Meet the New Boss Same as the Old Boss – Diligence of New Employment and Confidentiality Agreements

So, you’ve acquired a new asset and, in the process, new employees who are potentially subject to existing Employment Agreements (“EAs”) and Confidentiality Agreements (“CAs”). What is a good course of action to protect yourself and determine your exposure?

To start, it’s crucial to determine whether the acquisition of the underlying asset includes the assignment of the EAs and CAs for current employees based on the language stated in the Purchase and Sale Agreement (“PSA”) or Asset Purchase Agreement (“APA”). You may need to obtain new versions of these agreements if the PSA or APA does not permit their assignment. Typically, if this process is not undertaken during or early after the transaction, it is often neglected until either an employment claim arises, an employee violates one of these agreements, or you attempt to sell the same asset.

Additionally, in the absence of an EA, you will need to confirm whether your new employees are properly classified or whether their prior employer misclassified them as independent contractors, which could give rise to state and federal claims against your company. It’s recommended to review your existing agreements carefully to ensure that they contain adequate confidentiality provisions that protect your confidential information and trade secrets. If this is not the case, you should take swift action to draft and execute new agreements that provide more comprehensive protection. One option to ensure an employee executes the new agreements is to make their continued employment contingent upon it. When drafting the underlying CA language, it is important to consider the employee’s specific role and job responsibilities, which will be widely dependent on both your company structure and employees’ responsibilities.

Last, during the diligence process, identify key employees and assess the strength of non-compete and non-solicitation clauses in their current employment agreements. These clauses should be carefully crafted to comply with established case law in order to avoid being held to be unenforceable.

In the event that you elect not to retain and hire all of these employees, you will need to confirm that no state or federal Worker Adjustment and Retraining Notification Act (“WARN Act”) notices are due, which would apply in the instance that you are employing 100 or more employees and intending to conduct plant closings or layoffs that affect more than 50 employees and will last for more than six (6) months. As part of the process, you should confirm whatever liabilities you retain for the non-retention of employees and disclaim any surrounding obligations.

The asset integration process should result in some level of review of every Employee Agreement.  This includes developing a process that ensures all employees are subject to similar forms containing identical language. The language should be honed based on the seniority and management level of each employee’s role. In our experience, four or five sets of disparate drafted EAs and CAs make enforcement efforts and proper internal documentation nearly impossible.

Needless to say, the diligence process continues well after the asset integration phase, as individual fact-specific issues arise on an employee-by-employee basis. At RR&A, we’re skilled in addressing real world problems and coming up with derisked solutions that prevent disagreements from becoming a source of future litigation. Please contact us today!

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Andrew Clinton

Andrew Clinton

Andrew is a Partner at R. Reese & Associates and head of the Transactions and Corporate teams. His practice consists of energy and business transactional matters with additional competencies in real estate and title representation. To learn more about Andrew, visit his attorney page.

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