New California Employment Law May Impact Acquired Employees’ Compensation in the M&A Context

M&A Alert

Effective January 1, 2018, California Labor Code Section 432.3 was amended to, among other things, prohibit any employer – public or private – from “seek[ing]” salary and compensation history from applicants for employment. Moreover, California’s new law introduces a further requirement that employers provide applicants with “the pay scale for [the] position” for which she or he is applying. For more information, check out Orrick’s Employment Law and Litigation blog post on the topic.

Buyers and sellers alike will need to think carefully about the potential application of these new requirements within the M&A context – where oftentimes employees of the target company may continue their positions, but as new employees of the buyer. In particular, buyers should consider evaluating their current approach to HR diligence. If a buyer intends to inherit all employees of the seller, it may posit that none of these employees are “applicants” covered by the new statute. However, in almost all acquisitions, there is an element of uncertainty with respect to at least some positions. Accordingly, buyers should be mindful of the overall structure of the acquisition, particularly in situations where acquired employees may be regarded as job applicants.

Buyers should:

  • Instruct their corporate development teams to tread carefully from the outset: Asking for aggregated compensation cost data for overall business trends should generally be fine, but asking for any data that can be individually attributed to one or more specific employees – including salary, contingent/bonus compensation, equity compensation schedules, and specific or unique other benefits – should be carefully considered.
  • Review due diligence request lists and forms of representations and warranties to evaluate widespread requests for or collection of salary history data.
  • Plan in advance responses to inquiries about “pay scales,” particularly for certain high-demand categories of workers (such as engineers) where buyers may view such data as highly proprietary and confidential but will now need to think about complying with the new regulations.
  • Consider limiting routine diligence gathered for review of “excess parachute payment” compensation arrangements (“golden parachutes”) under Section 280G of the Internal Revenue Code to outside counsel only, as is done with other sensitive information, such as antitrust materials.

In addition, buyers also should keep in mind that:

  • Effective January 1, 2018, California law prohibits inquiring about criminal conviction history of employee applicants until a conditional offer has been made, and even then employers must go through a careful, prescribed analysis of any such conviction history before denying employment.
  • Effective July 1, 2018, the City of San Francisco will prohibit employers from, among other things, releasing the salary history (including wages, commissions or benefits) of any current or former employee to any prospective employer without such employee’s written consent.

While the law and guidance develops in this rapidly changing area, buyers and sellers alike should consult counsel to ensure they are up to date on the latest activity.