management Memo blog that will be of interest to many of our readers in the hospitality industry: “NLRB Drops Other Shoe on Temporary/Contract Employee Relationships: Ruling Will Require Bargaining In Combined Units Including Employees of Multiple Employers – Greatly Multiplies Impact of BFI Expanded Joint Employer Test.”

Following is an excerpt:

The National Labor Relations Board (“NLRB” or “Board”) announced in its 3-1 decision in Miller & Anderson, 364 NLRB #39 (2016) that it will now conduct representation elections and require collective bargaining in single combined units composed of what it refers to as “solely employed employees” and “jointly employed employees,” meaning that two separate employers will be required to join together to bargain over such employees’ terms and conditions of employment.” …

The potential for confusion and uncertainty is enormous. In an attempt to minimize these concerns, the Board majority stated that the so-called user employer’s bargaining obligations will be limited to those of such workers’ terms and conditions that it possesses “the authority to control.”

Read the full post here.

“Prepping” for the DOL’s New White-Collar Exemption Rule

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On May 18, 2016, the U.S. Department of Labor (“DOL”) announced the publication of a final rule that amends the “white collar” overtime exemptions to significantly increase the number of employees eligible for overtime pay. The final rule will go into effect on December 1, 2016.

The final rule provides for the following changes to the executive, administrative, and professional exemptions:

  • The salary threshold for the executive, administrative, and professional exemptions will increase from $23,660 ($455 per week) to $47,476 ($913 per week).
  • The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will increase from the current level of $100,000 to $134,004.
  • The salary threshold for the executive, administrative, professional, and highly compensated employee exemptions will be automatically updated every three years to maintain the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage census region.
  • The salary basis test will be amended to allow employers to use non-discretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the salary threshold.

While it is certainly good news that the DOL has not changed the primary duties requirements for the various exemptions, the significant increase to the salary threshold is expected to extend the right to overtime pay to an estimated 4.2 million workers who are currently exempt. This change will not only affect labor costs but require employers to rethink the current structures and efficiencies of their workforces, including assessing how the reclassification of workers from exempt to non-exempt will affect their fundamental business models. In addition, to the extent exempt employees are reclassified as non-exempt, employers will have to consider implementing policies and procedures to both comply with overtime laws and control overtime worked, such as prohibiting all forms of off-the-clock work and instituting and maintaining accurate record-keeping.

Resistance to the final rule should be expected. The DOL received nearly 300,000 comments to its Notice of Proposed Rulemaking, many of which came from employers and advocacy groups providing thoughtful commentary on the practical issues and repercussions in implementing such a significant increase to the salary threshold. Because of the severity of the final rule, a Congressional challenge may be in the offing. Subject to the Congressional Review Act, the final rule will be subject to scrutiny by the next Congress to be seated in 2017.

What Hospitality Employers Should Do Now

With the benefit of more than six months until the final rule takes effect, hospitality employers should do the following:

  • Audit your workforce to identify employees currently treated as exempt who will not meet the new salary threshold.
  • Closely examine your workforce to determine whether any of your currently exempt employees fail to meet the salary threshold of the new rule.
  • Take advantage of this time to also review your exempt employees’ primary duties, even though the duties test has not been changed by the new rule. Some job positions in hospitality that have been susceptible to failing the primary duties requirements include entry-level managers, catering managers, executive chefs, and sous chefs. There is no time like the present to conduct a comprehensive self-audit to ensure full compliance.
  • When auditing the exempt status of your workers, determine whether to increase their salaries or convert them to non-exempt. If an employee’s salary need only be increased slightly to satisfy the new rule, it may be an easy decision to simply provide the employee with that salary increase. But if you would have to provide a substantial salary increase to meet the new threshold, it may be easier to reclassify the employee as non-exempt.
  • Keep in mind that converting employees from exempt to non-exempt implicates a number of other issues that you would be wise to deliberate carefully, such as estimating how much overtime an individual is expected to work in order to determine what an employee’s new hourly rate will be and ensuring compliance with the overtime laws.

