An issue of great importance that many corporate attorneys neglect to properly address in finalizing an acquisition, asset purchase or merger is the seller’s workers’ compensation history. If the buyer is going to remain in the same industry as the seller, it is very likely that the buyer is going to assume liability for the seller’s workers’ compensation history. If the seller’s workers’ compensation history is not properly examined, buyers could be responsible for unexpected expenses related to BWC premiums and may also find themselves unable to qualify for group-rating discounts.
Generally speaking, the BWC will designate the buyer as the successor in interest to the seller and transfer the seller’s workers’ compensation liability to the buyer, even if the buyer opens up a new policy with the BWC. The BWC will only not do so when three specific conditions are met. Those conditions require: (1) a material change in ownership and the new owner must change the business so substantially that (2) the governing classification and (3) the process and hazard of the operation change. In other words, unless the buyer intends to use the seller’s assets in a completely different industry from the seller’s, the buyer is going to assume the sellers’ worker’s compensation history. There are exceptions for buyers who purchase the assets of sellers who are operating under a receivership or who have entered bankruptcy, but most sales will result in the buyer being designated a successor in interest by the BWC.
Understanding the potential cost of being designated a successor in interest is paramount for buyers. Fortunately, the BWC has made efforts to allow buyers to access sellers’ workers’ compensation experience and rating information prior to consummating the sale. The parties to a sale can submit a Request for Business Transfer Information, otherwise known as an AC-4 form, to the BWC. This form will allow the acquiring entity to learn about the seller’s workers’ compensation history. Prior to finalizing the sale, the parties can then adjust the purchase price as necessary to reflect future workers’ compensation costs or agree to an indemnity provision.
Failure to properly investigate a seller’s workers’ compensation history could lead to significant financial consequence, including unexpected BWC premiums and the disqualification of the buyer from group-rating programs. Depending on the size of the business, these costs could range from a few thousand dollars to well into six figures. If the buyer is not aware of its expected BWC costs, it may attempt to sue the seller for indemnification. If the buyer’s attorney did not conduct their due diligence, the buyer may turn their sights on their attorney for malpractice. As such, it is in the interest of buyers and their attorneys to make sure this important issue is addressed prior to sale.