Employment Offer to Seller’s Staff in a Merger

Two key documents

When a CPA firm acquires or merges in a smaller firm, it is common for the seller’s staff to be employed by the buyer. In this situation, there are two important documents (there may be others, but this blog addresses just two) to be executed between the buyer and the seller’s staff:

• Written offer letter. This should be the same letter that any firm issues to prospective hires. The letter outlines the salary and bonus arrangement, commission opportunity for bringing in business, major employee benefits, starting date, position or title and duties. It should also include a confidentiality agreement and a statement that employment is at-will. The offer letter may also address how differences in employment matters between the buyer and seller will be addressed (e.g., healthcare coverages and premiums, paid time-off, and so on). Some firms require new employees to confirm in writing their agreement with an employee policy manual.
• Non-solicitation agreement. The non-solicitation agreement may be embedded in the buyer’s employment agreement or a standalone agreement. This document states that the employee is prohibited from taking clients and staff of the buyer when they leave the firm, whether or not the clients and staff are solicited by the departing employee. The agreement typically will specify liquidated damages for violations. It should be noted that the enforceability of employee non-solicitation agreements is determined by state, not federal, law. Many states will uphold reasonable post-employment restrictions, but some states are more supportive of the employee and their ability to pursue their careers after leaving an employer. It is important to note that most states are much more likely to enforce non-solicitation provisions against partners than against rank-and-file employees.

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Best practice: Employee non-solicitation agreements

For decades, it has been a best practice for CPA firms to require employees to sign a non-solicitation agreement as a condition of employment. In the early years of most firms, it’s common to neglect having employees sign this agreement. The reasons are that (1) when firms are small and/or less sophisticated, they simply never think of it (until advised by a CPA firm consultant I know who is a big Cubs fan) or (2) they thought it was beyond comprehension that one of their employees might have the wherewithal and foresight to leave the firm and take clients and staff. Consequently, at some point in the past, many firms that today require employees to sign such an agreement changed their policy and started requiring existing employees to sign an agreement.

R. Peter Fontaine, a nationally known attorney specializing in CPA firm legal issues and business practices (reach him at pfontaine@newgate.law), says: “Generally speaking, there should be a meaningful event attached to the signing of a non-solicitation agreement with existing employees. For example, a substantial raise, a promotion, a new position, significant training, etc. Because the employee is giving up a right—taking clients and staff—they should receive adequate compensation.” The amount to be paid is subject to debate. Not too long ago, paying employees a nominal amount was acceptable. But, says Fontaine, “In this day and age, a nominal amount doesn’t cut it like it used to. Telling an existing employee that they must agree to a fairly significant restriction on future employment for a few dollars, or get fired, is generally viewed by the courts as draconian.” One firm we recently talked to pays $500–$1,000 per employee when they merge in employees of sellers, but, to the best of our knowledge, those amounts are not common.

When a firm employs the staff of a seller

Good news: In this case, the buyer need not remunerate the seller’s employees. “The offer of employment is usually sufficient,” says Fontaine. One firm we talked to that has made several acquisitions in recent years said that their compensation and benefit package—always better than the seller’s—is sufficient remuneration.

If the seller had signed non-solicitation agreements from their employees while potentially transferable, it is advisable for the buyer to have the seller’s employees sign their own (new) agreement as the terms are probably different and the enforceability of the seller’s agreement may be less certain.

The information provided in this blog post is for general informational purposes only and does not, and is not intended to, constitute legal advice. You should not act upon any such information without first obtaining qualified professional legal counsel on your specific matter.