It is commonplace for the seller of a business to provide consulting services to the buyer after the sale. Typically, an owner will enter into a consulting agreement whereby the seller will provide transition services after the closing. These transition services include things such as introducing the buyer to vendors, answering questions about the business which may arise post-closing, and facilitating customer relationships. In almost all circumstances, the seller is paid as an independent contractor. This common practice may no longer be viable after the passage of AB5.
The Dynamex holding and subsequent passing of AB5 – which is set to go into effect January 1, 2020 – may preclude sellers of companies from providing these services as independent contractors due to the widened definition of what constitutes an “employee.” As we have reported many times now, under Dynamex and AB5, a worker is presumed to be an employee unless the employer can prove (a) the worker is free of the employer’s control, (b) the worker is performing services outside the employer’s normal course of business, and (c) the worker is engaged in a separate business in which the worker provides the same services to others that he is providing to the employer.
While there are many exceptions to this new test to classify workers as employees or independent contractors, none are likely to include a former business owner providing post-sale transitional services. Instead, these former owners are likely to fail the second and third prongs of the Dynamex test: (1) the former owners will perform services well within the company’s normal course of business (e.g. communicating with vendors and building customer relations); and (2) the former owners are unlikely to provide these same transitional services to others under the banner of a separate business altogether. Thus, these post-sale transitional services may very well necessitate the former owner to be classified as an employee.
In this case, the company should ensure it is paying the former owner according to the Labor Code, including but not limited to paying the former owner at least minimum wage and for any and all overtime. Additionally, the former owner must be provided any and all necessary meal and rest breaks. If a company fails to provide these, the company may become liable for unpaid wages, waiting time penalties, and other fines. The company will also need to file and pay the appropriate taxes on any wages paid to the former owner. Failure to file and pay these taxes can result in steep fines, back taxes, and potential criminal liability.
The best approach will depend on the situation. Some companies may decide to forego these post-sale services altogether to avoid any potential liability under AB5. Others may find it more palatable to impose a cap on the post-sale services to be provided. For example, the new and former owners may decide to cap the services at a certain dollar amount of wages, or a certain number of hours. This way, the buyers can weigh the benefit received by the former owners’ services against the cost of the same. (Keep in mind though, an agreement to cap the amount of hours and/or wages of the former owner will not alleviate the responsibility to comply with the Labor Code.)
Regardless of which approach buyers take, one certainty is that the buyers should reach out to legal counsel for guidance. The cost of a mistake in this situation can be very high, putting a dark cloud over a company’s premiere under new ownership. If you are considering entering a sale transaction for a company and post-sale services are being discussed, contact the attorneys at Navigato & Battin to answer any questions you may have.