The Heightened Importance of Worker Safety Issues in Corporate Transactions

When conducting diligence for corporate mergers and acquisitions, attorneys and their clients often think of environmental, health and safety as a single category of liability—perhaps because many companies have integrated environmental, health and safety programs. However, within that category, purely environmental issues, such as liabilities associated with potentially contaminated land and compliance with regulatory programs governing protection of air, water and other natural resources, and health issues associated with exposure to hazardous materials tend to receive the most attention in purchase and sale transactions. This focus has resulted from the perceived lower risk of substantial liabilities from worker safety issues, given the relatively low penalties for violations of the Occupational Safety and Health Act of 1970 (“OSH Act”). However, a number of recent legislative and enforcement initiatives to increase penalties under the OSH Act and criminal and civil enforcement of worker safety violations should cause transactional attorneys and their clients to pay closer attention to potential liabilities arising from worker safety issues.

Increase in OSHA Penalties

Buried within the Bipartisan Budget Act of 2015 (the “2015 Budget Act”),¹Pub. L. 114-74. signed by President Obama on Nov. 2, 2015, is a provision requiring the Occupational Safety and Health Administration (OSHA) to increase its maximum penalties for the first time since 1990. Specifically, Section 701 of the 2015 Budget Act amends the Federal Civil Penalties Inflation Adjustment Act of 1990 to eliminate an exemption that excluded OSHA from the requirement to periodically increase penalties to account for inflation. The 2015 Budget Act allows OSHA to make a one-time catch-up penalty increase to take effect no later than Aug. 1, 2016 and, going forward, OSHA penalties will be subject to annual inflation increases. Given the increase in the Consumer Price Index since 1990, it is expected that OSHA maximum penalties will increase approximately 78 percent—from $70,000 to approximately $125,000 (for repeat or willful violations) and from $7,000 to approximately $12,500 (for serious violations). Although the 2015 Budget Act does not require OSHA to raise the penalties by the maximum amount, many believe that the increase will be substantial, given that it will be the first authorized increase in 25 years and OSHA officials have publicly stated that significantly higher penalties are necessary to provide disincentives against unscrupulous employers accepting penalties for injuries as a cost of doing business. While the increase in OSHA penalties is likely to be significant, the maximum OSHA penalties will still lag behind most environmental statutes, for which maximum penalties can be as high as $37,500 per day for continuing violations. The increased OSHA penalties will apply in states under federal OSHA jurisdiction, but it is expected that OSHA-approved state programs will follow suit, given that state plans must be “at least as effective” as federal OSHA plans.²29 U.S.C. §666.

Increase in Criminal Prosecutions and Civil Enforcement of Worker Endangerment Violations

In a Dec. 17, 2015, memorandum from the U.S. Deputy Attorney General to all 93 U.S. Attorneys across the country, federal prosecutors were urged to increase the “frequency and effectiveness” of criminal prosecution of worker safety violations 06 CARE, 1/11/16. The memorandum is an expansion of the Worker Endangerment Initiative launched by the Environmental Crimes Section of the Department of Justice (DOJ) in 2005 to prosecute employers who commit environmental crimes that endanger employees. The memorandum notes that criminal sanctions for violations of the OSH Act are limited to misdemeanors punishable by maximum fines of $10,000 and/or imprisonment for no more than six months.³Pursuant to the Sentencing Reform Act of 1984, the criminal penalty for willful violations of the OSH Act that resulted in death was raised to $250,000 for individuals and $500,000 for corporations. 18 U.S.C. §3574(b)(4), (c)(4). Therefore, the memorandum encourages prosecutors to charge offenses under Title 18 of the Federal Criminal and Penal Code (such as false statements, obstruction of justice, and conspiracy to defraud) and other environmental and endangerment crimes that often occur in conjunction with OSH Act violations and carry more significant fines and felony provisions with imprisonment ranging from 5 to 20 years. The memorandum also notes that responsibility for worker safety prosecutions has been transferred from the Criminal Division’s Fraud Section to the Environmental Crimes Section of the Environment and Natural Resources Division of the DOJ, which the DOJ believes is better equipped to pursue such prosecutions.

In a Memorandum of Understanding issued on the same day, the DOJ and the U.S. Department of Labor (DOL) established a framework for notification, consultation and coordination between the two agencies in order to more effectively prosecute worker safety crimes under the OSH Act, the Federal Mine Safety and Health Act of 1977, and the Migrant and Seasonal Agricultural Worker Protection Act 96 CARE, 12/29/15, 30 CCW 388, 12/30/15. The framework includes (i) designated DOL points of contact to coordinate with DOJ regarding employers or worker safety matters that may be appropriate for criminal referral or enhanced investigation, (ii) robust information sharing between the DOJ and DOL, and (iii) periodic training programs.

