Client Briefing from the Labor and Employment Group - December 14, 2009
THE NLRB's DEFINITION OF A "PERFECTLY CLEAR"
SUCCESSOR IS OFTEN QUITE MURKY
by Nancy A. Noall
So, you’re buying a business from a unionized employer, and you think you have done everything you need to do to avoid getting stuck with the onerous union contract. Specifically:
- You’ve done an asset purchase rather than a stock purchase;
- You specifically disclaimed assuming the union contract in your purchase agreement;
- You told the predecessor’s employees in a letter that they would have to fill out a new job application and that “significant operational changes would be ahead”;
- You told the predecessor’s employees in a letter that they would have to pass various pre-employment checks and pre-employment tests in order to obtain employment and that all such employment would be “at will”;
- You advised employees of the predecessor whom you hired that their initial employment would be only temporary for a 90 day period and that their employment would be terminated at that point unless they were selected for regular employment; and,
- You told your new employees in writing that they had to agree to your internal alternative dispute resolution policy as a condition of employment.
Given all that, you thought you would be safe from being bound by the terms of the prior union contract, right? Wrong. At least according to the National Labor Relations Board (“NLRB”) as S&F Market Street Healthcare discovered. S&F ended up having to go all the way to the United States Court of Appeals for the District of Columbia Circuit in order to overturn an NLRB decision holding that it was a “perfectly clear” successor and bound by two collective bargaining agreements between the predecessor company, Covenant Care, and the Service Employees’ International Union (the SEIU).
Meridian Management Corp. was not so lucky even on appeal - the United States Court of Appeals for the Second Circuit upheld a lower court decision finding that Meridian Management, a general contractor, was required to submit to arbitration the issue of whether and to what extent it was bound by a collective bargaining agreement between the United Food & Commercial Workers and a subcontractor when Meridian terminated the subcontractor’s services and hired the subcontractor’s employees directly to work on the same project for the same customer.
These two recent decisions (S&F Market Street Healthcare v. NLRB, 570 F.3d 354 (D.C. Cir. 2009) and UFCW v. Meridian Management Corp., 2009 WL 3151791 (2d Cir. 2009) highlight the risks employers face when acquiring all or part of a unionized company. They also underscore the need for legal advice from an experienced labor lawyer, not only with respect to those aspects of the purchase agreement that deal with labor and employment matters in general, and union contracts specifically, but also in preparing communications to the predecessor’s employees, both before and after any change in control.
The concept of being a successor employer under the National Labor Relations Act only comes into play if, upon acquiring all or part of a prior employer’s business, you end up continuing the prior employer’s operations and hire a majority of the employees from the prior employer’s unionized workforce as a majority of your employees. (Please note that there are other consequences associated with discriminating against the prior employer’s unionized employees in making hiring decisions.) But, if the new employer meets the definition of a “successor” it will, at the very least, have a duty to recognize and bargain with the incumbent union over any future changes in the terms and conditions of the employment of the employees in the bargaining unit. Whether the new employer is privileged to unilaterally establish the initial terms and conditions of employment, however, or is instead bound by the prior employer’s collective bargaining agreement, depends on whether the new employer is a “perfectly clear” successor prior to the change in control. The United States Supreme Court has concluded that a company that purchases the assets of a unionized company is not ordinarily going to be bound by the old employer’s collective bargaining agreement unless it has expressly or impliedly assumed the union contract.
The concept of a “perfectly clear” successor involves an employer that has impliedly accepted the terms and conditions of the union contract by leading the predecessor’s employees to believe that their employment status would continue unchanged upon accepting employment with the successor. Most employers, even if they become successor, are free to set the initial terms and conditions of employment with the duty to bargain (potentially) coming into play only if and when it hires a majority of its employees from the prior employer’s unionized workforce. A “perfectly clear” successor cannot unilaterally set the initial terms and conditions of employment, but instead must continue the terms and conditions of employment contained in the union contract unchanged until a new agreement with the union is achieved or the negotiations reach an impasse.
