Tuesday, December 16, 2014

Welcome to the winter edition of our committee newsletter. This edition we have articles from the US, Canada, France, UK and Ukraine, as well as a checklist on International M&A issues. Many thanks as always to our contributors. Please let me know if you would like to contribute an article to a future edition.

Wishing you all a Happy Holidays and best wishes for 2015!

Helen Colquhoun
Withers LLP
Registered Foreign Lawyer (Hong Kong), Dual qualified in New York and England & Wales

Canada - Foreign Workers Denied Medical Coverage After Status Expires

By Sergio R. Karas, B.A., J.D., principal of Karas Immigration Law Professional Corporation.

A recent decision of a three judge Ontario Divisional Court panel concerning the entitlement of foreign workers to medical coverage under the Ontario Health Insurance Plan has potential far-reaching consequences and may result in the denial of medical benefits for thousands of foreign workers and students in Canada whose status has expired or changed.

In Ontario (General Manager, Ontario Health Insurance Plan) v. Clarke , two foreign workers from Jamaica, Denville Clarke and Kenroy Williams, arrived in Ontario as participants in the Seasonal Agricultural Worker Program (SAWP), operated by the Federal government. The workers held Work Permits valid until December 15, 2012. They were employed by a company in Ontario. As part of that program, the workers signed an employment agreement with the employer, who was required to obtain insurance that will provide compensation for the worker for personal injuries received or diseases contracted as a result of the employment unless prevailing law provided for such compensation. In addition, the employer was required to ensure that the workers obtain health coverage according to provincial regulations. The foreign workers were covered by insurance from the Worker’s Safety and Insurance Board (WSIB) and health coverage by the Ontario Health Insurance Plan (OHIP).

A few days after their arrival, the two foreign workers were injured in a serious motor vehicle accident while being transported to work in their employer’s van with other coworkers. The accident resulted in fatalities to other passengers. The foreign workers received compensation benefits and medical care for their work related injuries funded by the WSIB. Their medical treatment had to be extended beyond the date of expiry of their Work Permits. Faced with the prospect of being in Canada without status after the expiry of their Work Permits under the SAWP, the foreign workers applied for and were granted visitor status by Citizenship and Immigration Canada until February 2014. They also applied for an extension of their OHIP coverage but it was denied. They appealed that denial of coverage to the Health Services Appeal and Review Board, which determined that the foreign workers were residents of Ontario and eligible for health insurance coverage, and were entitled to continue to receive medical services. However, the province of Ontario appealed that decision to the Divisional Court.

The issue on appeal was whether the foreign workers continued to qualify for OHIP coverage after the expiry of their Work Permits. The case turned on the interpretation of Section 1.3 (2) of Regulation 522 under the Health Insurance Act . That Regulation prescribes that people who are present in Ontario because they have a Work Permit issued under the SAWP are residents of the province, even if they do not meet any other qualifying requirements set out in the regulations. The intent is to cover workers with valid Work Permits issued under the SAWP, so the question was whether the workers whose SAWP permits had expired, continued to be covered by that section.

The Divisional Court discussed the appropriate standard of review and held that it was agreed between the parties that such standard was one of reasonableness, as the Board was interpreting a statute that is directly related to its core function. Further, the court relied on previous caselaw and held that where there is no real dispute on the facts and the tribunal need only determine whether an individual breached a provision of its constituent statute, the range of reasonable outcomes is much narrower.

The province argued that the foreign workers did not qualify as residents of Ontario after the expiry of their Work Permits and that the issue was not properly addressed by the Board. Instead, the Board had decided that, because the agreements signed by the foreign workers under the SAWP contemplated that, in certain circumstance, persons in Canada under the program might not leave the country by the date stipulated in their Work Permits, they continued to be residents of Ontario. The Board relied on the language in the contract that directed the foreign workers to return to their country of origin at the expiry of their Work Permits with the exception of extraordinary circumstances, including medical emergencies. The Board hastily concluded that the foreign workers continued to be residents of Ontario and were entitled to continuing medical coverage.

In a unanimous ruling, the Divisional Court disagreed. The court held that the Board’s conclusion was not reasonable in light of the plain wording in Regulation 522. The plain and ordinary meanings of the words used in Section 1.3(2) accords the status of residents to the foreign workers “because they have a Work Permit” under the SAWP. There was no dispute that the foreign workers’ Work Permits expired of December 15, 2012 and therefore they no longer had Work Permits. The court also rejected the foreign workers’ contention that the Work Permits did not need to be valid in order to qualify as residents of Ontario. The court held that such conclusion was neither reasonable nor sensible, based on two main reasons:

First, as a matter of basic statutory interpretation, there was nothing in the plain and ordinary meaning of the words used in that section of the Regulation that contemplated its application beyond the situation where a worker is present in Ontario under the terms of the SAWP. The court held that it was clear that such plain and ordinary meaning of the words meant that coverage was provided for people who were present in Ontario because they have a Work Permit under the program. The Regulation expressly uses the present tense, not the past tense. The court held that the simple fact was that there was no other plausible meaning that could be given to the Regulation.

