A private equity (PE) firm’s primary objective is to generate returns on its investments. When a PE firm acquires a portfolio company (PortCo), one way the PE firm increases its returns is by making employment-related changes—sometimes significant ones—at the PortCo level. Those changes can vary and may include leadership transitions, reorganizations, revisions to compensation structures, and sometimes layoffs. This paper explores some of the key employment considerations, legal and otherwise, that arise after a PE firm acquires a PortCo.
(I) Leadership and Management Changes
One pressing consideration following a PE acquisition is whether there will be changes in leadership and management at the PortCo level. PE firms often bring in new management teams or key executives who are aligned with their strategic vision. This can result in the departure of existing leaders, either voluntarily or involuntarily.
Leadership changes are not easy. Employees often understand that new management teams may be installed to implement a PE firm’s strategy and that those new leaders may decide to cut costs, restructure or make other decisions that could affect their employment. The prospect of these changes can create uncertainty among employees and may impact morale and productivity. To maintain stability in the organization, it is essential for PE firms to manage leadership transitions carefully by focusing on clear communication and support for affected personnel.
From a legal perspective, it is important—as with any transition—to understand whether and how existing employment agreements are implicated, and whether an executive might assert that their termination is unlawful. Usually, a PE firm will know the employment agreements through transaction diligence and can plan accordingly. However, transaction diligence will not necessarily prepare a PE firm for all the statutory and common law risks associated with a potential termination.
(II) Organizational Restructuring
Organizational restructuring is a common consideration. PE firms often thoroughly review a PortCo’s operations to identify areas for improvement, increased efficiency or reduced costs. Restructuring might involve departmental consolidation or realignment, the elimination of redundant positions, and/or the outsourcing of certain functions.
Pitfalls abound when company reorganizations result in job loss. Though there is no one-size-fits-all approach to a reduction-in-force, having clear goals and a thoughtful process is important to hedging risk. What are the ultimate objectives, who decides which employees are selected for inclusion, and by what metrics are they selected? If severance is offered, what is the package? Does it need to conform with an existing plan or practice, and is there a reason why some employees need to be treated differently than others? Depending on the size and composition of the workforce, layoffs can trigger obligations under various employment laws, including the Worker Adjustment and Retraining Notification Act or its state counterparts (WARN) and the Age Discrimination in Employment Act (ADEA)—are these laws implicated? Finally, how will the restructuring be communicated, both to employees who are affected and those who remain with the PortCo? And is it prudent to offer retention packages to key employees who may be concerned about job security in the wake of these changes?
(III) Employee Compensation and Incentives
PE firms frequently revise employee compensation structures to better align them with performance and the PortCo’s overall strategic goals. This may include changes to salary, bonuses, and other benefits. At the key executive and management level, PE firms might also introduce equity-based incentives like stock options or performance shares to better link those rewards to company performance.
If not managed in an equitable matter, these attempted motivational and talent retention changes may create disparities and dissatisfaction among staff. Consideration of the importance to the culture of the PortCo is vital to ensuring that compensation adjustments are perceived by the workforce as fair and equitable.
(IV) Legal and Compliance Considerations
U.S. employment law is a patchwork of local, state and federal statutes and regulations that deal with many facets of the employer-employee relationship. PE firms should understand the PortCo’s obligations—which may vary depending on where the employees work—concerning discrimination, harassment, retaliation, whistleblowing, pay equity, minimum wage and overtime requirements, payroll requirements, worker classification, non-competes and other restrictive covenants, concerted activity and labor unions, leaves of absence, workplace accommodations, the use artificial intelligence in employment decision-making, collection of biometric data and more.
One often overlooked consideration for PE firms is whether and to what extent they could be deemed a joint employer of the PortCo’s employees for liability purposes. There is no single joint employer test—the standard varies depending on location and the law at issue—but at a high level the question is one of control. The more control a PE firm exercises over a PortCo decision, the more likely the PE firm could be subject to joint employer liability with respect to that decision. The question of control is particularly acute when the PE firm sends one of its own into the PortCo to assist, even temporarily, in day-to-day management or operations.
Conclusion
Employment considerations can considerably impact the overall long-term success of a PE firm’s investment in a PortCo. Changes in leadership and management, organizational restructuring, revisions to compensation and incentives, and legal compliance are all critical facets of a PortCo investment that require diligence and strategic implementation. By devoting proper attention to these employment considerations, PE firms can help a achieve a positive work environment within the PortCo and thereby drive the growth of their investment.
