Distinct from a total acquisition of a risk's California insured operations, a different analysis must be performed when only a portion of a risk's operations undergoes a change in ownership (often referred to as a partial sale). Details concerning this analysis can be found in Section IV, Rule 1, Paragraph b(3) of the California Workers' Compensation Experience Rating Plan—1995.
For partial sales, the WCIRB must determine whether the new owner acquired one half or more of the seller's operations as measured by the number of employees and percentage of payroll. If the new owners acquired one half or more of the seller's operations, all of the seller's experience is applied to the new owners. Conversely, if a minority portion of the operations is sold, a change in status with respect to the acquired operations has occurred and the historical experience of the seller is not applied to the new owners. The change in status analysis relates to how historical data is applied to the acquired operations only. Regardless of the outcome of this analysis, all historical data from the operations is still included in the calculation of the seller's experience modification.
Thus, if a portion of a business is purchased and that purchase results in a material change in ownership, the seller's experience applies unless:
When Less Than the Entire Risk Is Sold Examples
Joe owns a restaurant and a bakery. He sells just the bakery to Al. During the 90 days before the sale, Joe had a total of 30 employees and a total payroll of $300,000. During the 90 days after the sale, Al retains 17 employees who also worked for Joe during the 90 days before the sale.
Since Al retained a majority of Joe's employees, there is no material change in employees. All of Joe's historical payroll and loss experience generated prior to the sale, including the restaurant's experience, applies to Al.
Gloria owns a bicycle shop and a machine shop. She sells just the bicycle shop to Sal. During the 90 days before the sale, Gloria had a total of 100 employees and a total payroll of $500,000. During the 90 days after the sale, Sal retains 40 employees who had also worked for Gloria during the 90 days before the sale. The 40 employees earned $275,000 during the 90-day period after the change in ownership.
While Sal retained less than 50% of Gloria's employees, the payroll for these retained employees for the 90 days after the sale was more than one half of the total payroll for all of Gloria's employees during the 90-day period before the sale. Since it was not a material change in both employees and payroll, all of Gloria's historical payroll and loss experience generated prior to the sale applies to Sal.
If these 40 employees retained by Sal had earned $175,000 during the 90-day period after the sale, then there would be a material change in both employees and payroll, resulting in a change in status because Sal retained fewer than one half of the seller's employees and less than one half of the seller's payroll. Under these circumstances, none of Gloria's experience would apply to Sal.
In short, to analyze a total sale, it must be determined what portion of the buyer's employees also worked for the seller. To analyze a partial sale, it must be determined what portion of the seller's employees also worked for the buyer. Dependent on the employee count analysis, the appropriate employee payroll amounts may also need to be analyzed.
We welcome your feedback on this guide. Please send comments and suggestions to [email protected].