Second, the court ruled that the triggering event for residency under the Regulation was the possession of a Work Permit, and therefore it was implicit that such Work Permit had to be a valid one. The suggestion that the province would have passed a regulation that contemplated its application based on an invalid Work Permit was “irrational” .

The court also rejected the foreign workers’ contention that OHIP coverage only ceases when there is no longer a causal connection between their physical presence in Ontario and the SAWP. The court held that when a Work Permit issued pursuant to the SAWP expired, it can no longer be reasonably said that there remains a causal connection between the person’s physical presence in Ontario and the SAWP, and the person’s employment is legally at an end. If the person continues to remain in Ontario, it is not an outcome connected to the SAWP. The court held that, if the foreign workers’ contention was correct, any person whose seasonal worker permit had expired could continue to be entitled to OHIP coverage essentially in perpetuity . That was an outcome that the legislature could never have intended.

The court held that the Board erred because it did not consider the plain wording of the Regulation and whether there was any ambiguity. The Board did not engage in any analysis of the scheme of the Act or of the Regulation, did not identify any policy considerations that directed the adoption of any particular interpretation of the Regulation, but instead, the Board considered only the SAWP agreement between the foreign workers and the employer and used one provision of that agreement to base its conclusion that Section 1.3(2) of the Regulation covered the foreign workers’ situation. The Board also failed to note that the province was not a party to the SAWP agreement and that it cannot have its interests affected by an agreement to which it is not a party, nor should its legislative or regulatory enactments be interpreted based on such an agreement, especially ones that can create fiscal responsibilities and liabilities.

In the court’s view, the plain working of the Regulation allowed for no other conclusion than the foreign workers ceased to be eligible for OHIP once their Work Permits expired on December 15, 2012. The Board's conclusion to the contrary was not a decision that "falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law" .

Further, the court held that, if there is a gap in the parameters of the SAWP that does not ensure health care coverage for seasonal workers who are required to remain in Ontario for legitimate medical reasons after the expiration of their Work Permits, then that gap should be filled either by requiring the employers to obtain supplemental health insurance, or through an agreement negotiated between the Federal and Provincial governments. However, it cannot be filled by a contrived interpretation of an existing regulation.

This decision has potential negative consequences for all foreign workers and students whose permits have expired. Further to the court’s decision, all foreign workers and Study Permit holders who are normally entitled to OHIP, can have their coverage terminated if their permits are not extended. The expiry of those permits would mean that they would cease to be residents in the province for health insurance purposes as they would no longer be entitled to remain in the province legally. It is noteworthy that, despite the fact that the foreign workers in this case obtained visitor status, that was not sufficient to maintain their OHIP coverage, as visitors are not entitled to receive it. Employers should also be concerned by the suggestion that the gap in coverage should be filled by private health insurance provided by employers, as the province should not assume those liabilities.

Ukraine - Dismissal of Executive Officers

By Pavlo Khodakovsky and Alesya Pavlynska, Arzinger, Ukraine

The status of executive officers is as a rule regulated by special legislative norms in various jurisdictions, since it undoubtedly differs from the status of ordinary employees in terms of appointment and termination procedures, scope of duties and level of liability.

But the Ukrainian legislation, though granting such categories additional (corporate) authorities and envisaging special (higher) level of liability for executive officers, generally refers to them as to ordinary employees in terms of employment rights, benefits and guarantees.

Unfortunately Ukrainian Labor Code is still de facto a Soviet inheritance which limits the owners’ right to dismiss executive officers under their own initiative while granting far-reaching powers to trade unions (e.g. to demand dismissal of the CEO under certain circumstances).

It must be emphasized that the Labor Code contains an exhaustive list of reasons for dismissal of employees, most of which are dismissals for misconduct and require sufficient substantiation.

As for executive officers, whose status is similar to the status of ordinary employees under Ukrainian labor legislation, the following grounds for dismissal are used most frequently in practice:

- agreement between employer and employee;
- termination upon the initiative of the employee;
- termination of the fixed-term labor contract;
- grounds envisaged by the labor contract;
- gross violation of labor obligations by the CEO, his/her deputies or chief accountant;
- guilty actions of the CEO entailing untimely payment of salaries or payment in amounts lower than the minimum salary established by law.

Other grounds (e.g. systematic violation of duties, truancy, appearance at work under the influence of alcohol, drugs or any other toxic substances, violation of some requirements of anticorruption legislation etc.) are also possible, but are seldom applied to executive officers.

Each ground, applied on the initiative of the owner, requires substantiation as well as adherence to procedures and terms.

Therefore, in view of the legislation in force, until recently it was not possible to dismiss an executive officer anytime without any reason at the employer's initiative, unless there the labor contract contained such special ground for dismissal, and provided such special ground was not recognized by court as one which is less favorable to the employee than the labor legislation in force.

Under Ukrainian labor legislation a labor contract is a special form of a labor agreement which may be concluded with special categories of employees, including members of the management body (board of directors) in joint-stock companies, and CEOs in other companies.

