In August 2018 the website “RevCycle Intelligence” reported that for the 15thconsecutive quarter private equity firms and other buyers announced over 200 healthcare merger and acquisition deals. Of course, many more deals were not announced publicly.  A report from the Health Research Institute predicts that continued regulatory uncertainty will drive the increase in healthcare M&A deals.  Regulatory uncertainty, including continuing uncertainty about the Affordable Care Act, is exacerbating reimbursement and cost pressures. With income predictability more challenging, many providers are more inclined to sell.

As with any acquisition, the due diligence investigation is a key component of a health care acquisition.  Before committing to the transaction, the buyer wants to make sure it knows what it is buying and what obligations it is assuming.  It is particularly important to conduct a thorough investigation of any employee or management issues.  While a buyer may agree to assume certain contractual obligations of the seller as part of the deal, many employment statutes impose “successor liability” for a new employer under certain circumstances.  A buyer’s failure to examine employment law issues may result in future liability for the survivor entity or purchaser (the “New Employer”).

Here is a brief review of some of the issues that the New Employer should address in the context of the acquisition of a health care entity.

Contracts: Some employees may have written employment agreements. The New Employer should be clear as to its obligations under these agreements, if any. Additionally, it is not always the case that employment agreements are assignable, particularly non-competition and non-solicitation covenants. It is important to review such provisions carefully.

Collective Bargaining Agreement: Unions are not uncommon in the healthcare industry.  An Employer should be aware if a Collective Bargaining Agreement is in place or if it has been discussed in the recent past.

Healthcare Licenses: The New Employer should obtain copies of all required licenses and verify that providers are in good standing.

Handbook/Policies: The New Employer should request copies of all handbooks in place as well as prior versions.  It is important to review current practices and whether they are consistent with the written policies, particularly concerning vacation/sick time.

Insurance Coverage: The New Employer should evaluate insurance coverage.  This includes malpractice insurance for providers as well as the entity itself and whether there is Employer Practices Liability Insurance coverage.

Pay Issues: Changes to the workforce could result in pay differentials that could create liability for the New Employer. For example, a significant difference between a male employee and female employee performing the same position for the New Employer could result in Equal Pay Act or Title VII claim.

Employee Benefits & ERISA:  The New Employer should request a summary of all benefits provided to employees and copies of all ERISA-governed pension, profit sharing, deferred compensation and retirement plans. The New Employer should review any deferred compensation arrangements to ensure compliance with IRS Section 409A.

Loans: The New Employer should determine if there are any outstanding loans from employees that need to be repaid pre-transaction.

Exempt vs. Non-Exempt:Information concerning employees’ job duties and pay classification (exempt or non-exempt) should be obtained.  Depending upon the size of the workforce, the New Employer may wish to conduct a wage and hour audit to determine any potential minimum wage issues or overtime liability issues under the federal Fair Labor Standards Act or applicable state law.

I-9 Compliance:  The New Employer should evaluate whether I-9s are compliant and if new I-9s need to be completed by employees.

Independent Contractor Misclassification: Misclassification of workers as independent contractors when they should be classified as employees is often a problem in the acquisition of smaller healthcare providers. The New Employer should obtain a list of independent contractors and should analyze whether those individuals are properly classified as such.

Non-Compete Agreements: The New Employer should review all non-competition agreements and other restrictive covenant agreements to determine enforceability and assignability.

Employment lawsuits/administrative proceedings: The New Employer should inquire into any lawsuits, settlements or administrative actions involving current or former employees of the company in the past ten years.

A thorough due diligence investigation is a key component of an acquisition on the buyer side.  On the seller side, it is important to understand what the buyers are looking for and to be prepared to provide this information.  In addition, the seller will be required to provide in the sale or merger document certain warranties and representations concerning their past employment practices.

The health care lawyers at Blalock Walters work closely with our employment law colleagues to ensure that our clients on the buyer side conduct a thorough investigation of employment law issues.  We also advise our clients on the seller side how to prepare for the due diligence investigation and assist them in the review and drafting of the warranties and representations contained in the sale or merger documents.

Matthew J. Lapointe, Esq., Business & Corporate, Health Care Law

Matthew J. Lapointe, Esq., Business & Corporate, Health Care

Anne W. Chapman Esq., Labor & Employment Law

Anne W. Chapman Esq., Labor & Employment Law