[ 3.3.1 - Acquisition (Acquired) ] [ 3.3.2 - By an Individual or Employing Unit ] [ 3.3.3 - From Employer Subject to the Act ] [ 3.3.4 - Of the Organization ] [ 3.3.5 - Of the Trade or Business ] [ 3.3.6 - Of Substantially All the Assets ] [ 3.3.7 - Relationship of Secs 201.022 and 206.004 ] [ 3.3.8 - Acquisitions & SUTA Dumping Legislation - September 1, 2005 ] [ 3.3.9 - Subsec 204.083 Acquisitions - Amended Sept 1, 1989 ] [ 3.3.10 - Secs 201.022 and 204.083 - June 10, 1985 thru Aug 31, 1989 ] [ 3.3.11 - The Mandatory Transfer Provision ] [ 3.3.12 - Factors Used in a Total Acquisition ] [ 3.3.13 - Continued Operation of the Business ]

Under Section 201.022:

In this subtitle, "employer" also means an individual or employing unit that acquires the organization, trade, or business of another, or substantially all of the assets thereof, of another that was an employer subject to this subtitle at the time of the acquisition.

Employer status under this subsection can attach only after the finding of:

1. Acquisition, and
2. Acquisition by an individual or employing unit, and
3. Acquisition from an employer subject to the Act, and
4. Acquisition of the organization, or
5. Acquisition of the trade, or
6. Acquisition of the business, or
7. Acquisition of substantially all of the assets of the organization, trade or business.

For the purposes of this subsection, an acquisition is a gaining by any means. In most cases, it can be expressed as gaining of possession. The acquisition does not have to be one that transfers all the title. It can be the mere right to possess and use under any kind of an agreement. The acquisition may be under an agreement to rent, to lease or otherwise to possess and use. It would seem to be limited only insofar as there is a legal right to possess.

The acquisition, through the gaining of a right to possession and use, need not be an acquisition for any specific period of time. The acquisition can be under an agreement transferring the possession for an indefinite period of time, the limitation of which is based upon a contingency. Through the gaining of the right to possession for any period of time, there is the type of acquisition which fulfills this one condition.

The language of the subsection conditions its application to create liability on the fact of acquisition without reference to the purpose of the acquisition or the intended use to be made of the things acquired. If the language of the Act is literally applied, it seems to be unimportant whether there was any intent to continue the trade or business of which assets or organization was acquired. For this reason, the subsection is applied to create liability on the basis of an acquisition, even though the assets acquired are never used in the operation of the business. The assets may have been immediately stored, sold or otherwise disposed of. The point is that inquiry need not be made into the question of intended use or actual use of the assets acquired.

It appears impossible to claim there was an acquisition of any thing which cannot thereafter by some means be discovered in the transferee. In the usual situation, the actual transfer of assets is easy to discover. Even though it appears that the organization, trade or business was acquired, however, such a claim cannot be made to support liability under this subsection unless it can be shown that the organization, trade or business was received through the acquisition in such a manner that it can be discovered after the acquisition. Difficulty in supporting a finding of liability by reason of acquisition of the organization, trade or business arises because each of these things is somewhat nebulous and of such a nature as to make following the transfer from one person to another uncertain.

A Texas Court of Civil Appeals held in the Lewis Case that, in separating the provisions of the subsection with the word "or," such word was used by the Legislature in the disjunctive and the provisions of the subsection are therefore to be applied separately.

The reasons for having a provision using language of this subsection appear to be: (1) to prevent avoidance of tax liability for any part of the calendar year by the device of changing ownership of the business within the year, and (2) to provide a full year's unemployment insurance coverage for individuals working in a particular business if any coverage at all is provided for that calendar year.

The specific language of the subsection covers an acquisition by "an individual or employing unit." The quoted phrase is interpreted quite literally.

While most individuals are employing units, by virtue of having at some time employed someone to perform service; individuals can become subject employers whether or not they are employing units.

Organizations, other than individual proprietorships, can become subject employers only if they are employing units. Technically, such an organization can be an employing unit without having "employment" as defined in the Act, but for all practical purposes this wording could be "employing unit with employment."

