Employment Obligations During Dealership Purchases and Sales

By Joseph Ambash, Jeffery Fritz, and Joshua Nadreau of Fisher Phillips LLP

In a time of increasing dealership purchases, sales, and consolidation, what does your dealership need to know about its obligations towards your current or prospective employees? In this month’s column, we discuss several employment law issues that need to be addressed regardless of whether you are the seller or purchaser.

Understanding the Transaction

How the transaction is structured is the key factor in determining which employment law obligations may be triggered. There are two primary ways a dealership may be purchased: a stock purchase or an asset purchase. In a stock purchase, the buyer purchases the stock of an existing entity and typically succeeds to all of the entity’s assets and liabilities. Conversely, in an asset purchase, the buyer only acquires the assets of the entity, leaving the seller responsible for most existing liabilities. For many reasons, the asset purchase is the preferred method of transaction, as it typically affords the buyer the most flexibility.

Final Wages and Vacation Pay

When a dealership is sold, the parties will typically negotiate what will happen to existing employees and how paid leave balances will be handled. In a stock purchase, this is not typically an issue, as the buyer steps into the shoes of the seller, with little interruption for employees. Asset purchases, however, are technically involuntary terminations. As we all know, Massachusetts law requires that employees be paid their final wages and any vacation pay whenever the separation of employment is involuntary.

On the closing date, employees are involuntarily separated from the seller. While many times the asset-purchaser agrees to re-hire all the existing employees, they are not required to, and, in any event, there is a change in the “employer.” While there is no guidance from the Attorney General or the courts as to whether an asset purchase where everyone is re-hired is technically a termination, the safest advice is that the seller should pay final wages and accrued vacation balances upon the change in control. Otherwise, there is considerable risk of incurring triple damages, attorneys’ fees, and interest in a class action lawsuit.

Employee Misclassification and Wage and Hour Concerns

Stock purchasers need to be critical of how the seller has classified its workers, because stock purchasers can be held liable for actions of the seller, even when the purchaser had no control over the workforce. Buyers in this context need to be on the lookout for misclassified independent contractors, whether employees are improper- templating an asset purchase will need to review employee agreements to see whether they can be “assigned” to a third-party. If they cannot, the purchaser would be wise to consider whether existing employment agreements are a priority, or whether it will want to have all of its new employees execute new agreements. Particular caution should be paid to non-competition agreements, especially since they now are subject to a host of technical requirements under Massachusetts law and under intense scrutiny from the Biden Administration.

Employees on Leave

ly classified as exempt from overtime, or whether the seller has complied with minimum wage and overtime regulations. Asset purchasers should also be aware of these issues so they can be immediately corrected but would likely avoid liability for actions that predate the acquisition.

Assignability of Employment Agreements

One of the benefits of a stock purchase is that the purchaser will not have to worry about whether any contractual agreements, such as non-solicitation or non-competition agreements, between employees and the seller will remain valid. This is because in a stock purchase the purchaser now owns the entirety of the dealership. Asset purchases, however, are different. Dealerships con-

In the case of a stock purchase, the buyer again steps into the shoes of the seller and has the same obligation to reinstate an employee on a required leave as the seller would. In an asset purchase, whether the buyer has an obligation to reinstate an employee at the expiration of a leave of absence will depend on whether the buyer is deemed a “successor” under the applicable statute. For example, if the buyer hires all the seller’s employees, an employee on an FMLA leave would likely have to be re-instated unless the buyer can prove the employee’s position would have been eliminated whether or not the employee was on leave. A similar analysis would be used in the context of leave as an accommodation under the ADA or leave under the Massachusetts Paid Family and Medical Leave Act.

Parting Thoughts

Other relevant issues include potential obligations under the federal WARN Act or dealing with the sale or acquisition of a unionized workforce. In sum, it is important that both sellers and buyers conduct due diligence as they approach any deal, so they are prepared in advance for any employment law headaches. As always, dealerships are encouraged to discuss anticipated contracts with counsel.