OSHA Liabilities Threaten Mergers and Acquisitions

As the trend of corporate mergers and acquisitions (M&A) continues to grow, entities planning to acquire new companies must be cautious with the potential financial risks of a poor Occupational Safety and Health Administration (OSHA) score hanging over the target of the operation.

This warning was issued by attorneys Adam R. Young and Aaron M. Gillett of the Seyfarth Shaw law firm and others with experience dealing with these issues. “Ill-informed M&A lawyers often fail to recognize the responsibilities arising from occupational health and safety risks,” they warn.

As an example, they cite the “nightmare takeover” of a small logistics company that previously had a good business reputation. The takeover goes smoothly, but 18 days later there is an accident with a forklift, which seriously injured an employee employed by an employment agency in the warehouse of a subsidiary of the newly acquired company. The injuries are severe enough to send the employee to the intensive care unit of a local hospital.

That’s bad enough, but OSHA also cited a subsidiary four years earlier for forklift violations in another state, and now the agency’s staff is on the ground in this case, considering imposing targeted penalties because the forklift operator was untrained and uncertified. As a result, the acquiring company faces the prospect of hundreds of thousands of dollars in civil citations to OSHA.

Additionally, if an employee dies as a result of their injuries, those in the company’s management responsible for operations and safety may be subject to criminal prosecution, which could result in six months in federal prison and a personal fine of $250,000. The company also faces a multimillion-dollar tort claim against the employee’s estate because it is not bound by the workers’ compensation system.

According to Young and Gillett, employers face numerous risks and liabilities arising from their legal obligations regarding health and safety. Some of them are quoted here. “Unaddressed safety threats can injure or kill workers. Employers face OSHA civil charges, including “case-by-case” violations that can be estimated at millions of dollars. Because business partners track safety records through third-party tracking services, OSHA citations and poor safety records can jeopardize business relationships.”

With respect to fatal accidents, the result may also result in referral to the U.S. Department of Justice or state prosecutors for criminal prosecution of the employers’ representatives, including operational, safety and executive management. “Poor safety records can tarnish the reputation of related entities,” they emphasize. A strong safety reputation can be quickly destroyed, and the work to rebuild it can be painstakingly slow.

So what can you do to avoid ending up in this situation? Young and Gillett say every potential buyer should familiarize themselves with key elements and look for red flags. This includes reviewing security records and documents, and, if necessary, engaging qualified external advisors and security specialists to assist the process and ensure effective due diligence.

One ready-made resource is the OSHA Serious Violators Enforcement Program (SVEP), which includes a registry of employers who have committed significant alleged OSHA violations. Placement in this log may indicate significant OSHA citations and allegations of intentional safety and health violations or violations that resulted in death or disaster (injuring three or more workers).

How to dive deeper

Additionally, listing a company on the SVEP log may result in additional OSHA inspections and scrutiny targeting the company’s operations. Lawyers emphasize that SVEP enrollment can damage an employer’s business reputation, and employers could be stuck in SVEP for at least three years.

Prospective buyers should review any citations, settlements and open OSHA inspections that could result in a citation, they urge. Settlements and accepted citations mean that the employer has a “history” of OSHA violations, which forms the basis for violations that OSHA can use to establish repeat violations in the future. “Repetitions are significant classifications that are damaging to reputation and will result in five or 10 times the standard penalty for each alleged violation,” Young and Gillett note.

OSHA data for the last five years should be publicly available on the OSHA Plant Search website. Attorneys acknowledge that while establishment searches may sometimes be factually inaccurate, this website will provide an additional source of information regarding any open and closed inspections and citations issued by OSHA. The status of these notices, including appeals and settlements, should also be noted.

Employers operating in industries classified as more hazardous are required to record work-related injuries and illnesses that meet certain criteria in an annual OSHA Form 300 log, which the company must keep for five years. Potential buyers should ask for and review these logs at all work sites that are required to maintain them, advise Young and Gillett.

They argue that this review also should be supplemented with an additional review of workers’ compensation losses, which may include additional injuries that did not meet OSHA’s registration criteria. This data should help identify trends in worker injuries and illnesses and perhaps reflect the existence of recurring hazards.

Acquiring companies should look beyond recorded injury and illness data as part of their review. For example, most employers are required to maintain written occupational health and safety programs to address potential workplace hazards. Look for the employer’s use of an overarching program, the Safety and Health Management System (SHMS) – also called an Injury and Illness Prevention Plan (IIPP) or Accident Prevention Program (APP) – which may indicate that the employer has implemented a safety-based (rather than just on compliance) program.

“Written programs addressing applicable safety hazards will also indicate compliance with OSHA standards,” Young and Gillett say. Key programs to address major hazards include fall protection, powered industrial trucks (forklifts), lockout/tagout (LOTO), confined space, heat illness and workplace violence prevention programs.

Such activities should take into account the risks identified in occupational risk assessments (JHA) that employers are required to prepare. “Review of these JHA programs and documents will provide due diligence to ensure that the employer is meeting OSHA standards and implementing a safety program designed to protect employees and other employees,” they emphasize.

However, Young and Gillett argue that deeper analyzes and a thorough examination of the target company’s culture are also needed. “Of course, the absence of a serious accident or injury does not invalidate the existence of a risk. And all the best-written safety programs may be ineffective in preventing accidents if the employer has not established a strong safety culture.