Tax liability under Section 201.022 is contingent upon acquisition of the organization, trade or business or substantially all of the assets of another subject employer. Usually, the business, etc., of an employer is acquired from that employer. In most instances, there is no intermediate ownership to be taken into consideration, and the employing unit who becomes subject under Section 201.022 does so by acquiring the business of a predecessor employer from that employer. Exceptions are discussed in the following paragraph and in Chapter 3 - Application of Sections 201.022 and 204.083.

The acquisition can be from an employer even though the dealings with respect to the acquisition and the transaction itself were conducted through another person who has acted as the agent of the employer. If it is found that the transaction bringing about the acquisition was with some person other than the employer, there is no liability under this subsection unless facts reveal that this person was, in truth, acting as an agent for the employer. The Commission must be prepared to prove that an agency relationship existed between the employer and the alleged agent.

The word "organization" refers to people and the arrangement of people. The organization within any business is a pattern of people arranged singly or by groups. Imposition of liability under this subsection by reliance upon acquisition of the organization alone would be difficult to sustain because of the likelihood that the same group of people previously organized by the predecessor would not be arranged in that same pattern by the successor after the acquisition. An attempt to sustain liability under this subsection by acquisition of the organization alone is discouraged. Nevertheless, any case under this subsection can be strengthened by a showing that all or substantially all of the same people continued in the business after the date of acquisition and that these people are working at the same jobs they had prior to the date of the acquisition.

The Commission considers trade and business to be synonymous since proof that either has been acquired is likely sufficient to sustain an assertion that the other has also been acquired. It would be difficult to support proof of liability under this subsection by showing the acquisition of only trade or business; however, any evidence that the successor has the same trade or business as that of the predecessor makes a stronger total case when considered together with the acquisition of assets or organization. There may be some evidence that the trade or business has been acquired if it is found that:

The word "assets" as used in this subsection refers to those assets of the predecessor used in the conduct of a business on which taxes are payable. This means that assets used in agricultural pursuits, domestic usage or other businesses with all services excluded from employment are not assets to be considered when applying the provisions of this subsection. If, however, Sections 201.028 or 201.027 are applicable, then the farm and ranch assets and/or domestic assets would be considered "assets" as used above.

Also, assets of a business retained by the predecessor are not to be considered if the retained business is of a nature which does not ordinarily require employment. If a business retained by the predecessor is of a type which ordinarily does require employment, regardless of whether there has ever actually been any employment, the assets would be considered.

There have been no court cases in Texas or other states construing the words "substantially all" as used in this subsection of the Texas law or in a similar section of other state laws. The words have been used in other statutes, however, and have been defined by court decisions; these decisions, taken together, indicate that "substantially all" may be any percentage between 80 and 90. It seems that 90% or more of the assets may be safely construed as "substantially all." A percentage of assets ranging between 80% and 90% may logically be questioned as not being "substantially all." It can be presumed by field personnel that liability will be established under this subsection if there is an unquestionable finding that as much as 90% of the assets of the predecessor were acquired and that the other conditions of this subsection have been met. If the facts clearly show the acquisition of assets by a percentage figure between 80 and 90, it can be presumed that liability as an employer under this subsection will not be established by the Commission without additional facts supporting a showing that the organization, trade or business has also been acquired. In any situation investigated, the conclusion reached should not be totally based on the percentage of assets acquired if there is a possibility that further facts about the organization, trade or business will make a stronger case for liability.

Few definite statements can be made as to those things which should be considered as assets of the predecessor. Moreover, certain things will be considered assets of the predecessor when there can be no certainty as to the value of the assets. These two facts are important considerations when investigating some cases raising the question of liability under this subsection.

