As the trend towards corporate mergers and acquisitions (M&A) continues to grow, those who are planning to acquire new companies need to be wary of the potential for financial threat posed by a poor Occupational Safety & Health Administration (OSHA) record hanging over the target operation.
This is the warning issued by attorneys Adam R. Young and Aaron M. Gillett of the Seyfarth Shaw law firm and others experienced in dealing with these issues. “Ill-informed M&A lawyers often overlook the liabilities posed by occupational safety and health risks,” they warn.
They cite as an example the “nightmare acquisition” of a small logistics company that previously had enjoyed a strong business reputation. The acquisition is completed without incident but 18 days later a forklift accident takes place resulting in a serious injury to an employee supplied by a staffing agency in a warehouse facility of a subsidiary operated by the newly acquired company. The injury is serious enough that the worker ends up in the intensive care unit of a local hospital.
That’s bad enough, but OSHA also had cited the subsidiary four years earlier for forklift violations in another state, and now the agency’s personnel are onsite in this case considering imposing willful citations because the forklift operator was untrained and uncertified. As a result, the acquiring company now faces the prospect of hundreds of thousands of dollars in civil OSHA citations.
In addition, if the employee ends up dying as a result of his injuries, those in company management responsible for operations and safety responsibilities may face potential criminal liability, possibly punishable with six months in federal prison and a $250,000 personal fine. The company also could face a multi-million-dollar tort claim from the worker’s estate because he is not bound by the worker’s compensation system.
Employers face numerous risks and liabilities arising from their safety and health legal responsibilities, a few of which are cited here, according to Young and Gillett. “Unaddressed safety hazards can injure or kill employees. Employers face civil OSHA citations, including ‘per instance’ violations that can be assessed into the millions of dollars. Because business partners track safety records through third-party tracking services, OSHA citations and poor safety records can jeopardize business relationships.”
When it comes to fatal accidents, the result also can be referrals to the U.S. Department of Justice or state prosecutors for criminal prosecution of employer representatives, including operations, safety and executive management. “Poor safety records can tarnish the reputations of affiliated entities,” they stress. A strong reputation for safety can be quickly destroyed and working to rebuild it can be painstakingly slow.
So, what can be done to avoid finding yourself in this sort of situation? Young and Gillett say that any prospective buyer should review key elements and look for red flags. This includes reviewing safety records and safety-related documents, as well as engaging qualified outside counsel and safety professionals where necessary to aid the process and ensure effective due diligence.
One ready resource is OSHA’s Severe Violators Enforcement Program (SVEP), which includes a log of employers that have incurred significant alleged OSHA violations. Inclusion on this log can be indicative of significant OSHA citations and allegations of willful safety and health violations, or violations that resulted in a fatality or catastrophe (injuring three or more employees).
How to Dive Deeper
In addition, a company’s inclusion on the SVEP log can trigger additional OSHA inspections and scrutiny directed at the firm’s operations. Inclusion in SVEP can be damaging to the business reputation of the employer, and employers can find themselves stuck in SVEP for a minimum of three years, the attorneys emphasize.
Prospective buyers should review any OSHA citations, settlements and open inspections which very well may result in a citation, they urge. Settlements and accepted citations mean that the employer has OSHA violations “on their record,” predicate violations that OSHA can use for future repeat violation findings. “Repeats are significant classifications that will be reputationally damaging and will carry five or 10 times the standard penalty for each alleged violation,” Young and Gillett note.
The last five years of a company’s OSHA record should be publicly available on OSHA’s Establishment Search website. Although the Establishment Search may sometimes be factually inaccurate, the attorneys admit, this website will provide an additional resource on any open inspections, closed inspections and citations OSHA has issued. The status of those citations, including appeals and settlements, should be recorded as well.
Employers in industries classified as being more hazardous are required to record work-related injuries and illnesses that meet certain criteria on the yearly OSHA Form 300 log, which the company must maintain for five years. Prospective buyers should request and review these logs from all worksites that are required to maintain them, Young and Gillett advise.
They say this review also should be supplemented with an additional review of the worker’s compensation loss run, which may include additional injuries that did not meet the OSHA recording criteria. This data should help identify trends when it comes to employee injuries and illnesses, and perhaps reflect the existence of recurring hazards.
Acquiring firms should make sure to go beyond recorded injury and illness data as part of their review efforts. For example, most employers are required to maintain written safety and health programs to address potential hazards at their worksites. Look for an employer’s use of an overarching program, a Safety and Health Management System (SHMS)—also called an Injury and Illness Prevention Plan (IIPP) or Accident Prevention Program (APP)—which can indicate the employer’s implementation of a safety-based (rather than just compliance-based) program.
“Written programs on applicable safety hazards will also indicate compliance with OSHA standards,” according to Young and Gillett. Key programs for serious hazards include fall protection, powered industrial trucks (forklifts), lock-out/tagout (LOTO), confined space, heat illness and workplace violence prevention programs.
These sorts of activities should address the hazards identified in the job hazard assessments (JHAs) employers are required to develop. “Reviewing these programs and JHA documents will provide diligence that an employer is meeting the requirements of the OSHA standards and implementing a safety program to protect employees and other workers,” they stress.
But a deeper dive and thorough investigation into the target company’s culture also is needed, Young and Gillett contend. “Of course, the absence of a serious accident or injury does not disprove the existence of a hazard. And all the best written safety programs may be ineffective at preventing accidents where an employer has not established a strong safety culture.”
