With a vast amount of people working on ensuring things run smoothly, especially when the deal is cross-border and involving multiple jurisdictions and their respective legislations, employment law is often not the first aspect on the team’s mind. Jonathan Carr, Partner at Lewis Silkin LLP, discusses due diligence in employment law, and what companies should consider when investing across the pond.
The key principles of employment due diligence in the UK are no different to most other jurisdictions: check compliance with local rules, benchmark against market norms and risk-assess the likelihood of claims or problems diminishing the target’s value. But the growing breadth and complexity of UK employment law (much of it derived from EU law but here to stay regardless of Brexit) makes employment due diligence on UK targets an increasingly important and skilled task.
A number of key concepts – the right to notice of termination, protection against unfair dismissal and mandatory holiday and rest entitlements – may be unfamiliar to many US clients, particularly those acquiring in the UK for the first time, and therefore need to be carefully explained. The ability to make sweeping changes to personnel and employment terms is more challenging than on the other side of the Atlantic, although generally easier than in continental Europe.
The list of employment factors that have the potential to become show-stopping or price sensitive considerations is also far longer and less obvious than it once was. Despite this, full employment due diligence is rarely requested. More often than not the brief is to focus on ‘red flag’ concerns, highlight material irregularities and identify key areas where pre or post acquisition remedial action may be required.
Much obviously depends on the nature and size of the business to be acquired but most buyers will be looking for reassurance in the same core areas. Is the target generally compliant with employment laws? Does the target own all of the IP created by its workforce? Are there any unusual or onerous employment terms (for instance, enhanced redundancy entitlements or change of control clauses)? What would it cost to terminate some or all of the senior executive team? Are the employees all employed by the target company? Do they have the right to work in the UK? Are there recognised trade unions and is that relationship constructive? Is the target properly protected against unfair competition from departing employees? Is there a latent pension or tax liability?
Answering these standard initial questions will usually give a reasonable indication of whether the HR function is well run and the overall ‘employment health’ of the target. But a good first impression is no guarantee of immunity from problems. In an increasingly complicated world, red flags are not always to be found in the most obvious places. The employment lawyer may need to look beyond ‘hard law’ compliance into matters such as the target’s gender pay gap, attrition rates, supply chain employment practices and the way in which employee data is managed and shared. High growth start-up businesses are often amongst the most vulnerable. Inevitably, compliance with employment laws and the development of a sophisticated HR function lags some way behind the pace of growth and recruitment.
In recent years, the evolution of UK employment law has been characterised by a number of seismic developments, some political, others arising from case law decisions challenging long held orthodox thinking. The common denominator has been the profound effect these developments have had on huge numbers of companies, both large and small, and across a range of industry sectors, increasing their employment costs materially, sullying reputations or even pitching companies into class action style disputes with sizeable chunks of their workforce. Key examples include the re-calculation of holiday pay to include allowances, overtime and commission, equal pay disputes where pay disparities between female and male dominated roles which appear to have very little in common have been put under the microscope, the ethics and abuses of zero hours contracts and perhaps most significantly of all, the trend of self-employed contractors challenging their status and claiming employment or worker rights, particularly in the fast growing gig economy.
No article would be complete these days without mention of Brexit. The impact on employment laws is likely to be negligible, at least in the short term, but our economy’s dependence on EU workers over the last few decades particularly in sectors such as healthcare and construction inevitably means competition for talent and workforce shortages are likely to have a serious impact on some UK companies in the years to come. A critical part of our role working with US law firms on the due diligence of UK targets is looking over the horizon for the next big trends. What may be a successful and highly profitable employment model one minute can quickly unravel with momentous consequences.
Lewis Silkin LLP
I am a partner and specialist employment lawyer with over 20 years’ experience advising on employment law issues.
My practice has a particular emphasis on restructuring, employee relations issues, TUPE/outsourcing, transactional support and senior executive exits. My clients are similarly diverse from law firms and hedge funds to football clubs and retail brands.