It seems certain that cash in the predecessor's business at the time of the acquisition should not be considered as an asset for the application of this subsection; however, accounts receivable will be considered as assets of the business. The accounts receivable should be given the value appearing in the predecessor's records, without regard to whether some of them may never be collectible. The percentage of assets acquired and of assets not acquired is determined in accordance with the dollar value of each of the groups of assets. If the values of all assets, on any basis, appear in the predecessor's records, these values furnish a sound basis for comparison. A logical exception might be taken to this method of comparison of values by a showing that the market value of some assets has increased more than others. In the absence of recorded values of assets in the predecessor's books, the comparison between the value of assets acquired and the value of assets not acquired can probably be made only by comparison of the purchase price of assets acquired with the estimated present market value of the assets not acquired. These suggested means of comparisons may not be adaptable to all circumstances.

Nothing definite can be said here as to whether a franchise, agency or similar business arrangement belonging to or used by the predecessor should be considered as an asset of the predecessor. Neither can any definite suggestion be made as to any method of determining the value of such an asset. It is sufficient to suggest that these things may be considered as assets of the predecessor and may have values to be considered in determining whether substantially all the assets were acquired.

This subsection requires that there be the acquisition of substantially all the assets of the organization, the trade or the business of the predecessor. There can be no question that assets have been acquired under these required circumstances if: (1) the place of business was open for trade and business, and (2) the business was being conducted by the person from whom it was acquired. A question arises if either condition (1) or condition (2), as stated, is not clearly present.

The acquisition may have occurred on a day when there was no visible business being conducted; that is, the doors of a mercantile business may not be open to customers, drilling equipment may not actually be in operation, or some other type of business may not be in actual operation on that day.

The absence of visible activity within the business does not necessarily mean that there had been a cessation of business. A business place may be closed or business operations may not be conducted on a day because of any number of circumstances. Rain may prevent any outdoor activity; absence of contracts on which to work may prevent actual activity; holidays, sickness, renovation of the establishment or any number of other things may prevent the doors of a mercantile business from being open; shortage of equipment, materials, manpower, etc., may sometimes prevent actual operations within a manufacturing business; some businesses have actual operations only within certain seasons. Under any one or all of the circumstances named above, it may well be shown that the business had not been discontinued. If all equipment and facilities are retained intact with the evident intent to continue the business or reopen it at such time as the preventive conditions do not exist, there seems to be considerable evidence that the business was still there even though it was not presently being operated. A business that does not have actual activity in any day or week might be asked, "Are you out of business?" Under any one or possibly all of the circumstances given above, the answer would likely be, "No, I am not out of business, my business is closed today or this week because of this or that." Should an acquisition occur from a predecessor at a time when the business is not operating, extensive investigation may be necessary to determine whether or not the business was discontinued for all purposes. Assets formerly used in the operation of a business can cease to be "assets thereof," i.e., assets of a business when the business has ceased to exist. Acquisition of such assets would not result in Section 201.022 liability for the purchaser any more than would purchase of similar assets from the stock in trade of a wholesale equipment dealer.

The status of a successor as an employer is not affected by the question of whether the predecessor is eligible, at the time of the acquisition, to terminate coverage.

EXAMPLE: Predecessor became an employer in 1996 but is eligible to terminate coverage as of January 1, 2000. On February 8, 2000, successor acquires all of predecessor's organization, trade or business and becomes an employer under Section 201.022. On March 31, 2000, predecessor files an Application for Termination of Coverage which is approved, thereby terminating liability for contributions as of January 1, 2000. The Commission will not close the successor's account as being erroneously established, for the reason that as of February 8, 2000, predecessor was an employer and remained in that status until approval of an Application for Termination of Coverage.

[ 3.3.8.1 - Background ] [ 3.3.8.2 - Procedures ] [ 3.3.8.3 - Scope ]

Amendments to Chapters 201 and 204 of the Texas Unemployment Compensation Act, Labor Code as the result of the passage of State Unemployment Tax Act (SUTA) dumping legislation in the Texas Legislature. Reference: House Bill 3250 passed in the Regular Session of the 79th Texas Legislature.

The purpose of this legislation is to amend the Texas Unemployment Compensation Act to incorporate provisions mandated by federal legislation. Employers engage in SUTA dumping when they unlawfully attempt to lower the amount of their unemployment insurance taxes by altering their experience ratings. Chapters 201 and 204 of the Texas Unemployment Compensation Act have been revised in an attempt to strengthen the financial integrity of the unemployment insurance program by reducing tax avoidance due to this manipulation of unemployment experience.