In S&F, the employer purchased a nursing home from a seller that had two collective bargaining agreements with the SEU. S&F ultimately hired a majority of the predecessor’s employees. But in a cover letter to the employees who were hired initially to assure continued care of the residents during the transition, S&F provided the employees with applications for employment and advised them that S&F intended “to implement significant operational changes.” The cover letter also made it clear that any offer of employment would be contingent upon the employees’ passing a physical examination, a drug test, and a background check. The actual offers of employment specifically stated that they were for temporary employment, without benefits, and that the employment would be “at will” (rather than terminable only for cause as contained in the union contract). Finally, all employees were specifically told that they must also agree to the company’s internal dispute resolution procedure as a condition of regular employment.
Despite these statements, the NLRB held that S&F was a “perfectly clear” successor that was obligated to recognize the SEIU and bargain before changing any terms of employment. The NLRB reasoned that all the references to temporary employment were nothing more than a probationary period and that there was no evidence that S&F intended to change the “core” terms and conditions of employment.
The Court of Appeals disagreed, finding that based on all the evidence in the record “no employee could have failed to understand that significant changes were afoot” and that, by announcing that any employment with S&F would be “at-will,” “S&F was announcing a very significant change in the terms and conditions of employment.” Likewise, said the Court, requiring employees to sign an agreement to be bound by the company’s internal alternative dispute resolution procedure would signal to any employee that the company was not going to be bound by the union’s grievance and arbitration procedure. The Court also ruled that the NLRB’s focus on whether the company signaled that it was going to change “core” terms of employment misstated the rule and all that was necessary is that the successor employer convey its intention to set its own initial terms and conditions rather than adopt those of the prior employer.
In Meridian, the general contractor cancelled its subcontract with a unionized janitorial employer and took over the janitorial services itself. While it hired a majority of its employees from the subcontractor’s workforce, it refused to follow the subcontractor’s collective bargaining agreement, but instead, implemented its own initial terms and conditions of employment. Rather than file an unfair labor practice charge with the NLRB, the union sued Meridian under the Labor Management Relations Act and ERISA alleging that Meridian had effectively assumed the subcontractor’s contractual obligation to contribute to the union’s health and welfare fund. Neither the lower court nor the Court of Appeals discussed the “perfectly clear” successor rule. Instead, the courts held that Meridian had to arbitrate with the union whether and to what extent Meridian must comply with the substantive terms of this subcontractor’s contract with the union. While the courts acknowledged that generally successors are not bound by the terms of the predecessor’s collective bargaining agreement absent an express assumption of the same, the courts believed that requiring Meridian to arbitrate whether, and to what extent, it was bound by the contract was the “fairest and most efficient way” to determine what terms and conditions of the old union contract should apply to the employer. Although the Court of Appeals relied heavily on the fact that Meridian was not a “typical” successor in that it subcontracted the work and then substituted itself for the subcontractor, it is difficult to explain why the Court opted not to analyze the case under normal successorship rules.
Both of the foregoing decisions highlight the risk to employers who take over existing businesses that have collective bargaining agreements. The S&F case illustrates the general rule that a successor employer should be able to avoid the obligations of the prior employer’s contract by clearly informing employees alternative terms will apply if they accept employment with the successor. The NLRB, however, did not give employees any credit in S&F for the ability to reach the common sense conclusion that their new employer did not intend to be bound by the old labor contract even when it informed them that they were “at-will” temporary employees with no benefits. The lesson to be learned from S&F is to err on the side of being overly explicit and expressly inform employees that you don’t intend to be bound by the existing terms and conditions of the union contract.
Meridian raises questions concerning the applicability of the “perfectly clear” successor rule and creates a possibility that a successor may be required to arbitrate the extent to which the “perfectly clear” successor rules apply. Again, however, by being explicit in disclaiming any obligations under the union contracts prior to offering employment to any of the predecessor’s employees, you should be able to avoid being stuck with the contract.
Whenever a company is considering acquiring all or part of a unionized business, it is wise to get the advice of an experienced labor lawyer before entering into a binding purchase agreement and before communicating with any of the predecessor’s union employees, let alone hiring them. The lawyers in Walter & Haverfield’s Labor and Employment Law Group will be pleased to assist. |
