Navigating FMLA Compliance During Mergers and Acquisitions (a BRCC White Paper)

Mergers and acquisitions (“M&A”) are complex transactions with far-reaching implications, including potential impacts on compliance obligations, liabilities and rights. One crucial area where compliance must be carefully managed is the Family and Medical Leave Act (“FMLA”). The following analysis delves into a detailed overview of the FMLA and offers guidance through the complexities of maintaining compliance and performing due diligence during M&A transactions. This will include particular emphasis on the concept of a ‘successor in interest’ and provides real-world scenarios relating to FMLA compliance. The aim is to ensure protection of employees’ rights and mitigate potential legal and financial risks for the buying company.

I. Understanding the FMLA

The FMLA offers job-protected leave to qualifying employees of eligible employers for certain family and medical circumstances. This law also mandates the extension of group health benefits under the same terms as if the leave was not taken. The FMLA leave may either be unpaid or coincide with paid leave provided by the employer. After their FMLA leave, employees must be reinstated to the same position or one that is nearly identical.

Covered employers under the FMLA include

1. Private-sector employers who employ 50 or more employees in 20 or more workweeks in either the current calendar year or previous calendar year;
2. Public agencies (including Federal, State, and local government employers, regardless of the number of employees); and
3. Local educational agencies (including public school boards, public elementary and secondary schools, and private elementary and secondary schools, regardless of the number of employees).

Eligible employees must have worked for the employer for at least 12 months and have worked at least 1,250 hours during the 12 months preceding the leave request. There are qualifying reasons for leave which allow eligible employees to take up to 12 weeks of unpaid, job-protected leave in a 12-month period for the following reasons:

1. The birth of a child and to care for the newborn child within one year of birth;  
   1. The placement with the employee of a child for adoption or foster care and to care for the newly placed child within one year of placement;  
   1. To care for the employee’s spouse, child, or parent who has a serious health condition;  
   1. A serious health condition that makes the employee unable to perform the essential functions of his or her job;
   1. Any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on “covered active duty”; and,
   1. To care for a covered servicemember with a serious injury or illness if the eligible employee is the servicemember’s spouse, son, daughter, parent, or next of kin (military caregiver leave).  

II. Successor-in-Interest Employer during FMLA

A buying company may be a covered employer if it takes over the business operations of the selling company, becoming a successor-in-interest employer (“successor employer”).  The successor-in-interest doctrine holds that a buying company may be considered a successor employer under the FMLA if there is “substantial continuity” between the seller and buyer’s businesses. Factors considered include, but are not limited to, whether the buyer:

• Retains a majority of the seller’s employees;
• Uses the same facilities;
• Produces the same products or services;
• Maintains the same customers or client base;
• Continues the seller’s operations without significant interruption.

If a buying company is deemed a successor employer, it must understand, among other things, the selling company’s employees cannot be deprived of their FMLA rights. A successor employer may also be liable for the predecessor employer’s FMLA violations. This includes potential liability for unpaid wages, benefits, and other damages, even if the successor employer was unaware of the violations.

III: FMLA Due Diligence Considerations During M&A

Thorough performance of due diligence is crucial for FMLA compliance during M&A. It aims to uncover potential FMLA liabilities such as pending leave requests or past disputes, allowing the buyer to assess risks and make informed decisions. Due diligence also helps ensure a smooth transition for employees by identifying any FMLA policy gaps or recordkeeping issues that need to be addressed. Following are some recommended due diligence action items for buying companies to consider during the M&A process: 

• Conduct a thorough due diligence review of the selling company’s FMLA policies, procedures, and records utilizing a checklist. Also, identify potential liabilities including pending or foreseeable FMLA leave requests and past FMLA leave usage and any related disputes or litigation; 
• Develop a comprehensive plan for FMLA compliance during the transition period, including addressing any potential gaps or inconsistencies between the two companies’ FMLA practices;
• Communicate clearly and consistently with employees about any changes in FMLA policies or procedures resulting from the M&A.  Provide clear and timely information about any changes to FMLA policies or procedures and address any employee concerns or questions;
• Monitor FMLA leave requests and usage patterns carefully during the transition period to identify any potential issues or trends; 
• Maintain thorough documentation of all FMLA-related communications, decisions, and actions.