Liability under Section 201.022 of the Labor Code is broadened to include all acquisitions, total or partial. “Employer” means an individual or employing unit that receives, “by any means,” all or part of the organization, trade, business, or “workforce” of another that was an employer subject to this subtitle at the time of the acquisition.

Section 204.081 is amended by adding two new definitions. The term “person” is defined as an individual, trust, estate, partnership, association, company, or corporation. “Substantially common management or control” exists if the predecessor continues to:

Section 204.083 now requires the transfer of compensation experience in acquisitions of all or part of an experience-rated organization, trade or business in which there is substantially common management or control or substantially common ownership.

Section 204.084 is changed to address approval of compensation experience for partial acquisitions of businesses that do not have substantially common management or control or substantially common ownership. In addition, this section states the conditions under which the businesses involved in those partial acquisitions may apply for a transfer of compensation experience and the conditions under which the commission shall approve or deny such a transfer. The method used to calculate the successor employing unit’s initial contribution rate is outlined for both experience-rated and non-experience rated successor employers.

Section 204.085 now addresses the contribution rate for successor employers that acquire part of the organization, trade, or business that is definitely identifiable and segregable when there is substantially common management or control or substantially common ownership. It details the computation of an experience rate for a partial acquisition and clarifies when a new computation of experience rate will take effect for a successor employing unit with an experience rate and without an experience rate. In addition, this section sets the contribution rate for a successor engaging in a partial acquisition solely to obtain a lower contribution rate at the initial contribution rate in Section 204.006.

The new Section 204.0851 addresses the contribution rate for total acquisitions and partial acquisitions in which there is substantially common management or control or substantially common ownership. This section excludes partial acquisitions that met the identifiable and segregable requirements under section 204.085. It details the computation of experience rates and clarifies when a new computation of experience rate will take effect for a successor employing unit with an experience rate and without an experience rate. It also addresses the computation of the predecessor employing unit’s contribution rate.

The new Section 204.087 defines an offense and sets the penalties for persons that advise others to violate the provisions of this subchapter, or commit violations of the subchapter. Violations are Class A misdemeanors.

The new Section 204.088 charges the commission with adopting a rule that establishes procedures for identifying the transfer or acquisition of a business.

The new Section 204.089 requires that the commission administer this subchapter in conformity with federal regulations prescribed by the United States Secretary of Labor.

Mandatory transfer of compensation experience applies to all acquisitions, total or partial that involve common management or control or substantially common ownership occurring after September 1, 2005. The successor employer is to be informed in their C-198 Employer Liability Notice, of the right to submit an application to transfer only the compensation experience of the portion of the predecessor business acquired, if it is identifiable and segregable. Partial applications submitted by successors without common management, control, or ownership will continue to be handled in the same manner as under the current law.

This legislation became effective September 1, 2005.

All acquisitions occurring before that date are governed by the law in effect on the date of the acquisition.

Questions may be directed to the Tax Department, Status Section, Raul Valdez at (512) 475-1122, or by e-mail at raul.valdez@twc.state.tx.us.

Subsection 204.083 was amended effective September 1, 1989, to make transfer of compensation mandatory only:

... if, on the date of the acquisition, a shareholder, officer, or other owner of a legal or equitable interest in the predecessor employer, or the spouse or a person within the first degree of consanguinity or affinity, as determined under Article 5996h, Revised Statues, of the shareholder, officer, or other owner:

1) is a shareholder, officer, or other owner of a legal or equitable interest in the successor employing unit; or

2) holds an option to purchase a legal or equitable interest in the successor employing unit.

For successions occurring on or after September 1, 1989, if a total transfer of compensation experience is in order, there must be the prescribed relationship between the predecessor and successor. There is no optional total transfer. See Tax Supplement 9-90.

Black's Law defines Legal Interest as: "Interest in property or in claim cognizable (capable of being known) at law in contrast to equitable interest.

Black's Law defines Equitable Interest as: "The Interest of a beneficiary under a trust is considered equitable as contrasted with the interest of the trustee, which is a legal trust."

