When buying or selling a dental practice, employee-related clauses in the asset purchase agreement are far more than standard, boring, tick-the-box legal verbiage.
Any experienced dental practice lawyer will confirm that these clauses define risk, which is why it is imperative to ensure both parties understand what is transferred and what liabilities will follow the closing.
Scenario: We recently represented a seller in the sale of his dental practice in Kansas. Under his paid‑time‑off (PTO) policy, all employees received their full annual PTO allotment on January 1 each year, to be used throughout the year. Because the practice was being sold in March, our client was potentially responsible for paying out an entire year’s worth of PTO to all employees at closing. We were able to negotiate a solution with the buyer under which the buyer agreed to assume the existing PTO policy going forward. This avoided a scenario where both parties were paying for the same year of PTO and prevented employees from effectively receiving a double PTO benefit.
As we will discuss, employee representation provisions clarify the status of employees, but also existing obligations and the potential for future exposure. Without a full understanding of these terms, the buyers may inherit issues, while the sellers risk post-closing disputes and reputational damage due to inaccurate sales disclosure.
Commonly, employees are terminated by the seller and then rehired by the buyer. But things are rarely that straightforward, and acting without thorough due diligence carries significant federal and state law risks.
One of the key areas a dental practice lawyer will examine is whether the employment agreements are properly disclosed, whether for W-2 or 1099 positions. A thorough dental employment contract review will ensure no hidden obligations will show up post-sales, such as bonus structures, restrictive covenants, or long-term commitments.
However, employment law compliance is more than just ensuring no hidden costs are present. The contracts need to comply with wage and hour laws, worker classification rules, anti-discrimination regulations, and also be in line with the codes of practice.
Plus, not being compliant with federal laws such as the Fair Labor Standards Act (FLSA) or Title VII of the Civil Rights Act can expose buyers to federal scrutiny after closing, which is why it's imperative to conduct a thorough legal review pre-purchase.
While proactively identifying problematic employment issues in contracts is the best option, a dental practice acquisition attorney will also look into any existing employment disputes.
During the transition process, sellers will typically represent and warrant that there are no pending or threatened claims (or disclose the status of existing ones), usually arising from wrongful termination, wage disputes, workplace harassment, and similar issues.
If the seller is transparent, the buyer will know exactly what they are getting at the time of sale. On the other hand, if the seller wasn't transparent, and there indeed were active disputes, the buyer can hold them accountable as they have a signed clause that guarantees the opposite.
It's also important to fully disclose compensation and benefits, which include salaries, bonuses, and benefit plans. Benefit plans can be problematic as they may fall under the Employee Retirement Income Security Act, further complicating the due diligence.
Depending on state law and any contractual language, including, but not limited to, Employee Handbooks, employers may be required to pay any accrued, but unpaid benefits upon termination. Since the employment of all employees terminates as of the closing date in a dental sale/purchase, the seller is potentially responsible for payment of these accrued benefits. This can equate to thousands or tens of thousands of dollars for the seller.
In short, a thorough upfront financial and legal due diligence will uncover any undisclosed liabilities, which tremendously impact the value of the deal. That's why it's best to work with a dental practice M&A lawyer early and set the transition on the right foundation, reducing the headaches that come from the issues that were put under the rug.
Don't let avoidable legal challenges bottleneck your transaction. Contact Finn Legal now and schedule a personalized consultation that will help you go through your dental practice transition with peace of mind.
