Michael R. Marra

Global M&A activity in the fashion and luxury goods industry has been significant over the past few years, with both headline-grabbing mega acquisitions and smaller, targeted deals dotting the landscape. In the past three years, approximately four such transactions closed every week. Market forces have pushed the appetite for corporate acquisitions even higher, and luxury and fashion industry watchers expect a busy 2019.

While the integration of an acquisition may present different challenges for a large conglomerate than for an independent brand seeking a strategic growth opportunity, there are key labor, employment and personnel — or LE&P — issues common to all business combinations that are oftentimes — even uniquely — front-and-center in fashion acquisitions.

Review Wage and Hourly Compliance

No other LE&P acquisition issue has the potential to create crushing financial exposure like the improper classification and payment of workers.

Systemic wage and hourly noncompliance is particularly troubling because it creates the potential for class and collective action lawsuits. There are many talented and aggressive plaintiff lawyers who are motivated and skilled at identifying class-wide mistakes by employers in the proper payment of workers. Even small violations can lead to multimillion-dollar settlements and verdicts when the impacted class of workers numbers in the many dozens, hundreds or more, especially in jurisdictions with long statutes of limitations. For example, New York employers can be sued for up to six years’ worth of wage underpayments; California employers may be on the hook for up to four years of underpayments; the shortest statute of limitations is under federal law, which is two years.

Especially intense scrutiny of a retail target’s wage practices is warranted if (a) an unusual number or type of workers are treated as “independent contractors” and are paid on 1099s; (b) if nonsupervisors and/or midlevel administrative employees are “on salary” and not eligible to receive overtime pay; (c) if time-keeping records and break policies are not well documented; or (d) if commission plans are informal or unwritten.

Special attention should also be paid to sales associates who earn commissions. As a general rule, those employees must be paid overtime unless they earn at least 1.5 times the minimum wage (adding regular wages and commissions, divided by total hours worked) and at least half of the associate’s income must be from commissions. For lower-paid associates, or those who do not earn substantial commissions, overtime is owed for 40-plus hour week. Even if these standards are met, technical compliance is often elusive and should be confirmed during the diligence period.

Last, ask whether the target has arbitration agreements that waive class actions. Dealing with individual wage claims can be far less daunting than facing class actions that consolidate hundreds of claims and raise the risk of paying enormous attorneys’ fees to a plaintiff’s lawyer. Often, wage and hourly class actions result in relatively small payments to employees but enormous fee awards to their counsel, so those lawyers have significant incentives to pursue class claims over frequent, small-wage calculation errors.

Understand the Emerging Patchwork of Predictive Scheduling Laws

Predictive scheduling laws prohibit retail establishments from changing employee schedules without substantial notice, taking away flexibility to adjust to daily operational realities. While those laws are still somewhat rare, they are increasingly receiving attention from state and city lawmakers. Currently, only Oregon has a statewide law, but citywide laws have been passed recently in New York City, Philadelphia, Seattle, San Francisco and other California localities. Although those laws do not threaten the same level of liability as class-wide overtime claims, compliance can be an operational headache that puts real strain on managers and human resources professionals and creates tension between boutique employees and management. Consequently, whenever applicable, understanding how predictive scheduling is implemented may help avoid post-acquisition trouble.

Prepare for Employment Policy Integration

It cannot be overstated how important it is to understand and prepare for the implementation of employment policies that impact the daily lives of incoming employees. For example, will the incoming employees expect more generous leave or vacation practices than you offer current employees? How many employees will be returning from leaves? What performance management processes are followed?

Human Resources stakeholders should be invited to the table to work with management to determine what policies will be carried over (or not), and to set out a clear communication plan for incoming employees once the acquisition is completed. An acquisition is about much more than balance sheets. Where the commitment and investment of employees is a key asset of the brand, the due diligence process should not simply flag cost and liability issues, but also identify the cultural and policy issues that are likely to most impact incoming employees.

Manage the Employee Experience

Closely related to the inquiries regarding employment policies and practices, a lot can be learned during due diligence concerning issues that are relevant to risk analysis as well as company culture.

Look beyond employment litigations and Equal Employment Opportunity Commission charges to identify potential liabilities — request internal discrimination and harassment complaints to understand what kinds of issues are raised by employees; whether there exist managers who are the subject of numerous complaints, and how effectively claims are investigated and resolved. Insist on access to human resource professionals who can speak directly and candidly about the work environment, and provide color to the personnel management, investigatory and disciplinary files. While signs of toxic mini-environments within a brand are unlikely to scuttle a deal, the potential liability should be understood not only for existing risk assessment, but also to make sure appropriate action (including training) is teed up so that matters can be effectively addressed immediately. In the interactive, interpersonal environment of fashion, healthy relationships are invaluable, and unhealthy relationships are known to spread with disastrous consequences. It is crucial to be ahead of potentially negative situations and much can be learned through the diligence process.

With signs pointing to incredible merger and acquisition activity persisting, buyers should take the necessary steps to understand not just the liabilities associated with labor and employment issues, but the challenges and opportunities presented by the workforce of the target company. Not only will thorough employment law diligence help organizations value the business and assets under consideration, but it will have a material impact on expectations and post-acquisition integration, ensuring a productive work environment and climate for success.

Michael R. Marra is comanaging partner of the New York office of Fisher Phillips, a leading labor and employment law firm. His practice focuses on understanding his clients’ business needs, developing effective strategies and solutions, and working closely on communication strategies. Marra represents some of the world’s best-known luxury brands, advertising and media service companies and technology and emerging growth companies.

Read his prior column here: Think Tank: Don’t Get Caught in the Cold During Seasonal Hiring

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