The following situations illustrate Section 204.083.

Situation Number 1:

A (Subject employer)
Organization, trade, or business, or all assets acquired by "B."

B (Individual or employing unit who is a father to "A.")

RULING:

"B" must take compensation experience of "A."

Situation Number 2:

A (Subject employer)
Organization, trade, or business, or all assets acquired by "B."

B (Individual or employing unit that is not related by blood or marriage to "A" and "A" does not have an option to buy.)

RULING:

"B" is liable under 201.022 but 204.083 does not apply. "B" will receive an entry level tax rate.

Situation Number 3:

A (Subject employer with option to buy equitable interest in "B.")
Organization, trade, or business, or all assets acquired by "B."

B (Individual or employing unit)

RULING:

"B" must take the compensation experience of "A," since "A" held an option to buy the business back.

Mandatory Transfer Provision

Section 204.083, effective June 10, 1985, through August 31, 1989, provided, in part,

COMMENT: In simplest terms, during this period Section 204.083, as amended, makes total transfers mandatory, rather than optional, when a total acquisition occurs. Under the prior law, the transfer of compensation experience was optional; that is, the compensation experience was transferred only if the predecessor and the successor voluntarily agreed to a transfer of the compensation experience, and signed the appropriate tax forms to formalize that transfer. This was true regardless of whether the transfer was a total or a partial transfer. That law no longer exists as to any total transfer occurring on or after June 10, 1985, and through August 31, 1989, as the prior subsection was replaced by the mandatory transfer provision of Section 204.083 for that time period. In short, if a total acquisition occurred within the above-referenced dates, and the successor continued the operation of the organization, trade, or business, the compensation experience of the predecessor employer was transferred to the successor. Partial transfers continue to be optional under Section 204.084 of the Act.

NOTE: Section 204.083 was again amended effective September 1, 1989. The application of those amendments is discussed in Paragraph 3.3.14, "Section 204.083 Acquisitions on or After September 1, 1989".

[ 3.3.11.1 - The Mandatory Transfer - History ] [ 3.3.11.2 - Statutory Language ] [ 3.3.11.3 - Acquisition ] [ 3.3.1.4 - Obtain Written Documents ]

The mandatory transfer provision asks if all of the organization, trade or business acquired.

The word "all" in the language of the mandatory transfer provision has been consistently interpreted by the Commission to mean "total."  That is, the word "all" in the context of the mandatory transfer provision was intended to distinguish total transfers from partial transfers under the Texas Unemployment Compensation Act.

[ 3.3.11.1.1 - Prior to 1985 ] [ 3.3.11.1.2 - June 10, 1985 ] [ 3.3.11.1.3 - After Sept 1, 1989 ] [ 3.3.11.1.4 - After Sept 1, 2005 ]

Under the law as it existed prior to 1985 the enactment of the mandatory transfer provision, a successor that acquired only an identifiable and segregable part of the predecessor's organization, trade, or business was treated differently with regard to the transfer of compensation experience than was a successor who acquired all of the predecessor's organization, trade, or business.  See Subchapter E - Acquisition of Experience-Rated Employer of the Act, as amended effective August 22, 1957.  Note also that the language of the prior law refers to "an employing unit (that) acquires all or part of the organization, trade, or business of an employer, without using the terms "total acquisition" or "partial acquisition."

In enacting the provisions of Section 204.083 effective June 10, 1985, the Legislature meant to maintain this same distinction between an acquisition of "all" and an acquisition of "part," making the transfer of compensation experience mandatory in the former (total transfer) situation while keeping it optional in the latter (partial transfer).  Like the prior law, the amendments at 204.083 use the word "all" to mean total transfer, and, at 204.084, the word "part" to mean partial transfer.

It is a basic rule of statutory interpretation that the prior law may be examined to determine the Legislature's intent in amending that law.  A law that has stood for a long period of time is generally viewed as being of sound construction.  The TWC's past practice with total and partial voluntary transfers of compensation experience over the course of more than twenty-seven years (from August 1957, to June 1985) supports the conclusion that the Legislature intended the word "all" in Section 204.083 to identify total acquisition situations.  The amendment changed the law to make the transfer of compensation experience mandatory for all total acquisitions occurring on or after June 10, 1985, through August 31, 1989, but the amendment did not change the meaning of the word "all."