A version of this article originally appeared in the Take 5 newsletter “Five Key Issues Facing Employers in the Hospitality Industry.”

Seventh Circuit Court of Appeals Sides with NLRB on Class Action Waivers and Mandatory Arbitration

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Our colleague Steven M. Swirsky, a Member of the Firm at Epstein Becker Green, has a post on the Management Memo blog that will be of interest to many of our readers in the hospitality industry: “Federal Appeals Court Sides with NLRB – Holds Arbitration Agreement and Class Action Waiver Violates Employee Rights and Unenforceable.

Following is an excerpt:

The US Court of Appeals for the Seventh Circuit in Chicago has now sided with the National Labor Relations Board (NLRB or Board) in its decision in Lewis v. Epic Systems Corporation, and found that an employer’s arbitration agreement that it required all of its workers to sign, requiring them to bring any wage and hour claims that they have against the company in individual arbitrations “violates the National Labor Relations Act (NLRA) and is unenforceable under the Federal Arbitration Act FAA).” …

The decision of the Seventh Circuit, finding that the Board’s view was not inconsistent with the FAA, sets the ground for continued uncertainty as employers wrestle with the issue.  Clearly, the question is one that is likely to remain open until such time as the Supreme Court agrees to consider the divergent views, or the Board, assuming a new majority appointed by a different President, reevaluates its own position.

Read the full post here.

Update on DOJ Website Accessibility Regulations and Mobile Accessibility: Employer Considerations

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Our colleagues Joshua Stein, co-chair of Epstein Becker Green’s ADA and Public Accommodations Group, and Stephen Strobach, Accessibility Specialist, have a post on the Retail Labor and Employment Law blog that will be of interest to many of our readers in the hospitality industry:  “DOJ Refreshes Its Efforts to Promulgate Title II Website Accessibility Regulations and Other Accessible Technology Updates – What Does It All Suggest for Businesses?”

Following is an excerpt:

On April 28, 2016, the U.S. Department of Justice, Civil Rights Division, withdrew its Notice of Proposed Rulemaking (NPRM) titled Nondiscrimination on the Basis of Disability; Accessibility of Web Information and Services of State and Local Government Entities.  This original initiative, which was commenced at the 20th Anniversary of the ADA in 2010, was expected to result in a final NPRM setting forth website accessibility regulations for state and local government entities later this year. Instead, citing a need to address the evolution and enhancement of technology (both with respect to web design and assistive technology for individuals with disabilities) and to collect more information on the costs and benefits associated with making websites accessible, DOJ “refreshed” its regulatory process and, instead, on May 9, 2016, published a Supplemental Notice of Proposed Rulemaking (SNPRM) in the federal register. …

The questions posed in the SNPRM indicate that DOJ is considering many of the issues that Title III businesses have been forced to grapple with on their own in the face of the recent wave of website accessibility demand letters and lawsuits commenced on behalf of private plaintiffs and advocacy groups.  It would be a positive development for any eventual government regulations to clearly speak to these issues.  Conversely, it may be even longer before we see final regulations for Title III entities. …

While most current settlement agreements regarding website accessibility focus on desktop websites, many businesses are anticipating that the next target for plaintiffs and advocacy groups will be their mobile websites and applications.  Such concern is well founded as recent DOJ settlement agreements addressing accessible technology have included modifications to both desktop websites and mobile applications.

Read the full post here.

Employers: DOL Final White Collar Exemption Rule Takes Effect on December 1, 2016

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Our colleagues Jeffrey Ruzal and Michael Kun at Epstein Becker Green have a post on the Wage & Hour Defense Blog that will be of interest to many of our readers in the hospitality industry: “DOL Final White Collar Exemption Rule to Take Effect on December 1, 2016.”

