NATIONAL LABOR RELATIONS BOARD NARROWS “PERFECTLY CLEAR SUCCESSOR” EXCEPTION IN DECISION THAT SHOULD BENEFIT COMPANIES ACQUIRING A UNIONIZED BUSINESS

In a recent decision, the National Labor Relations Board (the “Board”) narrowed the circumstances under which a business that acquires a unionized company must bargain with the union prior to setting the initial terms of employment.  The decision, Ridgewood Health Care Center, Inc., 367 NLRB 110 (2019), stands to benefit employers acquiring a unionized business through an asset purchase. 

Understanding the significance of Ridgewood requires a review of existing law on when an asset buyer of a company must recognize and bargain with an incumbent union.  The seminal case on the subject is NLRB v. Burns Security Services, Inc., 406 U.S. 272 (1972).  In Burns, the United States Supreme Court announced a two-part test for determining when an asset purchaser is a “successor” employer under the National Labor Relations Act (the “Act”), and thus must bargain with the incumbent union of the “predecessor” business.  As held by the Court in Burns, an asset purchaser is a “successor” employer when it: (1) maintains substantial continuity in the business operations of the “predecessor”; and (2) retains a majority of the “predecessor’s” union represented employees.  Importantly, a buyer may not avoid being deemed a “successor” employer if it does not retain a majority of union represented employees due to anti-union animus.  Put another way, a buyer must have a legitimate business reason for letting a union-represented employee go.  Where discrimination is the reason a purchaser did not retain a majority of its “predecessor’s” unionized employees, the Board will find that the second prong of the Burn’s test is satisfied, and will order reinstatement of the non-retained union employees, with back pay. 

When the Burn’s test is met, an asset purchaser is a “successor” employer who must recognize and bargain with the incumbent union.  A “successor,” however, is often not required to bargain with the incumbent union prior to setting the initial wages, hours, and conditions of employment.  Instead, the “successor” is generally free to establish the initial wages, hours, and working conditions, subject to its obligation to subsequently bargain with the incumbent union and subject to applicable law (e.g. minimum wage).  There are, however, exceptions to the rule that a “successor” employer can determine the initial conditions of employment prior to bargaining.  Most significantly, the Supreme Court indicated in Burns that a “perfectly clear successor” must consult with an incumbent union prior to setting the initial terms and conditions of employment.  The Court suggested that a successor” would be “perfectly clear,” and thus required to consult with the incumbent union prior to setting initial work terms, when it retained all of the “predecessor’s” bargaining unit employees, or would have done so absent anti-union motives.  

Since Burns, the Board’s treatment of what constitutes a “perfectly clear successor” has evolved considerably.  Initially, in Spruce-Up, 209 NLRB 194 (1974), the Board stressed that an asset purchaser would qualify as a “perfectly clear successor” only in narrow circumstances where “the new employer has either actively or, by tacit inference, misled employees into believing they would all be retained without change in their wages, hours, or conditions of employment.”  Subsequently, however, the Board began expanding the reach of the “perfectly clear successor” exception.  For instance, in Love’s Barbeque Restaurant No. 62, 245 NLRB 78 (1979), the Board ruled that a new employer was required to consult with an incumbent union before setting the initial terms of employment when it engaged in unlawful hiring practices against “all” or “substantially” all of the predecessor’s union employees.  The Board significantly expanded its ruling in Love’s Barbeque in Galloway School Lines, 321 NLRB 1422 (1996), holding that a successor employer could not set the initial terms of employment without consulting with the incumbent union if it failed to hire “some, but not all,” predecessor employees in order to avoid an obligation to bargain.  Subsequently, several decisions by the Board during the term of President Obama expanded the “perfectly clear successor” exception to the point of swallowing the rule announced in Burns that a “successor” was generally able to set the initial terms of employment prior to bargaining.   

The practical implication of the Board’s expansion of the “perfectly clear successor” exception was that asset purchasers who continued operations and retained a majority of the “predecessor’s” union employees were being deprived of the ability to set initial employment terms.  Such conditions placed successors at greater financial risk, and increased the chances of an asset purchase failing, a result that threaten strain labor stability, the very thing the Board is tasked with protecting under the Act.   

With its holding in Ridgewood, the Board has reined in the expansion of the “perfectly clear successor exception,” which should benefit employers acquiring a business with a unionized workforce.  In Ridgewood, a new employer represented to the “predecessor’s” unionized employees that it anticipated retaining close to 100% of them, and that it would adhere to the terms of the preexisting collective bargaining agreement.  Despite its representations, the new employer ended up only retaining 49 out of 101 bargaining unit members under circumstances showing that it denied employment to four union members for the purpose of preventing the union from obtaining majority status, and thus avoiding any obligation to recognize and bargain with the incumbent union under Burns.  The new employer then proceeded to unilaterally set the terms and conditions of employment for the business.  

In response, the incumbent union filed an unfair labor practice charge alleging that the new employer (1) discriminatorily failed to hire the four-union employees, (2) violated the Act by refusing to bargain with the incumbent union, and (c) violated the Act by unilaterally setting the terms and conditions of employment without first consulting with the union.  The union’s claims were heard by an administrative law judge (“ALJ”) who sided with the union on all three issues.  Specifically, the ALJ applied Galloway to determine that the new employer was held to the standards of a “perfectly clear successor” because it refused to hire “some” union employees (four of them) to avoid triggering an obligation to bargain.   

On appeal, the Board agreed that the new employer was a “successor” under Burns, and thus was required to bargain with the incumbent union.  The Board, however, disagreed with the ALJ’s determination that the “successor” employer forfeited its right to set the initial terms and conditions of employment prior to any consultation with the incumbent union.  According to the Board, since it was apparent that it was not going to hire “all” or “substantially all” of the bargaining unit members, the new employer could not be a “perfectly clear successor,” regardless of any discriminatory intent by the new

employer as to the four unoin employees in question.     

In its decision, the Board overruled Galloway and in effect returned to the standard announced in Love’s Barbeque.  This is a positive for employers acquiring businesses with unionized workforces, as it likely allows such employers to set the initial terms and conditions of employment without union consultation, except in cases where the new employer truly intends to hire all or substantially all of its “predecessor’s” unionized workforce.  Nevertheless, employers acquiring new businesses with unionized workforces should continue to take steps to avoid refusing to retain employees based on anti-union animus, as such discrimination can still have serious consequences, and should also be careful in their communications with employees regarding their intentions on retaining employees or making any changes to business operations or employment conditions.  

Any employer acquiring a business with a unionized workforce is strongly advised to contact labor and employment counsel for guidance.  

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