By Thomas R. DeVoe and Erin T. Escoffery
Although the seller’s Indiana unemployment insurance account may not be the focus of an asset purchase transaction, it is important for the buyer and seller to consider the subject before closing on the purchase. In an asset purchase transaction, the buyer will likely be required to legally assume all or a portion of the seller’s UI “experience account” and the UI tax rate that goes with the account. Acquiring the seller’s experience account may have a substantial positive or negative financial impact on the buyer’s business after the purchase.
By way of background, businesses that pay wages in Indiana are generally required to pay State Unemployment Tax Act premiums to the state of Indiana. Each employer has an experience account based upon the premiums it pays, and the employer’s experience account is used by the Indiana Department of Workforce Development to cover UI benefits for employees who become unemployed through no fault of their own. There is no fixed state UI tax rate. Instead, the UI tax rate varies from employer to employer based upon factors such as taxable wages, experience account balance, late payments, the number of former employees drawing on the account, and business transfers.
While some employers have “good” experience accounts with credit balances and low UI tax rates, others have “bad” experience accounts with debit balances and high UI tax rates. Since these experience accounts generally follow the assets being sold, the buyer of an Indiana business should (1) analyze the seller’s experience account, (2) determine whether the buyer will be a successor to all or part of the seller’s experience account, and (3) have a clear understanding with the seller as to how the acquisition will be reported to the DWD.
Under Indiana Code § 22-4-10-6(a)(2), when “an employer acquires the organization, trade, or business, or substantially all the assets of another employer … the successor employer shall, in accordance with the rules prescribed by the department, assume the position of the predecessor with respect to all the resources and liabilities of the predecessor’s experience account.”
In cases where the buyer acquires all of the seller’s assets, the buyer will normally assume full responsibility for the seller’s experience account. However, in cases where the buyer acquires some, but not all, of the assets, the determination is less clear. “In determining whether one employer has acquired substantially all of the assets of another, other courts have considered several factors, including acquisition of: (1) manufacturing equipment and machinery; (2) office equipment; (3) corporate name; (4) inventories; (5) covenants not to compete; (6) possession of premises; (7) good will; (8) work in progress; (9) patent rights; (10) licenses; (11) trademarks; (12) trade names; (13) technical data; (14) lists of customers; (15) sales correspondence; (16) books of accounts; and (17) employees transferred.” Indianapolis Concrete, Inc. v. Unemployment Ins. Appeals of Indiana Dep’t of Workforce Dev., 900 N.E.2d 48, 51 (Ind. Ct. App. 2009) (citations omitted).
Alternatively, under Indiana Code § 22-4-10-6(b)(2) when “an employer acquires a distinct and segregable portion of the organization, trade, or business within this state of another employer … the successor employer shall assume the position of the predecessor employer with respect to the portion of the resources and liabilities of the predecessor’s experience account as pertains to the distinct and segregable portion of the predecessor’s organization, trade, or business acquired by the successor.”
Whether an employer acquires a distinct and segregable portion of another employer depends on the facts of the transaction. For example, in Ashlin Transp. Servs., Inc. v. Indiana Unemployment Ins. Bd., the Indiana Court of Appeals concluded that “where (1) an employer acquires a clearly perceived group or unit of employees, or the entire workforce, of another employer, and (2) the acquiring employer assumes all of the employment responsibilities and provides the employees with continuous, stable employment, those employees constitute a ‘distinct and segregable portion of the organization, trade, or business’ of the predecessor employer under the Act.” 637 N.E.2d 162, 172 (Ind. Ct. App. 1994). In D & D NAPA, Inc. v. Unemployment Ins. Appeals of Indiana Dep’t of Workforce Dev., the Indiana Court of Appeals held that a company acquired a distinct and segregable portion of a predecessor’s business when it purchased all of the predecessor’s stock-in-trade, merchandise and inventory; leased the same building as the predecessor; and hired two of the predecessor’s employees, even though it did not acquire any of the predecessor’s customer lists, sales correspondence, books of accounts or goodwill. No. 93A02-1501-EX-58, 2015 WL 5545271, at *1 (Ind. Ct. App. Sept. 21, 2015).
In addition, buyers and sellers of Indiana businesses must notify the DWD of the transaction by submitting certain state forms. Sellers must complete State Form 46800, SUTA Account Termination or Transfer Request, and buyers must complete State Form 2837, SUTA Account Number Application and Disclosure Form. These forms must be submitted to the DWD no more than 30 days after the transfer date or no later than 10 days after the buyer and seller have been notified of successorship, whichever is earlier. See Ind. Code § 22-4-10-6(b). Filing these forms provides the buyer and seller with the opportunity to accurately report to the DWD the nature and scope of the business acquisition, particularly the agreed-upon percentage of the seller’s business being transferred.
Failure to submit the required forms with the DWD can create unanticipated problems, particularly for buyers. The DWD actively reviews and monitors employer accounts, employee movement and business acquisition activity. Unreported acquisitions can trigger an investigation from the DWD. If the DWD determines that the buyer has acquired the seller’s experience account, the buyer may protest the determination via an administrative appeals process but ultimately may be stuck with a negative experience account balance and a high UI tax rate that it never factored into the acquisition. To avoid unnecessary litigation and unanticipated liabilities, buyers and sellers should have a clear understanding of their SUTA obligations before completing an asset purchase transaction.•
• Thomas R. DeVoe is a partner in Taft’s labor & employment group. He can be reached at firstname.lastname@example.org. Erin T. Escoffery is an associate in Taft’s labor & employment group. She can be reached at email@example.com. The opinions expressed are those of the authors.