Forgotten Due Diligence: Overlooked Occupational Safety & Health, OSHA Liabilities During M&A Transactions

1. A Nightmare Acquisition

Your Company has recently acquired a small logistics company with a strong business reputation.  Eighteen days after the acquisition was finalized, you receive a call that there has been a tragic forklift accident in a warehouse operated by a subsidiary of the newly acquired target company.  An employee of a staffing agency was struck by a forklift and is in intensive care.  Federal OSHA has cited the subsidiary four years ago for forklift violations in another state, and is onsite considering willful citations the forklift operator was untrained and uncertified.  The Company faces hundreds of thousands of dollars in civil OSHA citations.  If the employee passes away, new operations and safety management may face potential criminal liability punishable with six months in federal prison and a $250,000 personal fine.  The Company also faces a multi-million dollar tort claim from the worker’s estate, as he is not bound by the worker’s compensation system. 

2. Overview of Potential Legal Liabilities from an Acquisition

Ill-informed M&A lawyers often overlook the liabilities posed by occupational safety and health risks.  Employers face numerous risks and liabilities, a few of which were described in the scenario above.  Unaddressed safety hazards can injure or kill employees. Employers face civil OSHA citations, including “per instance” violations that can be assessed into the millions of dollars.  Because business partners track safety records through third party tracking services, OSHA citations and poor safety records can jeopardize business relationships.  Fatal accidents can result in referrals to the USDOJ or state prosecutors for criminal prosecution of employer representatives: operations, safety, and executive management.  Poor safety records can tarnish the reputations of affiliated entities.  A strong reputation for safety can be quickly and rebuilt painstakingly slowly.

3. Key Review Elements and Red Flags

A prospective buyer should review safety records and safety-related documents, engaging qualified outside counsel and safety professionals where necessary to aid the process and ensure effective due diligence.  Key indicators to review include:

a. Severe Violators Enforcement Program

OSHA maintains a Severe Violators Enforcement Program (SVEP), a log of employers with significant alleged OSHA violations.  Inclusion on this log can be indicative of a significant OSHA citations and allegations of willful safety and health violations, or violations that resulted in a fatality or catastrophe (injuring three or more employees).  Inclusion on the SVEP log can trigger additional OSHA inspections and scrutiny. Inclusion in SVEP can be damaging to the business reputation of the employer.  Employers can be stuck in SVEP for a minimum of three years.   

b. OSHA Establishment Search and OSHA Record

Prospective buyers should review any OSHA citations, settlements, and open inspections.  Open inspections may result in citation.  Settlements and accepted citations mean that the employer has OSHA violations “on their record,” predicate violations that OSHA can use for future Repeat violations.  Repeats are significant classifications that will be reputationally damaging and will carry five or ten times the standard penalty, for each alleged violation. 

The last five years of a company’s OSHA record should be publicly available on OSHA’s Establishment Search website.  Though the Establishment Search may sometimes be factually inaccurate, this website will provide an additional resource on any open inspections, closed inspections, and citations OSHA has issued.  The status of those citations, including appeals and settlements, will be recorded as well. 

c. OSHA Logs and Loss Runs

Employers in more hazardous industries are required to record work-related injuries and illnesses that meet certain criteria on a yearly OSHA Form 300 log; the logs must be maintained for five years.  Prospective buyers should request and review these logs from all worksites that maintain them.  This review should be supplemented with a review of the worker’s compensation loss run, which may include additional injuries that did not meet the OSHA recording criteria.  This data should help identify trends with regard to employee injuries and illnesses, and perhaps reflect recurring hazards.

d. Written Safety Programs

Most employers are required to maintain written safety and health programs to address potential hazards at their worksites. An employer’s use of an overarching program, a Safety and Health Management System (SHMS) (also called an Injury and Illness Prevention Plan (IIPP) or Accident Prevention Program (APP)) can indicate the employer’s  implementation of a safety-based (rather than just compliance-based) program. 

Written programs on applicable safety hazards will also indicate compliance with OSHA standards.  Key programs for serious hazards include fall protection, powered industrial trucks (forklifts), lock-out tagout, confined space, heat illness, and workplace violence.  Programs should address the hazards identified in the job hazard assessments (JHAs).  Reviewing these programs and JHA documents will provide diligence that an employer is meeting the requirements of the OSHA standards and implementing a safety program to protect employees and other workers. 

4. Transaction Terms and Risk Allocation

Counsel and safety professionals should also carefully review the purchase agreement to ensure adequate disclosure of matters identified during due diligence.  In particular, the representations and warranties contained in the purchase agreement should include comprehensive statements of fact and assurances related to the target company and its employee health and safety record.  These representations and warranties serve as the foundation for a post-closing indemnification claim in the event of a breach and a critical risk allocation function for buyers.

5. Conclusion

The leading indicators identified in this article can help prospective buyers assess target companies, the risks they pose, and the opportunities they may present for creating a safer workplace.  Of course, the absence of a serious accident or injury does not disprove the existence of a hazard.  And all the best written safety programs may be ineffective and preventing accidents where an employer has not established a strong safety culture. For more information on occupational safety and health in due diligence and M&A transactions, please contact Adam R. Young (ayoung@seyfarth.com), Aaron M. Gillett (agillett@seyfath.com) or other members of Seyfarth’s Workplace Safety & Environmental and Mergers & Acquisitions teams.

 

Adam R. Young is a partner in the Workplace Safety and Environmental Group in the Chicago office of Seyfarth Shaw LLP. Mr. Young focuses on occupational safety and health, OSHA inspection management, employment, and OSHA retaliation. Mr. Young can be contacted at ayoung@seyfarth.com (312) 460-5538.

Aaron M. Gillett is a partner in the Mergers & Acquisitions Group in the Chicago office of Seyfarth Shaw LLP. Mr. Gillett focuses his practice primarily on M&A transactions, as well as corporate governance and commercial contracts. Mr. Gillett can be contacted at agillett@seyfarth.com (312) 460-5992.