For the period beginning September 1, 1989 and subsequent, the transfer of compensation experience is mandatory provided, as of the date of acquisition, a shareholder, officer, or other owner of a legal or equitable interest in the employing unit that is transferring the organization, trade or business, or the spouse or a person within the first degree of consanguinity or affinity of such an individual is a shareholder, officer, or other owner of a legal or equitable interest in the acquiring successor employing unit, or holds an option to purchase such an interest.

Those not familiar with the TWC's long standing practice of using the words "all" and "part" to distinguish between total transfers of compensation experience and partial transfers of compensation experience often, and mistakenly, believe that the word "all" in the mandatory transfer provision means absolutely one hundred percent.  Instead, "all" refers to a total, as opposed to a partial transfer.  If the facts are sufficient to establish that a total transfer of the organization, trade, or business has occurred within the referenced time frame, (June 10, 1985 to August 31, 1989) then the predecessor's compensation experience must be transferred to the successor.  The criteria used in making this determination will be discussed more fully below; however, those criteria are substantially similar to the factors listed in Chapter 3 - Of the Trade or Business in this Tax Manual.

Past experience demonstrates that it is not necessary to have acquired absolutely one hundred percent of the predecessor's organization, trade, or business for a total acquisition to have occurred.  Likewise, a partial acquisition can only be established if, among other things, the successor acquired a part of the predecessor's organization, trade, or business "to which a definitely identifiable and segregable part of the predecessor's compensation experience was and is attributable."  See Section 204.084 of the Act.

Section 204.083 now requires the transfer of compensation experience in acquisitions of all or part of an experience-rated organization, trade or business in which there is substantially common management or control or substantially common ownership.

"Organization" usually refers to the people within a business or the pattern or arrangement of people within a business either singly or in groups.  The words "trade or business" are considered synonymous and, in this context, are generally held to refer to the trade name, the location and physical structure of the business, the equipment, fixtures, furniture, and inventory used in the business, and the type of business or product or service sold.

Note that a successor who acquires all of the trade or business need not have acquired all of the "organization" of the predecessor in order for the mandatory transfer provision to apply.  The phase "organization, trade, or business" as used in this statute denotes alternatives.  That is, the comma after the word "organization" is treated in the disjunctive, because it is followed by the word "or" in the phrase "trade or business."  Thus, if it is established that the successor acquired the "trade or business" of the predecessor, it is not necessary that the successor also have employed all of the same individuals who were employed by the predecessor in order for the mandatory transfer provision to apply.

For purposes of the mandatory transfer provision, the same definition of "acquisition" applies as is used under Section 201.022 of the Act.  See Chapter 3 – Acquisition (Acquired) in this Tax Manual, which defines acquisition in more detail.  In general, an acquisition may be defined as:

When conducting an investigation, it is important that all written documents relating to the transfer be obtained and made a part of the TWC record.  Such documents include, but are not limited to: sale or purchase agreements, inventory lists, closing documents, franchise or dealership agreements, deeds, lease agreements, licenses, or any other written documents that relate to the business transfer, plus the attachments to those documents. A verbal description of a document or a written "summary" of any agreement is unacceptable.  Obtain a signed copy of the document.  Such written documents can usually be obtained from either the predecessor employer (seller) or the successor employer (purchaser). 

If the agreement is conditional upon an event to happen in the future, that agreement is generally not effective unless and until the event has actually occurred.  For example, a business might be turned over to an individual on the condition that business must be profitable within six months, at which time a formal written lease will be assigned to him.  In this example, there can be no acquisition by the designated individual until the condition has been met and the lease has actually been assigned.  A future condition that does not relate to the acquisition itself usually has no bearing on the application of the mandatory transfer provision, however.

