Healthcare M&A Employment Due Diligence
Healthcare M&A activity continues to rise, making employment law due diligence increasingly important, and complex, due to the industry’s heavy regulation. Buyers and sellers must closely examine each of the following: compliance, classification, contracts, and benefits. Below is a summary of critical employment considerations in healthcare transactions:
Exempt Status
Employee classifications under federal and state wage laws must be reviewed. For example, while registered nurses are often exempt under federal law, state rules (like California’s) may differ. Mid-level practitioners (such as physician assistants and nurse practitioners) and licensed practical nurses (LPNs) often present unique classification risks. LPNs are not considered mid-level practitioners and are typically non-exempt. Proper documentation of exempt status, including job descriptions, is essential. Where material misclassification issues exist, back wages and release agreements can help mitigate risk.
Independent Contractors
Federal tax decisions and court rulings have found mid-level practitioners, and even physicians, to be misclassified in certain situations, particularly when the hiring entity exercises significant control over the physician’s work. The IRS’s 20-factor test and the Department of Labor’s 2024 final rule on independent contractor classification under the FLSA provide key factors to consider for classification analysis, but state law must also be considered. For example, some states apply strict standards, such as California’s ABC test, which limits contractor use. Sellers may need to consider reclassification prior to going to market, while buyers should verify classification status rather than presume exemptions based on role alone.
Employment Agreements
Employment agreements often contain key provisions, such as change of control bonuses, options, equity interests, and similar clauses, that can impact the value of the target. These agreements must also be reviewed for assignability, choice of law/venue, cause/good reason termination standards, responsibility for nose and tail malpractice insurance, and other key provisions.
Non-Compete Agreements
Buyers typically want assurance that key employees, such as executives and physicians, will not leave and start competing, particularly with respect to the same clientele within the same geographic area. Several states have enacted limits on non-competes in the healthcare sector. In April 2024, the FTC proposed a nationwide ban on non-compete agreements, which is currently being challenged in court but may significantly alter the enforceability landscape. Thus, non-compete provisions must be analyzed for enforceability on a state-specific basis. Invalid clauses may require revised agreements or valuation adjustments.
Immigration Compliance
Healthcare industry employers often rely on immigrant labor for a variety of positions. Given the changes in enforcement priority at the federal level, immigration compliance is more important than ever. Buyers should evaluate whether Form I-9s are complete and compliant, and will need to decide whether to retain existing I-9s or have employees complete new ones. If existing I-9s are retained, errors can transfer to the buyer. Sellers should consider pre-transaction immigration audits to reassure buyers and proactively address issues. Employees working under visas such as H-1B, J-1, or O-1 may require petition amendments or transfers.
Labor Relations
Labor unions remain strong in the healthcare sector. If a union exists, the collective bargaining agreement must be reviewed, and negotiations with the union may be necessary. Recent organizing efforts might signal a disgruntled workforce. Buyers should evaluate how bargaining units are structured, such as whether they are limited (e.g., nursing department microunits).
Benefits & Executive Compensation
Physicians often have unique compensation models set forth in detail in their employment agreements, such terms should be reviewed to ensure that the buyer is comfortable adopting them. Healthcare executives may have generous terms, such as change of control bonuses and/or severance, that must also be considered. Interim operating covenants can help ensure that buyers retain consent rights to any payments or changes between signing and closing.
Anti-Discrimination/Harassment
High-profile verdicts for sexual harassment in healthcare settings have made workplace culture a critical part of due diligence. Sellers should have policies, training (especially in mandatory states like California, Illinois, and New York), and documentation in place. Buyers should review whether a history of lawsuits, audits, or investigations suggests a non-compliant culture. Sellers should be prepared to show that any instances of inappropriate conduct were addressed promptly and that appropriate remedial action was taken.
Workplace Safety
Several states have recently enacted laws requiring healthcare employers to take specific steps to protect their workers. For example, California’s new Workplace Violence Prevention Law (SB 553, effective July 1, 2024) mandates written plans, training, and incident reporting. Buyers should review compliance with state workplace safety regulations, as well as OSHA incidents, illness and injury prevention plans, and emergency preparedness protocols. Whistleblower claims, failure to follow safety protocols, or previous safety violations should be carefully assessed.
WARN Act Compliance
Buyers must confirm compliance with federal and applicable state “mini-WARN” laws for layoffs or closings. Advance notice obligations can vary by jurisdiction. Buyers should also assess whether recent or anticipated workforce reductions were handled in compliance with such requirements.
DEI and ESG Considerations
More buyers are incorporating Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) benchmarks into due diligence. Healthcare targets may be asked to demonstrate DEI initiatives, leadership diversity, community engagement, and sustainability practices, potentially influencing deal structure, valuation, and stakeholder perception.
Conclusion
Employment due diligence in healthcare M&A is complex but essential. A thorough, proactive approach to classifications, contracts, compliance, and culture helps reduce risk, enhance value, and support post-deal success.
For guidance on employment issues in healthcare M&A, contact Spencer Hamer, FBFK Law Employment Attorney and Shareholder.
