Conducting due diligence in connection with an acquisition involves, among other things, the identification of material risks. Historically, acquirers have not focused too heavily on employment practices as these risks have more often than not been considered either too individualized, esoteric and anecdotal, of too low value, or too remote. Times have changed. The rise of wage-hour collective and class action claims in the last dozen or so years has elevated risks posed by the methods companies use to pay their workers to a level where a serious review of a target’s labor and employment practices, including pay practices, has become a requirement to avoid unknown risks. But in order to understand how to avoid these risks, the acquirer needs to know where to look first, and then protect itself in the definitive documentation.
To be sure, the risks associated with wage hour claims can be difficult to spot. Some industries have a greater propensity for violations, sometimes it is the pay practices of the target that causes the greatest concern, and sometimes it is just the nature of the workforce that lends itself to issues. For example, the retail and hospitality industries in particular have been hit hard, with areas of concern often focusing on whether salaried managers must be paid overtime, whether hourly-paid employees worked off the clock, and, in the hospitality industry specifically, whether and to what extent the byzantine tip credit and tip pooling rules have been satisfied for servers, bartenders, and hosts. Companies that employ a large number of technology workers -- which is virtually every sophisticated company now -- often face claims that IT employees or service technicians should be paid hourly wages with overtime rather than salaries. Also, healthcare companies have been flagged for issues, from automatic deduction claims to recently enacted overtime requirements.