A press release accompanying both memoranda indicated that, in addition to enhanced prosecution of worker safety violations, the DOJ’s Environment and Natural Resources Division has been strengthening its enforcement of civil cases that involve worker safety violations under environmental statutes. Less than a week after the press release, the Environment and Natural Resources Division brought a civil enforcement action against a California winemaker for violations of the Clean Air Act, Emergency Planning and Community Right-to-Know Act, and Comprehensive Environmental Response, Compensation, and Liability Act in connection with a worker death in 2012 due to an accidental release of anhydrous ammonia from a refrigeration system.⁴Compl., United States v. Gibson Wine Co., Case No. 1:15-cv-01900 (E.D. Cal. Dec. 19, 2015). EPA is seeking penalties of $37,500 per day for each violation while OSHA entered into a settlement with a total amount of $31,500 for the same matter.

Increase in Pursuit of Individual Corporate Wrongdoing

Individuals responsible for worker safety violations and associated misconduct may also be facing an increased threat of criminal prosecution, given a recent DOJ memorandum that generally encourages pursuing individuals for corporate wrongdoing 30 CCW 274, 9/16/15, 13 CARE 1952, 9/11/15. Although the introductory paragraph of the Sept. 9, 2015, DOJ memorandum from U.S. Deputy Attorney General Sally Yates (commonly referred to as the “Yates memorandum”) references the enforcement of civil and criminal laws that protect the financial system, the guidance applies to all DOJ divisions, including the Environment and Natural Resources Division. The Yates memorandum sets out six key steps to strengthen the DOJ’s pursuit of individual corporate wrongdoing, including: (i) the provision by a company of facts relating to individual misconduct as a condition to qualifying for cooperation credit, (ii) an investigatory focus on individual wrongdoing at the inception of investigations, (iii) routine communication between civil and criminal DOJ attorneys, (iv) limitations on releases of individuals when resolving matters with corporations, (v) investigative plans to resolve individual cases prior to expiration of statute of limitations periods, and (vi) a focus on civil liability of individuals based on considerations beyond the individual’s ability to pay.

In connection with the Worker Endangerment Initiative, recent years have seen an uptick in the number of federal prosecutions of individuals for worker endangerment issues resulting in fatalities. Notable high profile prosecutions include the prosecution of several BP officials for manslaughter and a Clean Water Act misdemeanor in connection with the Deepwater Horizon oil spill and Massey Energy Co. officials (including the chief executive officer 81 CARE, 12/4/15) for willfully conspiring to violate mining safety standards and related false statements to the Securities and Exchange Commission, as well as the prosecution of four managers of a division of McWane Inc. for conspiracy and various related offenses associated with safety and environmental violations.

What Do These Initiatives Mean for Worker Safety Issues Identified in Connection With Corporate Transactions?

Taken together, given the risk of increased OSHA penalty amounts and expanded criminal and civil enforcement of worker safety violations, these initiatives mean that buyers and sellers in corporate transactions must pay closer attention to OSHA and other worker safety issues both prior to and after closing transactions and must consider specifically addressing worker safety issues in purchase and sale agreements.

• Pre-Closing Diligence: Buyers should consider increasing their diligence of worker safety issues prior to a merger or acquisition—particularly when the acquired company is an industrial concern or otherwise operates high-hazard workplaces or has numerous locations (as evidenced by the recent $875,000 penalty to resolve OSHA citations at certain Dollar Tree Stores). A thorough review of safety policies, training procedures and record-keeping should be conducted to ensure that the target has a robust, up-to-date and documented safety program.
• Post-Closing Conduct: Buyers should also be careful to correct any OSHA noncompliance or other worker endangerment violations as soon as possible after the closing.⁵See Secretary of Labor v. Delek Refining Ltd., 25 O.S.H. Cas. (BNA) 1365 (O.S.H.R.C. April 23, 2015) (rejecting asset purchaser’s argument that it should not be required to investigate and satisfy process safety obligations identified in prior owner’s compliance audits because OSHA’s process safety management standard applies to the process itself and, therefore, survives transfer of the process’s ownership). To do so, buyers should consider conducting a post-closing safety and health audit under attorney-client privilege in order to identify and eliminate worker safety hazards. Although conducting such an audit and implementing best practices for worker safety will require upfront costs, the ultimate payoff includes both reduced risk of OSHA penalties and decreased workers’ compensation costs, in addition to improved worker safety. Given the DOJ’s initiative to add environmental charges to worker safety prosecutions, buyers should also ensure that acquired companies have adequate environmental management systems to identify and implement any necessary corrective action with respect to noncompliance with environmental regulatory requirements.
• Contract Terms: Buyers should carefully review draft contract terms to ensure that worker safety issues are appropriately addressed. For example, buyers should consider including worker safety within the scope of the definition of “Environmental Law” so that environmental representations will cover worker safety issues. Correspondingly, sellers should be careful to include known and potential OSHA violations and other worker safety issues in scheduled exceptions to representations, given the increased likelihood that such violations could result in substantial liabilities.