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New California Labor Law: Impacts on Selling/Buying Your San Diego Business

As the calendar turned to 2018, many new California laws went into effect. See LA Times news report here. Among the new laws was a provision that now prohibits private and public employers from seeking information on a prospective employee’s pay, salary, or compensation history. See Cal. Lab. Code, § 432.3. The new law raises some dilemmas for those who are seeking to sell or buy a San Diego business if retaining certain employees is an aspect of the sale/purchase. Here are some thoughts.

New Labor Law: No Asking About Salary/Compensation History

The new law states that:

“(a) An employer shall not rely on the salary history information of an applicant for employment as a factor in determining whether to offer employment to an applicant or what salary to offer an applicant.

(b) An employer shall not, orally or in writing, personally or through an agent, seek salary history information, including compensation and benefits, about an applicant for employment.

(c) An employer, upon reasonable request, shall provide the pay scale for a position to an applicant applying for employment.”

What is the Problem?

As noted, the new statute raises some dilemmas for those selling or buying an existing business, particularly if there is going to be some sort of negotiations with “key employees.” When a business is being sold, part of the sales process involves conducting due diligence. This is a process of having the buyer confirm various information provided by the seller including wage and labor costs. Obviously, if the new owners are accepting the employees “as is,” then the employees are not “applicants.” As such, there should be no problem under § 432.3 in reviewing wage and salary rates/history as part of the due diligence.

However, what about “key employees” who may or may not stay depending on arrangements to be made with the new owners? Since they may or may not remain with the business, in this respect, key employees might be considered “applicants” as defined by § 432.3. Moreover, with key employees, the salary history and the salary to be paid are among the many considerations that factor into the price to be offered/paid for the business and for plotting expenses post-closing. Furthermore, negotiating a satisfactory employment agreement with key employees is often a condition precedent to consummating the sale.

Selling/Buying a San Diego Business: Working Around the Problem

Going forward, during the due diligence phase, obviously, a potential buyer — and a seller, too — must avoid running afoul of § 432.3. We here at San Diego Corporate Law suggest that some of the problems can be avoided with careful drafting of the sales contract. Here are some provisions and other procedural steps to consider:

  • Add a provision in the sales contract carving out salary/wage information for any key employees and prohibit the seller from providing that information at least until certain pre-conditions are met
  • If you are the buyer’s attorney, make the seller responsible for any accidental disclosure of the salary information that can be uniquely tied to any employee — indemnity clauses needed
  • Alternatively, limit salary and salary history disclosure to only outside counsel or to only employees/agents of the buyer involved in the purchase; prohibit disclosure to buyer’s human resources personnel
  • Reorder the due diligence sequence — put negotiating with key employee at the beginning of due diligence rather than let it linger for later in the process
  • Be cautious about aggregated expense data — avoid data sets that could uniquely identify salary and wage histories — sellers may need to redact or code differently
  • Consider segregating expense data from wage/salary data if feasible
  • Do not forget that “salary” will likely be defined to include all forms of compensation — so caution is in order with respect to non-monetary benefits

Selling/Buying a San Diego Business: Contact San Diego Corporate Law

For more information, contact Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to help with the sale or purchase of your San Diego business.

You Might Also Like:

Contracts: Purchase Or Sale of Business

Buying an Existing Business: What You Need to Know

Checklist When Buying Or Selling A Business

What to Expect When Selling Your San Diego Business

What Does the New California Labor Law Mean for Those Selling/Buying a Business?


Schedule a Consultation: 858.483.9200