Ukrainian courts are not in unity regarding the regulation that applies to such labor contracts, since pursuant to the general rule (Article 9 of the Labor Code), terms of labor agreements that worsen the state of the employee compared to the labor legislation in force are null and void. A dispute therefore often arises as to whether the labor contract can be considered separately, thereby allowing deviations from the legislative requirements.

However, recently in line with the policy of Ukraine on improvement of the investment climate some revolutionary changes were introduced. On June 1, 2014, Law 1255-VII amending Part 1 of Article 41 of the Labor Code came into effect. In particular, an additional ground for dismissal has been added (Para 5 Part 1 Article 41 of the Labor Code): revocation of authorities of executive officers.

Compared to other dismissal procedures, the amended labor legislation does not require separate notice or justification for dismissal on this ground. Thus, dismissal may be "same-day" without any grounds specified.

As a kind of compensation, Article 44 of the Labor Code prescribes the severance pay in the amount of at least six months’ average earnings.

Unfortunately, provisions of the Labor Code contain no definition of an “officer”, so there is still a problem identifying the categories of employees which may be subject to such dismissal.

In its clarification "The Class "Officer" in Labor Legislation" dated July 24, 2014, the State Labor Inspectorate of Ukraine attempts to find such a definition in the legislation relating to state officials, in criminal and corporate laws as well as in the relevant court resolutions.

In particular, the State Labor Inspectorate states that the note to Article 364 of the Criminal Code of Ukraine defines executive officers as persons who act as representatives of state authorities or local self-governments permanently, temporarily or under special authority as well as permanently or temporarily hold positions associated with organizational and management or administrative and business functions at state authorities, local self-governments, public or municipal enterprises, institutions or organizations or perform such functions under special authority, which are granted to a person by a competent state authority, local self-government, central state executive authority enjoying a special status, competent authority or authorized person of an enterprise, institution or organization.

An executive officer is endowed with a certain scope of authority, and within the same, has the right to take actions that generate, modify or suspend specific legal relations (e.g. the right to appoint or dismiss employees, to apply disciplinary or administrative penalties etc).

According to the Resolution of the Plenum of the Supreme Court of Ukraine , the organizational and management responsibilities (which are indispensable for the concept "executive officer") are responsibilities of managing an industry, staff members, task area or production activities of certain employees at enterprises, institutions or organizations regardless of ownership. Such functions are performed, in particular, by heads of ministries, other central executive authorities, state, collective or private enterprises, institutions and organizations, their deputies, heads of structural subdivisions (workshop managers, heads of departments, laboratories or chairs), their deputies, and persons managing task areas (masters, supervisors, foremen, etc).

However, in our opinion, application of the concept of criminal law to labor relations is controversial and such a broad definition is unlikely to be supported by the courts.

In our view, "revocation of authority" is basically a corporate law term, which assumes officers are elected, appointed and empowered by the higher authority (general meeting of owners, supervisory board).

Given the above and the fact that the Law 1255-VII also amended the Civil Code , the Commercial Code and the Law on JSC (i.e. the corporate legislation proper), we suggest considering the term under corporate law to define "officers" in this case.
According to Para 2 of Article 89 of the Commercial Code officers of a company are:

- Chairman and members of the Management Board,
- Chairman of the Audit Committee,
- in companies where a Supervisory Board is established – Chairman and members of the company’s Supervisory Board.

The Law on JSC (Para 15 Part 1 Article 2) additionally includes members of the Audit Committee, Head and members of another body of a joint stock company, if that body is provided for under the articles of association, as officers.

Thus, the corporate legislation defines only those persons as executive officers who are elected by the vote of the higher management bodies (general meeting of shareholders or supervisory boards) and are in corporate relations with the company, whereas mid- and low-level managers (heads of departments) are just appointed by the management board or CEOs without any corporate authorities and are therefore excluded from the list.

At the same time, such dismissal is included in Article 41 of the Labor Code (bearing the title "Additional grounds for termination of labor agreement on the initiative of the owner or its authorized body with separate categories of employees under certain conditions") and is thus a dismissal on the employer’s initiative. Therefore, all of the relevant safeguards apply to employees dismissed due to revocation of authorities, including, for instance, the following:

• Prohibition against dismissing pregnant women and women having children under three years of age (under six years of age in some cases provided for by Part 6 of Article 179 of the Labor Code) – Article 184 of the Labor Code;
• Prohibition against dismissing single mothers having a child under fourteen years of age or a disabled child – Article 184 of the Labor Code;
• This prohibition also extends to fathers raising their children without a mother (in particular, in case of the mother’s long-term treatment at a healthcare institution) as well as to guardians (trustees) and foster parents – Article 186 of the Labor Code;
• Employees under eighteen years of age may be dismissed only with the consent of the district (city) services for children’s affairs (Article 198 of the Labor Code);
• Employees may not be dismissed during a period of temporary disability or during their vacation (Part 3 Article 40 of the Labor Code).

To summarize, in our opinion the new ground for dismissal introduced into the Labor Code and dealing with dismissal of executive officers is undoubtedly a progressive regulation, protecting the rights of employers, foreign investors among them. The new regulation also smoothes out discrepancies between the corporate and labor legislation: whereas it was obvious that the owner may revoke the authorities of the executive any time, due to the rigid labor law prescriptions the labor relations didn't terminate simultaneously with such revocation. Therefore formally the officer was still in employment though due to revocation of his/her authorities he/she was not able to work.

