Buyer Beware: Workers’ Compensation Considerations When Purchasing a Business

Buyer Beware: Workers’ Compensation Considerations When Purchasing a Business

When purchasing a business in Ohio, it is possible for the purchasing company to inherit the worker’s compensation ratings and liabilities of the seller. This “successor in interest” rule often catches buyers off guard, especially due to the Bureau of Workers’ Compensation's (BWC) broad interpretation of successorship. The Ohio Administrative Code provides that where one employer succeeds another in a business, in whole or in part, the successor shall assume the predecessor’s obligations under the workers’ compensation laws. This broad provision generally results in the BWC finding that the purchaser inherits the seller’s workers’ compensation experience rating and is liable to the BWC for all of the seller’s unpaid workers’ compensation premiums and further could potentially cause the purchaser’s premiums to significantly escalate in the future.

Usually, when a new owner succeeds to the business as a whole and inherits employees of the previous owner, the BWC transfers the entire employer’s ratings and obligations to the purchaser as the successor in interest. If the new owner purchases a portion of the business, only a part of the former employer’s ratings and obligations will be transferred. Even if the asset purchase agreement expressly states that the purchaser assumes none of the liabilities of the seller or if the parties enter into some alternative agreement or arrangement which demonstrate that the entities are not undergoing an acquisition or merger, but the purchaser still takes on former employees of the seller, the BWC frequently determines that the purchaser is a successor to the predecessor and will automatically transfer any claims history and experience rating to the purchaser.

A recent case illustrated the BWC’s aggressive stance toward finding that a purchasing company is a successor in interest. In overturning the BWC’s finding of successorship, the Ohio Supreme Court unanimously held that the BWC abused its discretion when it transferred part of a predecessor company’s experience rating to another company who was not a successor in interest for the purposes of worker’s compensation.

The K&D Group Case

In 2004, K&D Enterprises contracted with Fame-Midamco Company through K&D Enterprises’s manager, Mid-America, to purchase an apartment complex. Prior to the closing, K&D Enterprises created a new company, Euclid-Richmond Gardens, and assigned its rights under the purchase agreement to that new company.

Euclid-Richmond Gardens hired K&D Group, a property-management company, to manage the apartments, which were renamed Parkside Garden Apartments. K&D Group hired some former employees of Mid-America and assumed the day-to-day operations of the complex.

The BWC conducted an audit of K&D Group in 2009 and determined that it was the successor in interest to the business operations of Mid-America. This determination was made despite the undisputed fact that K&D had nothing to do with the purchase of the building and did not acquire any assets of Mid-America. The sole connection between Mid-America and K&D was that K&D independently hired about half of Mid-America’s former employees to work at the rebranded property.

This determination authorized the bureau to base K&D Group’s experience rating in part on Mid-America's past experience, which included a large workers’ compensation claim. K&D Group filed a protest in response, arguing that it was not a successor in interest to Mid-America, because it had not been involved in the purchase of the apartment complex and it did not acquire anything in the transaction. However, the Bureau's adjudicating committee denied the protest concluding that the K&D Group was the successor in interest because: “The day to day operations of the apartment complex remained the same after the purchase. The K&D Group assumed the prior leases, retained some of the former employees and operated under the same manual numbers.”

K&D Group filed a lawsuit challenging the BWC’s successorship finding, which ultimately made its way to the Supreme Court. The Supreme Court concluded that for the BWC to transfer an experience rating from a predecessor employer to a successor employer, there “must be a transfer of business in whole or in part and the successor employer must be the successor in interest.”

The Court found that there was absolutely no evidence that Mid-America transferred the business of managing the apartment complex to K&D Group because the contract was between two other entities, K&D Enterprises and Fame-Midamco. Both the governing statute and rule focus on the transfer of business operations or labor, not the transfer of assets. The Court specifically stated that the fact that K&D Group hired some of the former employees of Mid-America, assumed management of the apartment leases, and coded its employees under the same job classification code as Mid-America was not sufficient to demonstrate that Mid-America transferred its business operation to K&D Group.

In sum, the Court found that K&D’s mere agreement to assume management of the existing apartment complex did not create a successor relationship for the purposes of worker’s compensation law.

Takeaway

This case adds to a growing line of cases demonstrating the potential breadth of the successor in interest rule and the BWC’s determination to find employer successorship (see hereand here). Although the Supreme Court overruled the BWC’s finding, this case illustrates the possible workers’ compensation implications from purchasing a business or any of its assets. This decision should limit the BWC’s ability to transfer experience ratings to all purchasing companies; however, when purchasing a business, it is important for the employer to consider the risks of inheriting a negative or penalty-rated experience from the seller.

Any company involved in the acquisition of an ongoing business should be sure to evaluate a predecessor business' workers' compensation rates as part of the due diligence in undertaking a purchase of another business in whole or in part. Purchasing companies should remember to be cautious when taking over a company with penalty-experience rating and liabilities. The rating and liability should be considered when calculating the purchase price, or some mechanism to recover payments made for inherited workers’ compensation claims. It may end up being preferable to forgo acquiring some of the assets, rather than inheriting extra workers’ compensation liabilities. With the assistance of counsel, purchasers can structure the deal in order to avoid unexpected liabilities once the transaction has closed and it is time to obtain workers' compensation coverage for the new entity.

 

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