Buying a business can require a lot of due diligence and proper documentation. There are the obvious evaluations, like infrastructure, finances, and employees. However, one cost that many buyers do not consider when buying a business, is their premium for workers’ compensation claims. Buyers beware, those rates can be determined in a way that may not show up on a balance sheet.
A recent Ohio Supreme Court decision regarding an asset purchase agreement, State ex rel. RFFG, L.L.C. v. Ohio Bureau of Workers’ Comp., stated that Bureau of Workers’ Compensation is authorized to calculate the new buyer’s workers compensation premium rate based on the predecessor’s experience within the most recent experience period. In other words, if the business you are buying had a number of employees make workers’ compensation claims; your premium is likely to be based off of those numbers.
The Court stated for workers’ compensation purposes, the term “successor in interest” means “simply a transferee of a business in whole or in part.”
Fair or unfair, this can lead to unexpected and astronomical fees for workers’ compensation premiums. Businesses already tend to have low profit margins in the beginning; unexpected fees are not welcome.
Proper documentation that would support a conclusion that the purchaser was only a partial successor to the seller was not provided by the purchaser, and thus the Supreme Court refused to set aside the decision of the industrial commission.
The Bureau of Workers’ Compensation has been authorized to set the premiums based on the predecessor’s experience. Additionally, Courts will defer to the Bureau’s decision in all but the most extraordinary circumstances and intervene only when the agency has acted in an arbitrary, capricious, or discriminatory manner. Thus, not only does the Bureau get to set the fees based on the previous owner, there is very little a buyer can do about it once the fees are set.
Keep in mind that the Bureau of Workers’ Compensation does have a duty to briefly explain the reasoning for their decision and inform the parties of their decision. If a buyer does not receive notice, then that may be an avenue of appeal.
Therefore, buyers of businesses should proceed with caution, and add the above to their list of due diligence. Contact an attorney if you have any questions regarding buying a business or premiums for workers’ compensation.
For more information, see the Ohio Supreme Court case in its entirety:
State ex rel. RFFG, L.L.C. v. Ohio Bureau of Workers’ Comp, 2014-Ohio-5199, P1, 2014 Ohio LEXIS 3028, 1, 141 Ohio St. 3d 331, 23 N.E.3d 1172 (Ohio 2014)