At the same time the new legislation also provides the officer to be dismissed under this ground with the minimum guarantee (severance pay) in the amount of at least 6 average monthly salaries - the price the employee has to pay for its corporate decision. Previously the sum of compensation was regulated between the parties (with the dismissal formalized as mutual agreement) and in practice varying from zero to any sum, as agreed under the circumstances.

In our opinion, to define the term "officer" for dismissal purposes under Para 5 Part 1 Article 41 of the Labor Code, it is more correct to use the definitions under corporate law. Also in our view dismissals of CEOs and members of management boards will be the most frequent ones performed under this ground.

We believe that controversies in the interpretation of the term "officers" by employees and employers as well as by courts are likely to arise in practice, unless additional definitions appear in the legislation or official position of state bodies and courts.

France - New Governmental Proposals to Jump-Start the French Economy

By Roselyn Sands,
EY Société d’Avocats, Paris, France

Over the past years, France’s economic system has often been criticized and accused of being unable to adapt to the new rules of a globalized economy. Indeed, the fact that unemployment is on a continuous rise since 2008 is often pointed out as proof that the French economy is under stress. The French labor market and the laws governing it are considered as being in part responsible for France’s current predicament.

In order to remedy this situation, the French government is taking bold measures in the hopes of jump-starting the economy. Since the beginning of François Hollande’s presidency, major changes have been implemented in areas of French labor law, such as the simplification of large scale redundancy process (while the process remains complex, at least the time is now much better secured).

Indeed, under pressure from the European Union as well as the high unemployment rate, the French government is being more enterprising in its reforms. A team of two French and German economists submitted a paper on the potential reforms both countries could implement to stimulate growth in both countries as well as Europe.

Based on this paper, the French Minister of the Economy has submitted a law which will be discussed before the French Parliament early 2015. This law includes a certain number of reforms which are aimed to create greater flexibility in the labor market and further simplify redundancies.

Measures which aim to increase flexibility

Regarding flexibility, the proposed law implements measures which expand the categories for fixed term employment.
The proposed law plans on preserving the possibility to enter into a fixed term contract for a “specific purpose”. This type of contract was highly sought by companies managing complex projects and that required specific competencies for long but fixed durations of time.

This contract, which had been authorized for an experimental duration between June 2008 and June 2014, allowed employers to hire “cadre” employees for a specific purpose or project, of a minimum duration of at least 18 months and a maximum duration of 36 months.

Measures to simplify redundancy process

The proposed law also aims to simplify additionally the regulations on redundancies in France.

- Selection criteria
Currently, French law requires that when a company considers undertaking the redundancy of more than 10 employees, a selection criterion be applied to all employees based on, notably, factors set forth in the French Labor code: age, number of dependents, years of service and disabilities.
However, this applies regardless of the geographical scope of the redundancy. Therefore, a company making employees redundant in one city had to compare the employees concerned with those located in another city.
The proposed law affords employers greater flexibility; indeed, through either a unilateral decision or through a collective bargaining agreement, the employer would be able to choose to limit the geographical scope of a selection criteria analysis.
- The “reclassement” obligation
In addition, one of the most difficult aspects of the redundancy rules in France is the extra-territorial “reclassement” obligation, requiring employers to search for other positions throughout the group of company even outside of France. The proposed law would limit the geographical scope of this obligation. Thus, if the law passes, employers will no longer have to search for job opportunities in subsidiaries established outside France.
- Labor inspector authorization
Finally, and more importantly, since July 2013 any redundancy plan must be approved by the French labor administration prior to being implemented. Currently, if a plan is approved by the administration and later overturned by the courts after its implementation by the employer, the termination are deemed null and void. This will no longer be the case if the proposed law is implemented as is.

Administrative and other simplifications

The French Parliament is also discussing a new law this month which would aim to simplify administrative procedures for employers and thus, cut through the red tape. The main simplifications are the following:
- Simplification of the part-time mechanisms,
- Harmonization of the timing rules of the French Labor Code,
- Simplification of the profit sharing schemes (merger of the mandatory and the optional profit sharing scheme).

Reducing unemployment is absolutely paramount for the French government. François Hollande had promised, in 2012, that his government would manage to reduce unemployment by the end of 2013.
The burdensome labor laws are viewed as an obstacle to attract investment and reduce unemployment. It is for this reason that labor law has been, and continues to be, at the heart of French politics and legislative reform.
In view of such a daunting political and economic task, the government is convinced that the benefits brought by increased flexibility, entrepreneurship and investments outweigh the potential costs of decreased security for employees.

USA and UK - Employment Insolvency Law Issues

By Gabrielle Culmer, overseas door tenant at 9 Stone Buildings, London.

In the United Kingdom, when a company goes into insolvency, it is usually when it is “unable to pay its debts as they fall due,” and is deemed to be so where it is proven to the satisfaction of the court. Also, where there is a shortfall of assets in relation to liabilities.

