Two recent decisions highlight the risks employers face when hiring unionized employees as part of an acquisition or business transfer. In general, when a new employer continues a prior employer's operations and hires a majority of its employees from the prior employer's unionized workforce, the new employer is a labor law successor and, as such, must recognize and bargain with the union over any future changes in the terms and conditions of employment. Whether the new employer can unilaterally establish the initial terms and conditions of employment, however, or must continue the prior employer's terms and conditions until it bargains with the union and reaches a new agreement or an impasse, is more difficult to determine, especially in light of two recent cases that appear to provide diametrically opposed views.

In S & F Market St. Healthcare LLC, d/b/a Windsor Convalescent Ctr. of Long Beach v. NLRB, 570 F.3d 354 (D. C. Cir. 2009), the court held that the National Labor Relations Board misapplied the law when it found that the new owner of a nursing home was a "perfectly clear" successor. A "perfectly clear" successor is an employer that has led the predecessor's employees to believe that their employment status would continue unchanged upon accepting employment with the successor. "Perfectly clear" successors cannot unilaterally set the initial terms and conditions of employment, but instead, must continue the predecessor's terms and conditions until a new agreement with the union is achieved, or the negotiations reach an impasse and the successor is privileged to unilaterally implement new terms.

In S & F, the employer purchased a nursing home from a seller that had a collective bargaining agreement with the SEIU. S & F hired a majority of the predecessor's employees but stated on a cover sheet distributed with applications for  employment that it "intends to implement significant operational changes," and that any offer of employment would be contingent on passing a physical examination, a drug test, and a background check. Additionally, the actual offers of employment expressly stated that they were for temporary employment, without benefits, and that the employment would be at will.  

Despite these statements, the Board held that S & F was a "perfectly clear" successor that was obligated to recognize the SEIU and bargain before changing any terms of employment. The Board reasoned that the references to temporary employment were nothing more than a probation period, and that there was no evidence that S & F intended to change the core terms of employment.  

The court ultimately overturned the Board's ruling. The court determined that on this record, "no employee could have failed to understand that significant changes were afoot," and that by announcing that any employment with S & F would be at will, "S & F was announcing a very significant change in the terms and conditions of employment." 570 F. 3d at 360. The court also ruled that the Board's focus on "core" terms of employment "misstates the rule, which is that the successor employer must simply convey its intention to set its own terms and conditions rather than adopt those of the previous employer." Id at 561.

In stark contrast with S & F, the court in Local 34 S, UFCW v. Meridian Mgmt. Corp., 2009 WL 3151791 (2d Cir. 2009) ignored the "perfectly clear" successor rule and, instead, held that the successor employer had to arbitrate with the union to determine whether and to what extent the successor was bound by the terms and conditions of the predecessor's collective bargaining agreement. In this case, Meridian had subcontracted janitorial service to another company whose employees were represented by the UFCW Local 348-S ("Union"). In 2005, Meridian cancelled the subcontract and took over the janitorial services itself. At the same time, Meridian hired a majority of its employees from the subcontractor's workforce, but refused to follow the subcontractor's collective bargaining agreement. Instead, Meridian implemented its own terms and conditions.  

Rather than file an unfair labor practice charge with the Board, the union sued Meridian under the Labor-Management Relations Act and the ERISA, alleging that Meridian effectively assumed the subcontractors' contractual obligation to contribute to the Union's health and welfare fund. Significantly, the court did not discuss the "perfectly clear" rules. Instead, the court held that Meridian had to arbitrate with the Union whether and to what extent Meridian must comply with the substantive terms of the subcontractors' contract with the union.  

The court acknowledged that, generally, successors are not bound by the terms of the predecessor's collective bargaining agreement absent an express assumption of the same. In the court's view, however, requiring Meridian to arbitrate whether and to what extent it was bound by the subcontractor's collective bargaining agreement was the fairest and most efficient way to determine what terms and conditions should apply to the employees. Although the court relied heavily on the fact that Meridian was not a typical successor in that it subcontracted the work then substituted itself for the subcontractor, it is difficult to explain why the court opted not to analyze the case under the "perfectly clear" successor rules.

The foregoing decisions are important for employers who take over existing businesses that have collective bargaining agreements. Hiring a majority of the employees from the predecessor's workforce generally will make the new employer a successor that is required to recognize and bargain with the union. The more difficult questions, however, concern the starting point — whether the successor unilaterally can establish new terms and conditions, whether the successor must apply the predecessor's terms until it bargains over new ones, and whether the successor must arbitrate to determine what terms and conditions apply.  

The S & F case illustrates the general rule that, by clearly informing the employees alternate terms will apply if they accept employment with the successor, the successor need only bargain over subsequent changes in those terms; however, the Meridian case raises questions regarding the "perfectly clear" successor rules and creates the possibility that a successor may be required to arbitrate the extent to which  the "perfectly clear" successor rules apply. As a result, companies taking over unionized workforces must carefully analyze the situation and develop a strategy for putting it in the best position to be able to unilaterally implement alternate terms and conditions of employment for the newly hired employees.