By proactively addressing FMLA compliance during a M&A, employers can minimize legal risks, ensure a smooth transition for employees, and promote a positive workplace in a post-deal world. 

IV. Penalties for Non-Compliance with FMLA

Penalties for non-compliance with FMLA can be substantial and a successor employer can be held liable for the selling company’s violations, even if they were not aware of them at the time of the transaction.  They can include compensation with interest, liquated damages, reinstatement to the position, with a possible due promotion, court enforced monetary penalties and government fines and penalties. 

The employer may be required to pay wages, salary, employment benefits, or other compensation lost due to the violation. An employer may also be required to pay interest on any compensation damages awarded. The compensation damages can be on a front and back pay basis. The calculation of front pay takes into account projected wage increases, promotions, and benefits, and could extend for a period of months or years into the future, depending on the circumstances. The amount of back pay is determined by the wages, salaries, or employment benefits the employee would have earned during the FMLA leave period, up to the time of judgment or settlement.

In addition to compensation damages and interest, an employer may be responsible for liquidated damages. This amount is typically equal to the combined amount of pay back and front pay. These could amount to twice the compensation damages unless the employer can prove its actions were in good faith and that it had a reasonable basis to believe that they were not in breach of the FMLA.

If a worker was improperly denied leave, got fired, or experienced retaliation for taking leave, they may be entitled to be reinstated to their former position or a comparable one, or get a due promotion. Furthermore, if an employee sues their employer for FMLA violations and wins, the employer might be compelled to pay the employee’s legal fees, which could significantly increase the total cost of non-compliance.

Finally, the Department of Labor (“DOL”) can also take enforcement action against the employer for failing to comply with their employee notification requirements prompted by the FMLA. Covered employers must provide employees with certain critical notices about the FMLA which include a general notice upon hire (including the FMLA poster), eligibility notice when an employee first requests leave, and a designation notice once the employer has enough information to make a leave determination. If the employer fails to provide the required notices, it could be seen as an obstruction or violation of an employee’s FMLA rights. This could lead to civil monetary penalties for each offense. 

V. Specific FMLA Compliance Scenarios During M&A

Following are some practical FMLA scenarios where the buying company is the successor employer and is a covered employer.

• Scenario 1: Employee on FMLA Leave at the Time of the Deal:
  • The buying company must uphold the employee’s FMLA leave rights;
  • The employee must be restored to their original or an equivalent position upon return from leave, unless the position has been eliminated due to legitimate business reasons unrelated to the employee’s FMLA leave.
• Scenario 2: Employee Becomes Eligible for FMLA Leave After the Deal:
  • The buying company must determine the employee’s eligibility for FMLA leave based on their combined service with both the predecessor and successor employers;
  • If the employee meets the eligibility requirements, they are entitled to FMLA leave.
• Scenario 3: Employee Requests FMLA Leave During the Transition Period:
  • If the employee is eligible for FMLA leave under both the selling company and buying company’s policies, they are entitled to FMLA leave;
  • If the employee is only eligible for FMLA leave under one of the companies, the buying company may need to grant the leave to avoid potential FMLA violations.
• Scenario 4: Changes to FMLA Policies After the Deal:
  • The buying company may make changes to its FMLA policies after the acquisition, but these changes cannot adversely affect employees’ existing FMLA leave rights;

Navigating FMLA compliance during M&A can be complex, but with careful planning and utilizing a due diligence checklist, employers can successfully protect employee rights and minimize legal and financial risks.

Additional Resources

For more information on FMLA compliance refer to the following useful resources:

• U.S. Department of Labor’s Wage and Hour Division
  • https://www.dol.gov/agencies/whd/fmla  
  • https://www.dol.gov/agencies/whd/fmla/employer-guide
• Successor-in-Interest 
  • https://www.law.cornell.edu/cfr/text/20/1002.35
• FMLA Enforcement
  • https://www.law.cornell.edu/uscode/text/29/2617
• Employer Notification Requirements under the Family Medical Leave Act
  • https://www.dol.gov/agencies/whd/fact-sheets/28d-fmla-employer%20notification