This is the third post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another business. My last post addressed withdrawal liability when a company acquires the assets of a business which contributes to a multiemployer pension plan pursuant to a collective bargaining agreement. This article discusses labor law issues when a union company acquires a nonunion business.
Five Important Questions to Consider When a Union Company Buys a Non-Union Business
You would think that when a union company buys a non-union business, there should be no concern that the non-union business could be subject to the buyer’s existing collective bargaining agreement, or that the purchased business is subject to an obligation to recognize the union. Like most things in labor law, it is not quite as neat as you would like.
1. What Jurisdictions are Both Parties In?
The first thing to ask when a union company is considering buying a non-union company is whether the non-union company is operating in the geographical jurisdiction of the current collective bargaining representative of the buyer. If the target company is outside the union’s jurisdiction, it is unlikely that there will be any obligation to bargain with the union which represents the buyer’s employees.
2. Companies are in the Same Jurisdiction, What Now?
If the target company is in the union’s jurisdiction, the next step is to review the buyer’s collective bargaining agreement to see if there are any provisions that discuss application of the collective bargaining agreement to other businesses owned by the buyer. If so, the buyer should think about designing the transaction so that the buyer does not own the new company, but instead, different shareholders or companies will own the business to be purchased from the seller.
3. How Similar are the Businesses of the Buyer and Seller?
Another factor to be considered is how similar the businesses are. For a manufacturer, is the product being manufactured by the seller, and the classifications of employees working for the seller, similar to those currently in the bargaining unit represented by a union? If the buyer is engaged in the manufacture of, for example, computer chips and the seller is engaged in the distribution of cellular phones, it would be difficult for the union representing the buyer to claim that they should also represent the employees formerly employed by the seller. On the other hand, if the target company and the buyer are engaged in similar businesses and employ employees in similar classifications, the buyer’s union may argue that the buyer’s union should also represent the employees employed by the target company in those similar classifications.
If the products being manufactured or sold by the seller and the buyer are similar and the classifications of employees are similar, there is still a question as to whether there is an arm’s length relationship between the two entities.
4. Will There Be an Arm’s Length Relationship Between the Acquired Business and the Buyer After the Purchase?
An arm’s length relationship occurs when two unrelated parties or strangers have no special obligation to the other party. If there is an arm’s length relationship between the buyer and the entity it purchased, the buyer’s union is less likely to have a claim for the target company’s employees. Thus, in planning how the buyer will manage the entity it is considering for purchase, the buyer should think about the degree to which the two entities will be connected. In determining whether there is an arm’s length relationship between the two entities, the NLRB considers four factors:
- The interrelationship of operations
- Common management
- Centralized control of labor relations; and
- Common ownership
No one of these four criteria is controlling and all four need not be present to warrant a single employer finding. In various cases, the NLRB has stated that the first three criteria are more critical than common ownership, with emphasis on whether control of labor relations is centralized, as these tend to show operational integration. If the buyer plans to be involved in the management of the acquired company, written agreements between the two entities are helpful (for example, an agreement in which the buyer agrees to “manage” or provide management services to the target company); but these criteria will also be examined to determine if there is truly an arm’s length relationship. If there is no arm’s length relationship, then the NLRB could find that the buyer and the acquired company constitute a single employer, thereby opening the door to the union claiming that the collective bargaining agreement applies to both entities.
5. When is Accretion Appropriate?
Another way in which the buyer’s union could attempt to apply the buyer’s collective bargaining agreement to the target company after the transaction is completed is through accretion. In accretion, the union would claim that some or all the target company’s employees should be accreted to the buyer’s existing operation.
Whether it is appropriate to accrete a unit is subjective and depends on all the facts and circumstances. The factors which the NLRB discusses when considering accretion include:
- The degree of interchange among employees in the two companies;
- Geographic proximity;
- Integration of operations;
- Integration of machinery and product lines;
- Centralized administrative control
- Similarity of working conditions, skills and functions;
- Common control over labor relations;
- Collective bargaining history; and
- The number of employees at the facility proposed for accretion as compared with the existing operation.
The critical question is whether the new facility is sufficiently integrated into the buyer’s existing operation to justify the application of the collective bargaining agreement. Therefore, when designing the transaction, it would be important that the purchased business use separate management and have an autonomous operation from the buyer’s existing facility. If these factors are not considered in structuring the acquisition, the buyer may be faced with a claim by its union that the seller’s employees should be added to the bargaining unit.
In planning an acquisition, a union-represented buyer should consider whether its union may have a basis to demand to add the target’s employees to its bargaining unit. The financial aspects of the transaction are not the only issues to consider.