The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Mergers & Acquisitions · Workforce
People are often the most valuable part of a business and the least documented. Employment diligence checks how the workforce has been classified, paid and promised — before those obligations become yours.
The workforce question
Payroll problems rarely appear on a balance sheet. A company can look profitable precisely because it has been underpaying overtime or treating employees as independent contractors — and the cost of correcting that can land on the buyer.
In a share purchase or merger, the entity keeps its history, so past wage claims, tax assessments and discrimination charges come with it. In an asset purchase the buyer chooses what it takes, but a buyer that hires the same workforce to do the same work at the same location can still face arguments that it is a successor employer for some purposes. Neither structure makes employment risk disappear; it changes where it sits and how you protect against it.
New Jersey adds its own layer. The state applies an ABC test to decide whether a worker is an employee for wage, unemployment and related laws, lookback periods for wage claims were lengthened in 2019, and penalties for misclassification have been strengthened. Practices that were common in the industry a few years ago may now carry real exposure.
Employment law outcomes depend heavily on the facts of each workforce. The points here are general information to help frame the review, not a conclusion about any particular business.
Document requests
These go beyond the general diligence list and focus on the workforce specifically.
Contracts with individual executives deserve their own close reading; that work is covered on the page about employment agreements in an acquisition.
Risk areas
Classification
Under the ABC test a worker is presumed to be an employee unless the business can show, among other things, that the work is outside its usual course of business or places of business and that the worker runs an independently established trade. Crews, drivers, installers and technicians paid on 1099s are a frequent finding in trades and service businesses.
Pay
Salaried employees treated as exempt who do not meet the tests, unpaid off-the-clock time, missing records and improper deductions can all produce back-pay claims. The size of the exposure depends on headcount, pay practices and the lookback period.
Layoffs
The NJ WARN Act, as amended in 2023, covers employers with 100 or more employees and requires 90 days' notice and mandatory severance for covered mass layoffs. If a deal involves closing a site or reducing the workforce around closing, the parties need to agree in advance who is responsible for notice and payment.
Benefits
Retirement and health plans carry their own compliance obligations, and late filings or operational errors can follow the plan sponsor. The agreement should say whether plans are assumed, terminated before closing or replaced.
Retention
If a few employees hold the customer relationships or the technical knowledge, the deal should address how they will be retained: new agreements, retention bonuses, or a closing condition that they have signed on with the buyer.
Structure matters
| Question | Asset purchase | Share purchase or merger |
|---|---|---|
| Who is the employer after closing? | The buyer, but only for those it chooses to hire; employment with the seller ends | The same entity — employment continues without interruption |
| Do past wage claims come along? | Generally stay with the seller, though successor arguments are possible | Stay with the entity the buyer now owns |
| Do accrued vacation and paid leave carry over? | Must be decided and documented, including whether the seller pays out | Usually continue as obligations of the company |
| What happens to benefit plans? | Typically remain with the seller unless expressly assumed | Remain with the company unless changed |
Choosing between these structures involves far more than employees; the trade-offs are compared on the asset purchase vs. stock purchase page.
Using the findings
Most employment findings do not kill a deal. They are handled in one of three ways: fixed before closing (reclassifying workers, correcting payroll, bringing plans into compliance), priced through a reduction or an escrow sized to the estimated exposure, or allocated through specific indemnities that survive longer than general representations.
The workforce review is one part of broader legal due diligence; the general request list is on the due diligence checklist page. Paul coordinates employment findings with the rest of the deal so they show up correctly in the purchase agreement and in the plan for day one. The overall process for buyers and sellers is described on the mergers and acquisitions hub.
Questions & answers
In a share purchase or merger, yes in practical terms — the employer entity is unchanged, so its liabilities remain. In an asset purchase the seller generally keeps them, but a buyer continuing the same operations with the same workforce may face successor-liability arguments in some contexts. Either way, diligence plus targeted indemnities and escrows are the usual protection.
A sale by itself is not a mass layoff, but terminations connected with the transaction can be. The amended Act covers employers with 100 or more employees and requires 90 days' notice and severance for covered events. Where layoffs or a site closure are planned around closing, the purchase agreement should allocate responsibility for notice and severance between seller and buyer.
Their employment with the seller ends, and the buyer decides whom to offer jobs to and on what terms. The seller must handle final pay and any obligations it keeps, and both sides should agree how accrued paid leave, benefits and any notice requirements are addressed. Clear communication plans help avoid losing staff the buyer wants.
Identify them during diligence, then decide what will keep them: new employment or retention agreements, a bonus payable after a set period, equity or profit participation, or simply early conversations with the seller's cooperation. For truly critical people, buyers sometimes make signed agreements a condition of closing.
Your attorney
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
Contact
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
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