Don't Neglect Safety Due Diligence During Acquisitions

The trend of successor companies being held liable for the past violations of the acquired company is growing, according to an occupational safety expert.

It is critically important to perform safety and health due diligence during mergers and acquisitions, said Eric Conn, chair of the OSHA Workplace Safety Practice Group at Conn Maciel Carey, based in Washington, D.C. Companies being acquired could have been cited by the Occupational Safety and Health Administration (OSHA) or have unabated violations. “OSHA won’t care that you’re the new employer and will hold you accountable for those violations as a legal successor,” Conn said. “It’s becoming much more important to understand what obligations you are buying into, and what safety record you are adopting, because OSHA will try to use that record against you to cite repeat violations.”

Repeat penalties can cost employers up to $70,000. The violations attached to those penalties are characterized as repeat if they:

• Have been committed by the same employer.
• That same employer received a prior citation for the same or substantially similar condition or hazard.
• The prior citation became a final order of the federal Occupational Safety and Health Review Commission (OSHRC).

“The idea of what constitutes the ‘same employer’ is becoming more complex,” said Conn. He explained that generally the same employer means the same corporate entity. Multiple corporate entities within a corporate structure should be protected from repeat liability. If corporations set up the proper corporate form with independent operations, different management in key roles, and don’t commingle funds, the separate entities should be considered different employers, Conn said.

“But we’ve seen recent significant cases where OSHA has tried to expand what same employer has always meant in the past,” he added. The review commission ruled April 23, 2015, in favor of OSHA and affirming penalties against Delek Refining for failing to address recommendations from several process hazard analyses and a process safety management audit undertaken by the previous owner at Delek’s oil refinery in Tyler, Texas. OSHRC concluded that the fact that responsibility for these items originated under previous ownership did not absolve Delek of its own legal obligations. “The [process safety management] standard’s focus remains the ‘process’—there is no language in the standard limiting its obligations to a particular employer, let alone the one that conducted the required [analyses] and compliance audits,” the commission said.

Delek was “truly a different employer,” and in fact the previous employer was a competitor, Conn said. “The successorship line is breaking down more and more as OSHA and OSHRC seek ways to expand liability to repeat exposure and hold employers responsible for the conduct of the past even if it wasn’t their conduct.”

"OSHA is not aware of a trend regarding the liability of successor companies," a spokesperson for the agency said. "The agency has long asserted successor liability when appropriate. In determining whether to hold an acquiring company liable, the secretary and commission apply a substantial continuity test. Under the test, the commission looks to whether there is substantial continuity of the nature of the business, the jobs and working conditions, and personnel who control decisions related to safety and health," the spokesperson said.

Determining Successor Liability

There are two tests OSHRC uses to determine successorship for repeat liability.

There’s the “alter ego” analysis, which makes sense and is somewhat intuitive, said Conn. This is applied when an employer that commits violations confirmed through an OSHA settlement or an OSHRC decision goes out of business and later resurfaces under a new name. It’s essentially the same employer operating under a different name, owned by the same owner, performing the same work in the same manner, Conn said. OSHRC has said that simply changing names does not allow an OSHA record to be wiped clean and employers can be held to account for the violations of the past as repeat violations.

OSHRC adopted the “substantial continuity” test in 2010. The commission said that an employer can be cited for the violations of a prior employer if the two companies operate with substantial continuity: which is broken down as continuity of the nature of the business, the jobs and working conditions, and the decision makers, with a focus on safety decision makers. The presence of the same decision makers at a successor company is weighed heavily in determining substantial continuity, Conn said.

How to Avoid Repeat Violations

The No. 1 way to avoid getting hit with repeat violations is communication throughout the corporate structure, Conn said. “I’ve seen employers get in trouble the most at sister facilities. Citations are issued at one location. That location abates the hazard and stays on top of it. But the other facilities don’t know about it, and never hear about the safety commitments made to abate the hazard or change policies. They’re sitting ducks for the next inspection,” he said.

It’s critical for employers to communicate on safety and health corporatewide, according to Conn. He advised deliberately building in corporatewide abatement activities at the settlement stage in certain circumstances. “I think it ensures that communication is happening with sister facilities and that you’re implementing corporatewide abatement. It also buys protection. If you build in an abatement provision into a settlement agreement that says we have one year to audit facilities and implement recommendations, it buys a year to get facilities in shape.”

Without that protection, OSHA will show up at an employer’s other facilities soon after the original case becomes final to see if issues are systemic, he said.

Roy Maurer is an online editor/manager for SHRM.

Follow him @SHRMRoy