When you acquire a business, you’re not just gaining opportunities to increase market share and grow sales revenue. You’re also inheriting employees, including their needs, concerns, and the various compliance obligations that come with employing them.
When you work with a PEO that helps you conduct HR due diligence before you close on a purchase, you can look beyond the numbers and take advantage of several opportunities to ensure a more seamless and efficient acquisition process.
7 Must-Know Considerations in HR Due Diligence
Conducting comprehensive HR due diligence provides valuable insights into the target company’s most significant expense and greatest value-creator: its people. It also helps you identify risks and avoid surprises that could cost considerable time and money down the road.
In a recent webinar, Aspen HR’s Assistant General Counsel Anthony Knight and CEO Mark Sinatra highlighted the following areas of opportunity in HR due diligence:
1. Selecting the Right Purchase Type
Different purchase structures come with varying tax, personnel, regulatory, and administrative obligations, each with its own advantages and disadvantages. For example, consider the people implications of an asset purchase vs. a stock purchase:
- Asset purchase: Your potential liability exposure is limited because you’re only acquiring assets like equipment and facilities, not tax ID numbers, insurance plans, or payroll. However, you are responsible for establishing new insurance and payroll partners to ensure no lapses in coverage or employee pay. Even in an asset purchase though, you may run the risk of any unpaid payroll tax liability.
- Stock purchase: While you can keep the target company’s insurance plans, payroll, and employer tax IDs, you may be taking on potential liabilities such as unpaid taxes, debts owed, and any pending litigation.
Whichever acquisition type you choose, ensuring employees are paid on time and insurances don’t lapse is critical. Proper due diligence simplifies the acquisition process by ensuring you ask the right questions and gather the necessary documentation to manage your new workforce effectively.
2. Audit of Wage and Hour Documentation and Procedures
Due to the numerous federal and state laws regulating employee pay, overtime eligibility, and working hours, the target company may unknowingly be out of compliance in several areas. However, a thorough wage and hour audit can uncover potential issues by exploring:
- Employee classifications (e.g. I-9 contractors vs. W-2 employees)
- Employee overtime eligibility
- Payroll structure
- Compliance with state laws governing salary transparency and meal and rest breaks
- Preparation for new and upcoming requirements, such as the Department of Labor’s 2024 overtime rule
Reviewing these items in advance makes it possible to identify potential areas of concern and correct them before the purchase. That way, you don’t inherit any owed back wages, back taxes, or wage and hour penalties stemming from the target company’s past actions.
3. Audit of Employee Work Authorization Documentation
While ensuring employees are authorized to work in the US is rather straightforward, not all businesses consistently adhere to this practice, especially those with limited HR support. As a result, it’s critical to audit the target company’s work authorization documents and confirm everyone in the workforce is legally employed.
In addition to having a complete Form I-9 on file for all employees, companies must comply with state-specific e-Verify requirements and federal record retention obligations. Before the purchase closes, you should review audit results with your HR due diligence partner and determine how you’ll meet these requirements. You can:
- Rehire each individual and complete a new I-9 for each. With this option, you start with a “clean slate,” but you also take on the administrative burden of completing new paperwork for each employee.
- Continue the employees’ employment and maintain their existing I-9s. There’s less administrative work up front, but you also risk inheriting any liabilities, errors, or omissions that occurred in the past.
4. Review of Key HR and Benefits Documents
Depending on the size and complexity of the target company, there are dozens of HR documents to review during the due diligence process. Examples include:
- Employment agreements and restrictive covenants
- Payroll records
- Employee census reports
- Policies and handbooks
- Benefits information
- State-relevant employment documentation
Keep in mind that while reviewing HR and benefits documents is a must, thorough due diligence should also uncover any documentation the target company doesn’t have. For example, a lack of job descriptions may indicate the need for a closer look at employee classifications, reporting relationships, and the work employees are actually doing.
5. Review of Employee Practices Liability Insurance (EPLI) Claims
Despite the potential risk of employee claims for wrongful termination, whistleblowing retaliation, harassment, and discrimination, only an estimated 3% of small businesses carry Employee Practices Liability Insurance. If the target company has an EPLI policy, you should review the policy and any loss run reports with legal counsel. Additionally, make sure you understand any clauses regarding employment claims that arise before the close date but are filed afterward.
If the target company doesn’t have an EPLI policy, you can ask for the following items:
- Details of any past or pending losses, claims, or legal disputes related to employment regulatory compliance
- Details of any disputes or claims resulting in a settlement or litigation, including the final judgment of any litigated cases
- The current employment status of any individuals who have made an employment claim
6. Review of Employment Agreements and Restrictive Covenants
Some employees in the target company, especially key employees and executives, may have employment agreements with or without non-compete and non-solicitation clauses. Reviewing these agreements will help you understand any future obligations to these employees and determine if there’s a need to pursue a retention agreement for any of them. If you desire retention agreements for any employees, you might consider requiring the target company to execute those agreements pre-close.
7. Comprehensive Benefits Review
The acquisition process will be smoother for everyone if you can ensure seamless continuity in employee health benefits, retirement benefits, and other employee services. This is why HR and benefits due diligence with Aspen HR aims to identify opportunities for employees and employers in the following areas:
- Insurance administration, including medical, dental, disability coverage, and COBRA
- Employee services such as spending accounts and employee assistance programs
- 401(k) administration, leave management, and other HR administrative processes
After the acquisition, we can also work with you to make improvements in areas such as benefit plan design, selecting carriers with the best network of specialists and hospitals for employees, and pursuing a benefit renewal strategy that delivers cost savings to you and your workforce.
Get the Full HR Picture
Comprehensive HR due diligence gives you the tools to fully analyze the target company and ask questions to ensure you operate optimally on day one post-close.
Aspen HR is here to help! We’re the only PEO to offer the services of an in-house employment attorney, plus our team of highly experienced HR and benefits experts. If you’re already an Aspen HR client, our HR and benefits due diligence services are complimentary. And if you’re not a client, you can explore the service as an a-la-carte option. Contact us to learn more.
