When purchasing a business with a collective bargaining agreement or CBA, buyers should take steps before closing to protect their legal position and understand their obligations to union-represented employees. Union status can also affect transaction structure, post-closing operations and long-term labor costs.
- Business buyers dealing with collective bargaining agreements should strategize pre-closing to understand union obligations and how to structure deals for transaction and operational flexibility.
- Asset purchases offer more flexibility than stock acquisitions, potentially bypassing obligations to recognize existing unions, which could impact long-term labor costs.
- Early legal reviews and strategic communication can help avoid unintended obligations, ensuring smoother integration and long-term stability post-purchase.
- Neglecting union and successor status considerations may lead to operational challenges and cost inefficiencies, highlighting the need for proactive planning.
Structuring the Deal and Union Considerations
How the deal is structured plays a central role in determining the buyer’s relationship with the union. In a stock acquisition, the buyer effectively steps into the seller’s role and remains bound by the existing collective bargaining agreement for its remaining term. This limits the buyer’s ability to change wages, benefits or other employment terms covered by the agreement.
An asset purchase can offer more flexibility. In some cases, the buyer may not be required to assume the existing collective bargaining agreement or recognize the union at all. That said, recognition obligations can still arise if two conditions are met: a majority of the buyer’s workforce consists of the seller’s former employees and the business continues to operate in substantially the same manner.
If the buyer does not hire the seller’s employees or integrates only a portion of union-represented employees into a broader, existing workforce, there may be grounds to argue that no ongoing bargaining obligation exists.
Key Questions and Successor Considerations
Whether a buyer must recognize the seller’s union often depends on the degree of continuity between the seller’s and buyer’s operations. If the buyer hires few or none of the seller’s employees, the buyer may not be viewed as a successor employer. When analyzing successor status in an asset transaction, several factors are considered, including:
- The percentage of the seller’s employees hired by the buyer
- Whether wages, benefits and working conditions remain the same
- Whether the buyer uses the same equipment or produces the same products
- Changes in management structure
- The level of integration between existing employees and those hired from the seller
If the buyer’s operations differ materially from the seller’s and employees perform different work, the obligation to recognize the union may not apply. Buyers should evaluate their operational plans well in advance of closing to avoid unintentionally waiving rights or assuming unnecessary obligations.
Establishing New Employment Terms
Even when a buyer qualifies as a successor employer, it generally has the right to decline adoption of the existing collective bargaining agreement. Instead, the buyer may establish initial terms and conditions of employment and then negotiate a new agreement with the union. This approach allows the buyer to develop a contract aligned with its own business model rather than inheriting provisions designed for the seller’s operations.
Risks of Being Deemed a Successor
A buyer can lose the right to set new employment terms if its conduct suggests that existing employees will be retained without changes to wages, hours or working conditions. Misleading statements or unclear communications can result in a finding that the buyer has accepted the predecessor’s agreement as the status quo.
To reduce this risk, buyers should clearly communicate that they do not intend to adopt the existing collective bargaining agreement and that any post-closing employment offers will be made under new terms. Consistency is essential across transaction documents, public announcements, employee communications and offer letters. These precautions are especially important when purchasing a business with an active union.
Reviewing the Existing Collective Bargaining Agreement
Buyers should closely review the economic terms of the existing agreement, including wages, bonuses and benefits. While current pay levels may appear manageable, many agreements include automatic annual increases that are not tied to performance. Health care and other benefits can also present long-term cost concerns, particularly if mid-term changes are restricted.
Pension obligations require additional scrutiny. Employers that participate in underfunded multi-employer pension plans may face significant withdrawal liability if they later exit the plan. This exposure alone can weigh heavily against adopting a predecessor’s agreement.
Non-economic provisions also warrant careful analysis. These may include:
- Promotion procedures
- Overtime assignment
- Hiring and layoff rules
- Grievance and arbitration processes
- Neutrality provisions
- No-strike clauses
- Subcontracting limitations
- Management rights
Once established, these terms typically remain in place for three to five years and can be difficult to modify in future negotiations.
Operating Union Versus Non-union
Buyers should also consider how union status affects day-to-day operations. Unionized environments often involve less managerial flexibility, particularly in:
- Hiring
- Promotions
- Terminations
Recall rights, seniority rules and for-cause termination standards can limit discretion that would otherwise exist in a non-union setting.
Grievance procedures can be time-intensive and require strict adherence to contractual steps. Errors in process can result in adverse outcomes for the employer and arbitration decisions may set precedents that apply to future situations. In some cases, labor-management relationships can become adversarial, particularly during contract negotiations or disciplinary actions.
Key Takeaways for Buyers
When purchasing a business with a unionized workforce, buyers must assess not only the legal obligations created by a collective bargaining agreement but also the broader operational and cultural implications. Failure to address these issues before closing can lead to lasting workforce challenges and operational constraints.
Careful planning, clear communication and early legal review can help buyers manage risk and position the business for long-term stability following the transaction.
For further information about buying or selling a business with or without a unionized workforce, contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.
