Your company and another have decided to join forces. The process is moving forward smoothly, with both sides enthusiastic about the soon-to-be-combined company's products, technology and profitability. Then, on the eve of the closing, you discover that the target has misclassified its work force, resulting in a failure to pay overtime for the past three years. Both sides have to go back to the drawing board to revalue the deal, or it unwinds altogether.

Unrealistic? Hardly. If your company does not adequately identify employment issues in connection with a merger or acquisition, it could easily find itself in a similar situation.

Here are 10 problems companies encounter that may lead to post-combination employment problems. By focusing on these issues in advance, you can ensure the success of your merger or acquisition.

10. No employment focus

Too often companies focus exclusively on the business side of the deal (the desired products or technology, the stock value) and fail to anticipate employment issues that can result in post-merger liability. Of particular concern are statutes with timing requirements that may be triggered in an acquisition: the Workers Adjustment and Retraining Notification Act requires 60 days notice to employees and government agencies of a mass layoff or plant closing; in union settings, the National Labor Relations Act imposes a duty to bargain in good faith (including for a reasonable time) regarding changes in pension and other benefits (which often accompany an acquisition); and the Older Workers Benefits Protection Act ("OWBPA") mandates specific consideration periods for release provisions in separation agreements to be valid. If these (and other) statues are not followed, your company may find itself subject to fines, penalties, back pay or worse.

9. Loss of key employees

Post-merger losses of key employees can undercut the value of any deal. Before any business combination, your company must carefully evaluate any employment agreements to ensure there are not "change in control" or "good reason" provisions that would allow critical employees to exit following the closing -- often with full stock acceleration and/or with lucrative severance. Also, never underestimate the impact a merger can have on the combined company's culture, which can impact morale and lead to the loss of employees. Good pre-merger planning includes an analysis of the to-be-merged entities and a plan for blending their cultures with minimal impact on the employees.

8. No employment audit

Employers that have not examined their own (or the other company's) employment policies and/or practices do not have a complete understanding of existing or potential liabilities. No company wants to unknowingly acquire an entity with unresolved employment issues. A thorough audit should be performed, covering wage and hour classifications, workplace policies (including discrimination and harassment prevention, Fair Credit Reporting Act compliance, records retention and segregation policies), and proprietary information protection. If the target company has policies that do not comply with state or federal law, its potential liability should be factored into the acquisition price, or a portion of the proceeds held in escrow for a period after the close of the deal.

7. Failure to assign liability

Too often merging companies are not specific enough in assigning employment liabilities. You should ensure that both existing and future liabilities (claims discovered in the future for past actions) are covered, including litigation risks, wage and hour misclassifications, among others.

6. Failure to resolve policy conflicts

Employment policies, ranging from benefits and leaves to progressive discipline processes and beyond, may differ substantially between the two companies. These policies must be harmonized in advance of the consolidation. Remember, policy conflicts and changes can (and do) affect morale and attrition.

5. Fair Credit Reporting Act violations

The FCRA applies any time a company uses an outside agency for employee or applicant background checks. There are myriad, often complex, consent and notice requirements that must be followed, or the employer is subject to litigation and significant penalties. Smaller companies are often ignorant of the FCRA, and may have performed non-compliant background checks for years. If you are seeking to acquire such a company, you must assess its non-compliance into your valuation.

4. Poor reduction-in-force planning

Work force reductions often accompany business combinations. They should be planned, structured and implemented by a uniform body -- ideally one that includes senior management. Proper and uniform criteria should be used, and should be closely tied to business purposes. Do not use work force reductions to separate "problem" employees, unless they meet the objective reduction criteria. Also remember that statutory notice may be required for a "mass layoff."

3. RIF needs assessment

Before reducing your work force, analyze whether the reduction is necessary. Do you have excess employees and/or a redundancy in areas of operations? Many alternatives are available, including pay reductions, work furloughs/temporary closures, employee transfers (following skill set analyses), voluntary resignation packages and attrition "reductions." Reductions can be traumatic; be certain that there are no other equally effective alternatives.

2. Poor executive contracts

Certain provisions in executive contracts can lead to post-merger problems. Many agreements contain post-employment non-competition provisions. California law, however, voids non-competition agreements except under very limited (an usually inapplicable) circumstances. If your company uses non-competition agreements it is likely engaging in unfair competition under California law. Non-solicitation provisions, while commonly enforceable, can be so broad as to be unlawful. Non-disparagement provisions may be unenforceable, and "good reason" clauses (allowing the executive to quit and receive severance) can also create problems. Always ensure your legal counsel understands California law. Often, one of the combining companies is located in another state, but what is lawful there may not be in California.

1. Faulty separation agreements

The OWBPA, covering workers 40 or older, requires a 21- to 45-day consideration period and a seven-day revocation period before a release of age claims is valid. If your company separates older employees and obtains waivers without these characteristics, it is leaving itself open to litigation. Other common problems in separation agreements include non-competition clauses (illegal in California), and no waivers of unknown or unanticipated claims.

Careful, upfront analysis and planning surrounding employment issues should give you far less to worry about following your merger. The alternative includes fines, penalties and litigation, not to mention the realistic risk of not closing the deal at all.

Hunsaker, a principal of Fish & Richardson PC in San Diego, practices employment litigation and counseling, including trade secret, employee mobility issues, personnel policies, wage/hour laws, EEO compliance, hiring, disciplining and firing employees, executive employment agreements, and reductions in force.