An official liquidator is appointed, and an application is made to the court to wind up the company by a petition presented whether by the company, or the directors, or by the creditors.

Employment Contracts in Administration and Receiverships

In an administrative receivership, the receiver acts as the agent of the company and acts as manager while being personally liable on any contract entered into by him/her in the carrying out of functions, but has an indemnity out of the assets of the company. In an administration, the administrator rescues the company as a going concern, and achieves a better result for the creditors than if it were wound up, or makes a distribution to one or more secured or preferential creditors.

Furthermore, the administrator has a duty to the general body of creditors and powers are given on behalf of the general body of creditors. The administrator is not generally liable for the contracts in which he enters or for the employment contracts adopted.


There is relief awarded to employees of companies in the U. K. In a liquidation, the pari passu principle is the order the creditors are to receive funds, and starts with secured creditors. Usually, the insolvency practitioner can keep the employee contracts where there is a viable company, however, if it is not feasible, can be liable for fraudulent trading if contracts are kept which cannot be covered financially.

Statutory Protection is provided as to the transfer of undertakings under the Insolvency Act 1986 where the company has been transferred. Also, a claim for arrears is preferential within the confines of the act. Under sections 257 and 258 of the Pensions Act 2004, eligibility is assessed and ensured, and the Pension Protection Fund provides compensation where the employers’ pension scheme is underfunded.

Preferential creditors have preferential debts to be paid in advance of other unsecured creditors. Schedule 6 of the Insolvency Act 1986 classifies these as PAYE , social security contributions, occupational pension scheme contributions, remuneration which includes, holiday pay, guarantee payments and any pay for the time off work if for trade union duties, ante natal care and medical supervision required by statute.

In addition, the insolvency practitioner may provide gratuitous payments to employees if they are bona fide payments to carry on the company’s business. However, a golden handshake or other terminal payments are harder to justify.

National Insurance Fund

Section 182 of the Employment Rights Act 1996 states that the Secretary of State needs to be satisfied that (a) the employer has become insolvent, (b) the employee’s employment has been terminated and (c) on the appropriate date, the employee was entitled to be paid the whole or part of any debt to which the part applies. Then subject to section 186, the Secretary of State will pay the employee out of the National Insurance Fund.

The Redundancy Payment Scheme

The insolvency provisions of the Employment Rights Act 1996 are brought into force when section 183 of the IA 1986 applies.

Under the Employment Rights Act 1996, the Redundancy Payment Scheme allows the employees who have some debts payable to them covered by the state.

The Redundancy Payment Office of the Department for Business Innovation and Skills (BIS) provides this in addition to the recourse of being able to recover some debts as creditors of the company.

In addition, employees dismissed by the administrators may look to them for claims arising during this period.

The Redundancy Payment Scheme Debts

These are to be applied for on form RP15 enclosing form RP16 and include:
1. Arrears of pay up to £464 per week (Effective since 14th April, 2014) for a maximum of eight weeks which includes commission overtime and guarantee payments.
2. Statutory payments for time off work, or suspension on medical and maternity grounds.
3. Any ‘protective award’ made by an employment tribunal if an employee has failed to inform or consult a worker’s representative about the collective redundancy.
4. Holiday pay, for unused holidays and for holidays which have been taken and not paid, up to a week’s limit of £464 for a maximum of 6 weeks. Holiday pay may include holiday carried over from the previous year if the contract permits.
5. A compensatory payment for failure to give proper statutory notice, up to a weekly limit of £464.
6. An unpaid basic award made by an employment tribunal of compensation for unfair dismissal.
7. Reasonable reimbursement of apprentices ‘or articled clerks’ fees or premiums. Unlike holiday pay and compensation, the full amounts can be recovered.
8. Statutory redundancy payments in the employee’s weekly pay (up to a current set limit of £464 per week) multiplied by a number of qualifying weeks equivalent to length of employment. 0.5week’s pay for each full year of service where the age during the year is less than 22 years. A week’s full pay for each full year of service where age during the year is 22 or above, but less than 41 years, 1.5 week’s pay for each full year of service where the age during the year is 41 years.

If such payments fail to be made, the procedure is then taken to the Employment Tribunal. The regular insolvency proceeding considers claims which are not covered by the scheme and which must be formally registered.

Recent Developments

In Gomes Viana Novo and Others v Fundode Garantia Salarial (ECJ) Case C-309/12, 372 (2014) ICR, it was held that under the second paragraph of Article 3 Directive 80/987, member states were free to determine the date from which the employees’ outstanding pay claims were to be taken over by a guarantee institution in the event of an employer’s insolvency. Under Article 4(1)(2), as amended, it is possible for the minimum guarantee period of 3 months to be after the reference date, with the member states also having the option of providing for a minimum guarantee limited to 8 weeks provided that 8 week period was within a longer reference period of at least 18 months. It was open to the member states to fix a date from which the reference period was to be calculated, as the date on which the proceedings for a declaration of the employers’ insolvency was commenced. Where a member state decided to exercise the option to limit the guarantee by setting a reference period, it could choose to limit that period to 6 months provided that it guaranteed pay for the last 3 months of the employment relationship.

