As we have previously discussed, the Bureau of Workers' Compensation (BWC) has traditionally taken an aggressive position in finding that a business purchasing all or part of another business is responsible for the predecessor entity's workers' compensation risk, frequently resulting in an increase in premiums and penalties for the purchasing entity.
As we reported in 2009, the Ohio Supreme Court reaffirmed a narrow exception to the BWC's broad successor-in-interest rules when the alleged successor obtained the business from the predecessor through an involuntary foreclosure proceeding. Then, in 2010, the BWC created a new rule that invalidated the Ohio Supreme Court's holding. Based on this rule, the BWC has frequently found successorship whenever an employer succeeds another employer in the operation of a business. In 2012, we warned of these often unforeseen consequences.
Last week, the Ohio Supreme Court confirmed its position that the BWC's approach simply is inappropriate. In State ex rel. K&D Group, Inc. v. Buehrer, the Court held that the BWC abused its discretion when it transferred part of a predecessor company's experience rating to K&D Group, as K&D Group was not a successor in interest for purposes of workers' compensation.
In 2004, K&D Enterprises contracted with Fame-Midamco through its manager, Mid-America, to purchase an apartment complex. Prior to closing the deal, K&D Enterprises created a separate company, Euclid-Richmond Gardens, and assigned its rights under the purchase agreement to that new company. The new company then hired K&D Group to manage the apartment complex. K&D Group hired some of the former employees of Mid-America, and took over the operations of the complex. After an audit in 2009, the BWC determined that K&D Group's experience rating should be based in part on Mid-America's past experience, which was detrimental to K&D Group's experience.
K&D Group protested the BWC decision and ultimately filed a lawsuit challenging the BWC’s successor finding, which ultimately made its way to the Supreme Court. The Supreme Court concluded that for the BWC to transfer an experience rating from a predecessor employer to a successor employer, there "must be a transfer of business in whole or in part and the successor employer must be the successor in interest." Previously, the Supreme Court had defined a successor employer as a "transferee of a business in whole or in part."
In this case, the Supreme Court found that there was absolutely no evidence that Mid-America transferred the business of managing the apartment complex to K&D Group, as the contract was between two other entities, K&D Enterprises and Fame-Midamco. Further, the Supreme Court specifically stated that the fact that K&D Group hired some of the former employees of Mid-America, assumed management of the apartment leases, and coded its employees under the same job classification code as Mid-America was not sufficient to demonstrate that Mid-America transferred its business operation to K&D Group. The Court found that K&D's mere agreement to assume management of the existing apartment complex did not create a successor relationship.
The Supreme Court's ruling provides guidance for a purchasing company. However, as before, the BWC may issue a new rule circumventing this decision. It remains vital to evaluate the workers' compensation history of a selling company as part of any due diligence when purchasing the assets of another company, in whole or in part. If the selling company is penalty-rated, it may be wise to take that into consideration in arriving at a purchase price or to create a mechanism to recoup payments made for inherited workers' compensation claims.