While negotiating the purchase of another business, you need to consider how such purchase might impact your company’s unemployment insurance premiums. A company’s insurance premium is based upon an experience rating, which is impacted, in part, by a company’s payment and employment history. The lower the experience rating, the lower the insurance premium.

When you purchase the assets of an existing business, you will most likely be required to accept the transfer of the prior business’s experience rating. This may or may not be beneficial. If it is beneficial, you need to make an election to have such transfer made within a certain time frame. If it is not beneficial, the Department of Labor could allocate to your company the prior business’s experience rating from the date of transfer. A transfer of experience from one employer’s account to another is governed by the provisions of the Unemployment Insurance Law. If there is a “transfer of a business,” in whole or in part, from one employer to another, the statute allows the NYS Department of Labor, Unemployment Insurance Division, to also transfer the experience rating of the business. A transfer of the business is deemed to have occurred whenever any one of the following four conditions are present in the transaction between two parties:

1. The transferee has acquired some of the transferring employer’s good will; or
2. The transferee has assumed some of the transferring employer’s obligations; or
3. The transferee has either continued or resumed the business of the transferring employer, in the same establishment or elsewhere; or
4. The transferee has employed substantially the same employees as were employed by the transferring employer.

What constitutes these conditions has been interpreted very broadly, so as to include situations where the transferee has continued the name of the business, operated out of the same location as the prior employer, resumed the business of the transferring employer, assumed any debts or obligations, or even just operated the same type of business. Attributing nominal value toward the assets in a purchase contract will not be sufficient to avoid these transfer rules.

Accordingly, a purchaser should request specific documentation during the due diligence period in order to verify the transferor’s unemployment insurance experience ratings and premiums. A proper analysis should be made as to how the transfer of such experience rating may impact the insurance premiums for the transferee’s current or new business. While a business deal can potentially be structured in order to avoid such transfer rules, case law is extremely broad and most cases reflect that the transfer of business assets from a transferor that is either discontinuing its business operations or allowing the transferee to take over, will constitute a transfer for experience rating purposes. Depending upon the size of the payroll upon which unemployment insurance premiums are based, even a small increase in experience rating could significantly impact the cost of a deal and should be carefully considered.

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