U. S. A. Chapter 11 Restructuring and Employment Contracts

In the United States, the Chapter 11 bankruptcy allows for the reorganization and restructuring of the company. The Debtor in Possession can continue the contracts of employees under the code. Management is left mainly in place and the shareholders have a stake in the outcome. A cram down is imposed via a plan on the creditors.

Under Title 11 USC of the Bankruptcy Code § 1107, the debtor in possession is a fiduciary with the rights and powers of a trustee. The Automatic stay is placed on the business dealings of the company where the claims arising before the filing of the bankruptcy petition may not be pursued. The Code states that, “A stay of creditors’ actions against the Chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.” (11 USC § 362(a)). However, it is noted that certain types of actions are exempt under 11 USC § 362 (b). Furthermore, secured creditors can obtain relief from the stay under specific circumstances.

Fees can be paid to professionals hired by the DIP or appointed by the court.
However, in the case of executory contracts the DIP may assume or reject any one. Should the DIP refuse an employment contract, the former employee can file an unsecured claim arising out of the date of the bankruptcy petition.

In Chapter 11 the debtor can renegotiate leases and contracts, and can repay debts and discharge them. Section 507 lists the types of priority claims against a debtor. In § 507 (a)(4), an employee claim for “unpaid wages, salary or commissions, including vacation, severance and sick pay leave, is entitled to fourth priority treatment.” The amount of the claim to be prioritized is $11,725 and earned by the employee within 180 days before the petition date and when the business ceased. If the claim goes above $11,725 or is earned prior to the 180 day window it becomes considered unsecured.

Priority is applied where the Code states that there should be priority, and the claim arose post petition. Also, where it can be applied as an administration expense under § 503(b) of the Code. The DIP usually prioritizes the employee claims that arise post petition while reducing unnecessary employee claims.

International M&A Employment Due Diligence Checklist

By Donald C. Dowling, Jr., White & Case, New York

Thorough due diligence involves a wide range of business and legal issues including antitrust analysis, accounting principles, intellectual property rights, environmental compliance, tax status, and an analysis of pending and potential lawsuits against the seller. One part of any thorough due diligence process is the staffing piece—workplace due diligence into the seller’s labor practices, its employment law compliance and its employee benefits offerings. Due diligence into workforce issues internationally, outside the US is particularly vital, because business acquirers away from employment-at-will in effect inherit the seller’s human resources status quo—whether by vested rights in a stock purchase, by acquired rights in an asset purchase or else by some contractual commitment amounting to some sort of employer substitution. Also, because law in many places shifts pre-closing employment liabilities to the buyer after closing, any prospective buyer of a business needs to study the seller’s global personnel operations and get familiar with the to-be-acquired worldwide workforce.

Using a thorough due diligence checklist helps a prospective business buyer figure out what data to scrutinize and also helps a prospective business seller anticipate what data prospective buyers will expect to see. But conducting due diligence into human resources across borders is tricky, because employment is inherently local, rooted in issues indigenous to each affected country. For example, Hong Kong imposes unique social security and pension compliance requirements, Mexico imposes strict profit-sharing mandates, Brazil imposes an unusual employer-financed unemployment compensation regime, Saudi Arabia imposes unique workforce gender-segregation rules, and South Africa imposes unique diversity plan obligations. An employment due diligence checklist can account for these inherently local workplace and employment law issues only if it gets tailored for all the jurisdictions in play in the present deal.

This international human resources due diligence checklist focuses on staffing issues that tend to arise across various jurisdictions. So this checklist is merely an outline that needs tailoring for each local jurisdiction where a seller in a given deal employs staff:

• Data laws in due diligence. The due diligence process exists to root out noncompliant problems, so the due diligence process itself should never cause its own compliance breach. Many jurisdictions, including the European Union as well as most of the rest of Europe plus Argentina, Canada, Israel, Japan, Korea, Philippines, South Africa, Uruguay and a growing number of others, impose broad data privacy (“data protection”) laws that inevitably have unexpected consequences in the due diligence context. Electronic due diligence data rooms raise exposure under these laws if they offer up to bidders personal information about identifiable seller employees. Bidders cannot shrug this off as the seller’s problem, because liability for breach of data laws can transfer to a buyer at closing, particularly in a stock deal. Compliance steps may require “anonymizing” data room information, entering into “onward transfer agreements” with bidders, entering into cross-border “model contractual clauses” agreements, collecting signed employee consents and taking other steps. Jurisdictions including Argentina, Hong Kong, Japan, Korea and the United Kingdom have issued legal guidance specific to the M&A due diligence context. Follow it.

• Materiality threshold. Prospective business buyers do not care about immaterial aspects of the seller’s staffing operations. International HR due diligence in any merger or acquisition therefore needs to be subject to some materiality threshold. Find out what the threshold is, and then focus HR due diligence only on issues that could exceed it.