[ 3.3.12.1 - Predecessor Owns Multiple Operations ]

In determining whether there has been a total acquisition of the predecessor employer's organization, trade, or business, the factors to be considered include, but are not limited to, the following:

1. Is the same type of business being conducted?
   
   
2. Is the business conducted in the same location?
   
   
3. Did the successor acquire the furniture, fixtures, or equipment used in the predecessor's business?
   
   
4. Did the successor acquire the inventory on hand as of the acquisition date?
   
   
5. Is the business being conducted under the same trade name?  Do the same signs appear on the business premises?
   
   
6. Were the doors of the place of business closed at the time of the change in ownership?
   
   
7. Did the successor acquire the franchise or dealership agreements from either the predecessor or the manufacturer or franchise holder?
   
   
8. Does the successor sell or distribute the same or a similar line of products as the predecessor?
   
   
9. Does the successor use the same advertisements, signs, letterhead, telephone directory listings, phone number, or post office box number that the predecessor used?
   
   
10. Would the public see any change in the business other than a change of ownership?

Note that not every one of the listed criteria need be shown in every case.  Moreover, a particular case may include criteria in addition to those listed above.  For example, certain unique types of business may include, as an essential part of the trade or business, specific items not included on the above list.

Difficult questions sometimes arise when the predecessor employer has, or is alleged to have, multiple business operations.  First, of course, it must be determined whether there are multiple business operations, and, if so, whether those businesses were in operation, with individuals in employment, on the date of acquisition.  Again, referring back to the language of the mandatory transfer provision, Section 204.083 of the Act, we see that the successor employing unit must have acquired all of the "organization, trade, or business of an employer ..." to trigger application of the statute.  If the predecessor had multiple business locations, each of which was an employer on the acquisition date, and if the successor acquired only one but not all of those several business locations, then the mandatory transfer provision probably would not apply.  Instead, this would normally be considered a partial transfer under Section 204.084 of the Act, assuming all of the conditions of that statute have been met.  However, there are several important factors to consider in a multiple business location situation.  These include, among others, the following:

1. Was each business an "employer" under the Act? 
   
   Where there are multiple business locations, each must have been a recognized "employer" under the Texas Unemployment Compensation Act, with individuals in employment on or before the date of acquisition.  If not, the business is simply an "asset" or a non-covered business activity and is not relevant to the determination whether 204.083 applies.
   
   
2. Were the multiple business operations each located in Texas? 
   
   Out-of-state business operations are not considered in applying the mandatory transfer provision, because the laws of the state where their activities are localized govern those out-of-state operations.  With a few exceptions not relevant here, the Texas Unemployment Compensation Act is concerned only with Texas employers.
   
   
3. Were the multiple business operations each separately incorporated? 
   
   Under the Texas Unemployment Compensation Act, each corporation is treated as a separate "employer", and is assigned a separate TWC account number, because each corporation is a separate legal entity.  Thus, a successor's failure to acquire every one of several corporations that are owned by one individual will not defeat application of the mandatory transfer provisions.  Essentially, each corporation stands on its own as to Section 204.083.

[ 3.3.13.1 - Business Operations Ceased ] [ 3.3.13.2 - Continuation of Same Type of Business ] [ 3.3.13.3 - Transfer of Customers of the Business ] [ 3.3.13.4 - Third Party Approval of the Transfer ] [ 3.3.13.5 - Contract States No Successor Liability ]

As noted above, the mandatory transfer provision only applies where the employing unit that acquired the organization, trade, or business also continued the operation of that organization, trade, or business.  In order to determine whether there was such a continuation of the organization, trade, or business, one should ask, first, whether there was any cessation of business activity on or after the date of acquisition.  Second, determine whether the nature of the business changed to such an extent that the successor no longer operates the same type of business.

