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Managing HR in a downturn: the work behind opportunistic decisions by boards and management teams

Claire Logan and Christopher Hitchens
PA Consulting Group and Morgan Lewis People Management
22 July 2009

As the recession continues, more pressure is being put on organisations to make the most of potential opportunities. What should HR’s involvement be in this and what are the legal considerations? Christopher Hitchins and Claire Logan offer some answers

The opportunities for robust organisations to take advantage of struggling businesses increase when the economic cycle is unstable. Parts of businesses or whole organisations may be put up for sale. HR teams could be managing mergers and acquisitions as industry players look to consolidate, take out a competitor or simply try to stay afloat.

Employee costs
The HR team has a major role in sales, acquisitions and mergers. Employee costs could be a material item in the deal. There may be significant ongoing financial liabilities in terms of:

  • bonuses;

  • enhanced contractual redundancy terms;

  • defined-benefit pension plan liability.

The latter is particularly significant at a time when many large blue-chip organisations, such as IBM, are looking to close their current schemes. Purchasers are unlikely to want to assume these costs, not least because they might be paying bonus deals to their own senior management.

Due diligence
All these financial and other liabilities will need to be identified during due diligence. Most often it is HR that will be requested to assemble (if selling) or gather (if buying) this data to assist in the evaluation of the deal. Negotiations will demand clear information on:

  • the number of employees;

  • summary terms and conditions (for example: salary, bonus entitlement and notice provisions, any pay rises already committed to, employee remuneration expectations, pensions and severance terms).

There will also be requests for data on less specific areas, such as:

  • who the key people are, and verifying that their terms are adequate to retain them and provide an incentive;

  • any litigation issues, including recent settlements or compromise agreements;

  • the extent of the organisation’s liabilities for non-employees, such as contract and temporary staff.

The state of employee relations in general and any collective agreements that are in place with unions should also be requested. One recent telecoms client was reluctant to take any staff from an organisation as the collective agreement would also transfer with them. The telecoms company thought this would jeopardise the non-union approach within their own workforce.

Whether acquiring or selling a business, the appropriate handover of knowledge and skills following the transaction is vital. HR should get involved in managing this process, particularly where there is likely to be a headcount reduction. This may seem like an extra burden but it is valuable for the longer-term benefits of the business. In one recent merger, the lack of knowledge transfer from the admin staff within the buying function meant that contractual documents with suppliers were lost, causing a great deal of anxiety when it came to end-of-year payments.

Post merger
The HR team should also be involved in what the merged business should look like. It should:

  • identify cost synergies;

  • design the new organisation;

  • select individuals for new roles (this involves detailed knowledge of employees’ current roles, in order to be able to map out and manage a redeployment or redundancy exercise).

There will often be more reliance on the HR function where there is a sale or purchase of business assets rather than shares of the company itself. This legal distinction is important, as a business/asset transaction is likely to be covered by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (Tupe) whereas the sale of shares is not. Tupe affords employees greater protection, including an obligation to elect employee representatives and to inform and consult over what is happening before the deal is completed. The HR team are often required by other senior colleagues to explain Tupe. They should indicate the direction of travel and the timescales involved early on, so that project plans allow employees time to make informed decisions.

Post transfer
Many organisations want to harmonise terms and conditions following a Tupe transfer. However, an employer can only change terms and conditions if it is for a reason unconnected with the transfer. If it is connected to the transfer, the employer must show a specified reason, covered by Tupe, which entails a headcount or functional change. Actually, harmonising terms and conditions is deemed to be by reason of the transfer itself, and therefore such changes are void (even if employees agree to them).

The Department for Business, Innovation and Skills (BIS, formerly BERR or DTI) has said that there is likely to come a time when the link with the transfer can be treated as no longer effective, but there is no “rule of thumb” to define when this occurs. When Tupe does not apply, and the deal is a share acquisition, then it might be technically feasible to force through changes unilaterally in certain circumstances, but, generally, employee consent is required to any changes. Employers should get legal advice separate from the advice they are taking on the deal itself if they are considering harmonising terms and conditions following a transaction.

Further Info

Christopher Hitchins is a partner with law firm Morgan Lewis, and Claire Logan is a managing consultant with PA Consulting:

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