• Claims, liabilities and exposure. Is the seller subject to any pending, threatened or potential employment-related grievances, claims, lawsuits, appeals, disciplinary proceedings, workplace inspections or audits, government complaints or investigations, administrative charges, unfair labor practice charges, criminal proceedings or unpaid employee judgments? What about claims disposed of over the last few years, be they settlements or judgments? What is the exposure for the seller’s noncompliance with labor/employment, payroll, safety, and HR data privacy laws? What are the seller’s cash reserves for these claims?

• Corporate employer issues. In each country, identify the seller’s local affiliated corporate entities that employ staff. Learn the relationships among the seller’s operating entities and any “services companies” that employ people.

• Census and organization chart of employees plus contingent staff. Get a census of seller employees (and directors) worldwide, including part-time and contracted-out employees. Include both employees who service the target entity and target-entity employees “seconded” out to service other organizations. Ideally this census should include dates of hire, compensation and job category. Separately, get an organization chart and verify that only the employees who actually serve the target unit—regardless of title or designation—will transfer as part of the deal. Conversely, verify that all essential staff who should transfer will come over as part of the deal. Identify any “shared services” employees who work for both the target unit and non-acquired units. Next, identify the seller’s contingent staff (independent contractors, consultants, agents, secondees, sales representatives, “business partner” staff dedicated to this business and employees working from home or remotely, even overseas).

• Expatriates and immigrants. Collect information on the seller’s expatriate and immigrant populations and programs. Who are the overseas secondees and other posted expatriates? Which corporate entity employs each expatriate? Identify “stealth expatriates” outside the formal expatriate program who are nevertheless working outside their home countries. Check the visa status of non-local-citizen employees worldwide. How might this deal affect these visas?

• Compliance with policies and laws. Identify (and check compliance with) the seller’s own employment policies, written and unwritten. Look at employee handbooks, written work rules, health/safety guidelines. Separately, check whether the seller complies with legally mandated terms and conditions of employment. What special terms and conditions (beyond legal minimums and above market) does the seller extend to employees? The buyer will likely have to replicate these terms after closing.

• Code of conduct. Check compliance with the seller’s internal ethics code of conduct and social responsibility programs, including any commitment to an industry code, any corporate social responsibility program and any so-called “framework” (global union neutrality) agreement. Are these translated into local languages and compliant with overseas language laws? Do the seller’s HR practices comply? Will the seller’s current practices align with the buyer’s practices and comply with the buyer’s policies and codes? Check seller practices regarding government procurement, payment procedures to government officials, and compliance with anti-bribery laws and audit/ accounting rules. Verify that any seller whistleblower hotline complies with Europe’s tough data protection law mandates.

• Supply chain and human rights. Get the seller’s supplier code of conduct, if any, and collect compliance data like social/human rights audits. Collect data on labor practices in the supply chain, particularly as to components and products sourced from poor countries, including construction projects. Consider post-closing obligations on the buyer under California’s Transparency in Supply Chain Act 2010. (Cal. Civil Code §1714.43; Cal. Revenue and Taxation Code §19547.5) Consider post-closing exposure to workplace-context human rights claims. Consider whether the seller’s supply chain practices might, after closing, breach the buyer’s supplier code of conduct, if any. This said, keep human rights issues in perspective. Discount advice (from certain consultants and activists) that the United Nations Guiding Principles on Business and Human Rights and other aspirational declarations somehow impose binding legal obligations relevant to international mergers and acquisitions. For the most part, they do not.

• Compensation and benefits. Using a separate compensation/ benefits checklist, check the seller’s benefits and compensation offerings, including bonus plans. Are they above market? Do they comply with legal minimums? Look into the seller’s compensation philosophy, compensation/benefits “schemes” or plans, severance plans, retirement plans, bonus plans and perquisites (like meals, housing and expatriate benefits). Check sales compensation. Check individual pension promises, special agreements, grandfather clauses, death/disability benefits, cafeteria plans, service awards, profit-sharing and savings plans, tuition and adoption reimbursement plans, employee assistance programs, employee loans and guarantees—even unusual expense reimbursements. Understand the interplay between foreign pension plans and foreign social security in each affected country. Check compliance with local laws that mandate extra payments and benefits (like thirteenth-month pay and profit sharing in Latin America). Get an accounting of any transferring plans and study funding—unfunded, underfunded, and “book reserve” plans can raise huge problems and occasionally even kill deals.

• Equity. Look at seller stock options, stock grants, phantom stock and other equity plans, plus employee ownership programs, officer/director stock ownership, and employee ownership in affiliates and entities doing business with the seller. What will happen to these after closing? If the buyer will not or cannot replicate them, what will it need to do instead?

• Employee insurance coverage. Look at the employment-related insurance the seller provides, like employee life/health/accident insurance, hazardous duty/kidnap insurance, payments to state-mandated insurance funds (workers’ compensation and state social security insurance), expatriate coverage and “key man” policies naming the employer as beneficiary. Consider analogous insurance needs post-closing and, in an asset deal, consider the logistics of getting insurance in place by the closing date.

• Performance management. Study the seller’s performance management system. Focusing on key employees, collect data on job evaluations, performance appraisals and problem employees. Consider integration after closing.

