Scenario

A New York based company purchased another New York based company and merged the employees onto its payroll without advising the state of the acquisition. The problem was that they had a very good unemployment insurance tax rate (3.4%) and the company they bought had a terrible one (the maximum 9.9%). The acquiree did not look at the UI taxes during due diligence and they had no idea how much money this purchase would cost them. What they also did not realize was that they could have written NY State a check for $34,000 and lowered the rate significantly.  Over two years, New York State found out about the purchase and retroactively raised their UI rate to 9.9% and demanded $650,000 in back taxes because they claimed this company should have been paying the higher rate all along. The state was right and the employer was wrong, putting the business on the brink of closure.

Solution

In this case, New York State needs to be notified when one company acquires another within 30 days after the quarter in which the acquisition occurred. It does not matter whether a company buys the entire company or solely the assets. What is important is whether or not the employees are transferred from one entity to another. A company can be wholly or partially transferred to another company and then become under the law a “successor in interest” or it is said that a “transfer of experience” has occurred.

The state then combines the balances in the two UI accounts along with the 5-year average taxable payrolls, as those are the two components to a UI rate calculation in NY, which creates a blended UI tax rate. The data the state uses is as of Dec 31 of the prior year. It does not include the tax payments and benefit charges from Jan 1 to year to date.

Takeaway

Companies need to consult not only with accountants and lawyers prior to acquiring another company, but also with unemployment insurance experts. This company had both lawyers and accountants advising them on the deal, but neither had advised them of the UI implications, resulting in disastrous consequences. The UI exposure can extinguish all profitability on a deal if it’s not priced accordingly.