Smaller companies often use professional employer organizations (“PEOs”) as a way to reduce benefit costs and to assist with many, if not all, human resources and payroll functions. While PEOs may work well for a company’s day-to-day operations, they can create headaches and complications in corporate transactions. When acquiring a company that uses a PEO, it is important to consider the following:
- Seller’s representations and warranties relating to employee benefit plan compliance generally include representations and warranties relating to the compliance of the plans it sponsors. Since individual companies do not sponsor PEOs, the typical benefit plan representations and warranties should be modified to include representations and warranties regarding any plans or benefits provided by the seller or its controlled group members plus more limited representations and warranties regarding the plans sponsored by the PEO.
- Depending on the PEO involved, it may be more difficult to get copies of actual plan documents, insurance policies, and other diligence-related items from the PEO that a buyer would typically review during the due diligence process.
- Most PEO contracts require at least 30-60 days’ notice for termination, so the buyer in a stock deal may have to continue the PEO arrangement for a period of time post-closing.
- Terminating participation in a PEO plan in a stock deal is a complicated process. Generally, in a stock transaction, the seller will terminate its retirement plan immediately prior to closing so that the seller’s employees will receive a plan distribution as a result of the transaction. However, if a seller participates in a multiple-employer retirement plan sponsored by a PEO (a “PEO Plan”), for the seller’s employees to receive a distribution as a result of the transaction, the seller must first adopt a mirror-plan to the PEO Plan and then terminate the mirror plan prior to closing, which is a cumbersome and more time-consuming process.
A buyer should ask the seller early in the process whether the seller uses a PEO so the buyer can properly navigate the transition issues caused by the PEO and reduce any surprises as the deal gets closer to closing.