• Labor organization relationships. What labor organizations represent the seller’s workers? Are these independent unions, in-house unions or so-called “white unions”? What about pending employee requests for union recognition or organization? Separately, collect organizational data on the seller’s in-house or company-sponsored labor organizations like local/national works councils, any European Works Council, health/safety committees, staff consultation committees, worker committees, workplace forums, labor/management committees and ombudsmen. How cooperative or contentious are these groups? Collect meeting minutes and records memorializing labor disturbances and days lost to strikes.

• Collective agreements. Look at applicable collective bargaining agreements, “industrial awards,” “social plans” and other agreements with employee representatives—not only union agreements, but also accords with works councils, worker committees, health and safety committees, ombudsmen and the like. Avoid the common mistake of asking only for “collective bargaining agreements”—a phrase usually interpreted as meaning only formal union agreements, excluding informal one off accords and arrangements with works councils. Get expired agreements with terms that still apply. Identify all industry (“sectoral”) collective agreements that bind the seller even as a non-signatory. Does the seller participate in any multiemployer bargaining associations?

• Individual employment agreements. Look at individual employment contracts with employees, including employment agreements labeled “offer letters,” “statement of particulars,” restrictive covenants, non-competes and confidentiality agreements, indemnification agreements, invention and intellectual property agreements, expatriate arrangements, resignation letters and releases. At least check these for key executives and look at form/template agreements for rank and file employees. Be sure to look at contracts with contingent workers—service providers like “temps,” independent contractors, consultants and agents).

• Employee consents. Check individual employee consent forms. Employee consents come in many flavors: In jurisdictions like the UK and Korea, employees may have consented in writing to work overtime. European employees may have consented to employer processing of sensitive personal data. Employees may have acknowledged a code of conduct or work rules in writing. If these consents are electronic, do signatures comply with electronic signature protocols?

• Change-in-control clauses. Check change-in-control, golden parachute, and other transfer-related clauses in employment and agency agreements, including M&A-ratification provisions in any labor union contracts and European Works Council agreements. Of course, dig out every change-in-control clause in every executive employment agreement and find all transferability clauses in independent contractor agreements. These are vital.

• External agreements. Do any external agreements (with third parties) limit staffing flexibility? For example, in a stock purchase, are there acquisition agreements from earlier deals that limit reductions-in-force? Has the seller signed onto any supplier codes of conduct of its customers? Is the seller a government contractor that has taken on staffing-related public procurement obligations? In the United States, for example, a buyer of a government contractor can take on big “affirmative action” obligations after closing, and analogous issues can arise abroad. Separately, look at outsourcing agreements with HR service providers like payroll providers, “temp” agencies, benefits providers and whistleblower hotline providers.

• Payroll and government filings. Check the seller’s payroll processing compliance as to deductions, withholdings, reporting, compliance with mandatory payments to unions and remittances to agencies including government tax, social, unemployment and housing funds. How is payroll issued? Are there any extra deductions (such as for charitable contributions or employee loan repayments)? Does the seller pay mandated benefits like premium-pay vacation, profit sharing and thirteenth-month pay? If the seller employs anyone in countries where it is not registered to do business, how does the seller comply with host-country payroll obligations? Be sure to check “permanent establishment” issues—are there “floating” employees doing business in countries where the seller is unregistered, not paying taxes, and flouting local payroll mandates? This scenario is common.

• Wage/hour compliance. Verify compliance with wage/hour laws, cap-on-hours laws, vacation and holiday mandates, overtime payments, payments during business travel, exempt-status designations, mandatory meal breaks, toilet breaks and rest periods.

• Health and safety; duty of care. Check compliance with health and safety laws, including recordkeeping mandates. Get information on duty of care/safety/evacuation and other protocols such as for hazardous-duty work and occupational health/safety law compliance, particularly for expatriates.

• Discrimination/harassment. Verify compliance with local discrimination/diversity/harassment laws including laws on pay equity, affirmative action, mandatory training and bullying. Verify compliance with the seller’s own discrimination/harassment policies. For example, does the seller impose mandatory retirement in violation of a no-age-discrimination provision in its own code of conduct? (That, unfortunately, is a common problem. Indeed, many international discrimination/harassment policies go well beyond local laws, and many employers violate their own policies.)

• Recent layoffs and divestitures. What layoffs or “collective redundancies” have occurred in the last few years? What divestitures of business units have occurred? Did these comply with applicable laws? What lingering obligations exist in old “social plans”? Any recall rights?

• HRIS. Look into the seller’s employee data-processing and human resources information systems (HRIS). Check how HRIS complies with data protection laws, especially as to cross border data exports. Has the seller made all required notices/communications to employees about HR data processing and collected necessary consents? What so-called “sensitive” staff data does the seller process? Beyond HRIS, verify compliance with data protection laws in the HR context, including as to routine HR data exports overseas, and as to global whistleblower hotlines.

• Powers of attorney. Find out what powers of attorney employees, officers and directors hold. These are particularly critical in Latin America, where there can be different levels of powers, some of which include the power to dispose of company assets. Consider how these powers will need to work after closing.

• Management oversight. What controls does the seller’s headquarters use to monitor local management’s compliance with laws and corporate policies?