Following is an excerpt:

Nearly a year after the Department of Labor (“DOL”) issued its Notice of Proposed Rulemaking to address an increase in the minimum salary for white collar exemptions, the DOL has announced its final rule, to take effect on December 1, 2016. …

According to the DOL’s Fact Sheet, the final rule will also do the following:

  • The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will increase from the current level of $100,000 to $134,004, which represents the 90th percentile of full-time salaried workers nationally.
  • The salary threshold for the executive, administrative, professional, and highly compensated employee exemptions will automatically update every three years to “ensure that they continue to provide useful and effective tests for exemption.”
  • The salary basis test will be amended to allow employers to use non-discretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the salary threshold.
  • The final rule does not in any way change the current duties tests. …

With the benefit of more than six months until the final rule takes effect, employers should not delay in auditing their workforces to identify any employees currently treated as exempt who will not meet the new salary threshold. For such persons, employers will need to determine whether to increase workers’ salaries or convert them to non-exempt.

Read the full post here.

OSHA’s Electronic Recordkeeping Rule: New Pitfalls for Employers

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Our colleague Valerie Butera, a Member of the Firm at Epstein Becker Green, has a post on the OSHA Law Update blog that will be of interest to many of our readers in the hospitality industry: “OSHA’s New Electronic Recordkeeping Rule Creates a Number of New Pitfalls for Employers.”

Following is an excerpt:

On May 12, 2016, OSHA published significant amendments to its recordkeeping rule, requiring many employers to submit work-related injury and illness information to the agency electronically.  The amendments also include provisions designed to prevent employers from retaliating against employees for reporting injuries and illnesses at work.  The information employers provide will be “scrubbed” of personally identifiable information and published on OSHA’s website in a searchable format. …

OSHA plans to rely upon computer software to remove personally identifiable information from these records.  The software will supposedly remove all of the fields that contain identifiers such as the employee’s name, address, and work title, and to search the narrative field in the form to ensure that no personally identifiable information is contained in it.  OSHA’s reliance on a computer system to detect every piece of identifiable information in a narrative is terribly risky and increases the potential for a data breach.

Read the full post here.

NLRB May Make It Harder for Employees to Decertify Unions

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Our colleague Steven M. Swirsky, a Member of the Firm at Epstein Becker Green, has a post on the Management Memo blog that will be of interest to many of our readers in the hospitality industry: “NLRB Looks to Make It Harder for Employees to Decertify Unions.”

Following is an excerpt:

National Labor Relations Board (NLRB) General Counsel Richard F. Griffin, Jr., has announced in a newly issued Memorandum Regional Directors in the agency’s offices across the country that he is seeking a change in law that would make it much more difficult for employees who no longer wish to be represented by a union to do so.  Under long standing case law, an employer has had the right to unilaterally withdraw recognition from a union when there is objective evidence that a majority of the employees in a bargaining unit no longer want the union to represent them. …

An employer faced with evidence that a majority of its employees no longer wish to be represented by their union has always faced a difficult choice – whether to petition for an election or to respect its employees’ request and take the risk of charges and litigation by immediately withdrawing recognition. Clear understanding of the law and facts, as well as the potential consequences of each course of action has always been critical.  By issuing this Memo and announcing his goal, the stakes have clearly been raised, and the right of employees to decide—perhaps the ultimate purpose of the National Labor Relations Act—has been placed at serious risk.

Read the full post here.

Maryland Casino May Have to Pay Trainees – Employment Law This Week

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The top story on Employment Law This Week: Casino trainees could be entitled to minimum wage.

The U.S. Court of Appeals for the Fourth Circuit recently revived a class action suit from a group of trainees at a casino in Maryland. Applicants who wanted to work the casino’s new table games were expected to attend a 12-week “dealer school,” during which they went mostly unpaid. Several of the trainees sued, alleging that the practice violated the Fair Labor Standards Act. Though the district court dismissed the case, the Fourth Circuit ruled that the company could be found to be the primary beneficiary of the training and remanded the case for further fact-finding. Our colleague Nathaniel Glasser, from Epstein Becker Green, goes into further detail.