Be aware that a short-term interruption in the business activity will not be sufficient to avoid application of the mandatory transfer provision, particularly where the reason why the business activity ceased is directly related to the transfer or the continuation of the business.  For example, closing the business for a week or two to clean and restock it in preparation for reopening under the new ownership does not amount to a discontinuation of the business under the mandatory transfer provision.  When investigating whether the business operation was continued, the following are among the factors that should be considered:

1. What was the date of acquisition?
2. Were the doors of the business closed at the time of the acquisition?
3. What was the total length of time, if any, that the business was closed to the public?  What were the exact dates that the business was closed?
4. What were the reason(s) or circumstances why the business activities ceased?  Do those reasons suggest an intent to continue the business in the future?  How?
5. Are there any other factors that suggest an intent to continue the business?  For example, do the terms of the transfer agreement, if any, show or imply an intent that the business was to be continued?
6. Was notice given to the public that the business was closed?  If so, in what manner was notice of the closing given?
7. Did the notice say or imply that the closing was temporary or permanent?

Another situation that often arises in the context of a mandatory transfer case concerns changes made to the business following the acquisition.  That is, it is sometimes contended that the second requirement of the mandatory transfer provision -- that the operation of the organization, trade, or business was continued -- has not been met because the successor has altered the business significantly from the way it was operated by the predecessor.


In general, any minor change in the business operation is not sufficient to avoid application of the mandatory transfer provision.  For example, if the predecessor operated a restaurant and the successor continues to operate the same restaurant, but with a different menu, the Commission has held that the predecessor's compensation experience will be transferred under Section 204.083 of the Act.  Similarly, where the successor changes some of the product lines or inventory from what was sold by the predecessor, the successor is nevertheless held to have continued the operation of the predecessor's organization, trade, or business, and the mandatory transfer provision does apply.

This same analysis applies to the acquisition of the customers of the predecessor's business.  That is, the successor's assertion that he/she did not continue the operation of the business because some or all of the predecessor's customers were not retained, and the successor had to build his/her own customer base, ordinarily will not defeat application of the mandatory transfer provision.  As a practical matter, it is the customers themselves and not the predecessor or successor who determine where they will do business.

In some cases, the continuation of the business is conditional upon some action to be taken by a third party, or a party unrelated to either the predecessor or the successor.  For example, certain businesses can only operate if a license has been granted by a private or governmental regulatory agency.  Another example would be a franchise or dealership business, where the franchise holder or manufacturer is a third party unrelated to the predecessor or successor.  In these cases the successor might argue that there was no continuation of the business until the license or franchise was granted by the third party.  However, if the successor is in fact operating the business it should be obvious that either the license or franchise was granted (either provisionally or permanently) or that the license or franchise is not actually required to continue to operate the business.  Again, this is a situation where it would be wise to examine the written documents with care.  Rarely will a third party's actions bar application of the mandatory transfer provision.

Sometimes the written purchase agreement between the predecessor and the successor states, in effect, that the successor assumes no liability for the predecessor's debts.  The written contract may even specify the types of predecessor debts, such as unemployment compensation contributions, that the successor is not obligated to pay.  If the purchase contract contains this language, the successor may argue that TWC can neither assign the predecessor's unemployment compensation contributions experience to it under the mandatory transfer provision, nor collect from it any past due taxes that the predecessor owed to the TWC.  Neither of these arguments is persuasive.

The first argument -- that the written contract prevents the successor from having to assume the predecessor's unemployment compensation contributions experience -- is invalid because unemployment compensation contributions experience is not a "debt" of the predecessor. Rather, it is simply information used to compute the unemployment compensation contributions experience rate, based on the formulas set forth in the Act.  Therefore, the written contract provision that purports to protect the successor from payment of the predecessor's "debts" cannot be used to defeat application of the mandatory transfer provision of the Act.

The second argument -- that the written contract provision protects the successor against the TWC's attempts to collect from the successor any debts the predecessor may have owed to TWC -- is also invalid.  Because the TWC is not a party to the written contract between the predecessor and the successor, it cannot be bound by the terms of that contract.  Moreover, the TWC is alone responsible for administering Texas' laws relating to unemployment compensation.  Therefore, two private parties cannot make an agreement which would effectively alter the statutory provisions of the Texas Unemployment Compensation Act, which expressly require the TWC to collect from the successor any taxes, penalty, or interest owed but not paid by the predecessor to the acquisition.  See generally, Section 207.071, Waiver, Release, or Commutation Agreement Invalid, and Section 204.086 of the Act, Collection of Contributions.