View the episode below or read more about this story in a previous blog post.

Fourth Circuit Decision Highlights Need for Employers to Assess Whether Training Time Should Be Compensated

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CasinoWhether time spent in training is compensable time under the Fair Labor Standards Act (“FLSA”) is an issue that the courts have addressed in a variety of contexts. A new Fourth Circuit decision – Harbourt v. PPE Casino Resorts Maryland, LLC – addressed that issue in the context of pre-hire training provided to some casino workers in Maryland and concluded that the casino workers alleged sufficient facts to proceed with their claims that they should have been paid for pre-hire training.

After Maryland legalized full-fledged casino gambling in November 2012, the state had a supply and demand problem. Casinos had six months to hire workforces before the law went into effect, but they found that there were not enough trained dealers to staff the table games. Maryland Live!’s solution was to create a “dealer school.”

Needing approximately 830 dealers to work its 150 table games, the casino vetted more than 10,000 applicants to participate in a free, twelve-week instructional program to equip them with the skills needed to work as dealers at Maryland Live! The trainees attended 20 hours of instruction per week, receiving training in techniques that the trainees contend were specific to Maryland Live!’s operations

The trainees were not paid for attending the program, and, after completing much of the school, some of the trainees filed a putative class and collective action lawsuit alleging that they should have been compensated as employees under the Fair Labor Standards Act (“FLSA”) and Maryland state law for time spent attending the dealer school.

Maryland Live! moved to dismiss the lawsuit, which was granted by the District of Maryland. The Fourth Circuit reversed, allowing the lawsuit to proceed. In reaching its decision, the Fourth Circuit applied the “primary beneficiary” test to determine whether the attendees were “trainees” who were not eligible for compensation, or “employees” who were eligible. In so doing, the Fourth Circuit reaffirmed prior precedent and joined the Second and Eleventh Circuits in rejecting the application of the U.S. Department of Labor’s six-factor test to determine whether an individual is a trainee or employee.

The court concluded that the plaintiffs had alleged sufficient facts to state a claim that the casino was the primary beneficiary of the school such that the attendees would be “employees” under the FLSA.

In reaching the decision to permit the lawsuit to proceed, the court rejected the casino’s argument that it could not be the primary beneficiary of the school because the trainees did not interact with customers and the casino did not receive any monetary benefit from their training. Rather, the plaintiffs sufficiently alleged that the casino received an immediate benefit — “an entire workforce of over 800 dealers trained to operate table games to the casino’s specification at the very moment the table games became legal.”

Because the Fourth Circuit addressed this issue in the context of a motion to dismiss, it only considered the sufficiency of the plaintiffs’ allegations. Maryland Live! will have an opportunity to rebut the plaintiffs’ allegations as the case proceeds.

While Maryland Live! may still establish that the trainees, and not the casino, were the primary beneficiaries of its dealer school such that their training time is not compensable, the decision to permit the lawsuit to proceed highlights the need for employers to review their own policies and practices relating to training. Employers that have training programs that do not pay attendees for their time should review those programs closely to determine whether they are for the primary benefit of the attendees and, if not, consider either paying the attendees for their attendance or restructuring them so that they primarily benefit the attendees, not the employer.

Among other things, employers who wish to implement or continue unpaid training programs should:

  • Ensure that attendees do not expect to be paid for the training;
  • Provide skills that are transferrable to other potential employers, rather than skills that are specific to the employer’s workplace;
  • To the extent possible, provide the training in an educational environment rather than the employer’s workplace.
  • In the context of internships, attempt to tie the training to a formal education program for the student or intern.
  • Not guarantee jobs to the attendees at the end of the training program; and
  • Not require the attendees to perform work that will displace current workers.
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