• 2023.05.15
  • M&A

Checkpoints for Labor Issues in Due Diligence

Labor Relations Documents

In order to confirm labor issues, it is necessary to check various documents such as employee lists, organizational charts, employment regulations, employment contracts, severance payment regulations, non-competition and confidentiality agreements, memorandums of understanding regarding employee inventions, and employee stock ownership agreements. In addition, documents such as 36 agreements reported to the Labor Standards Inspection Office, collective agreements made through labor-management consultations, and documents related to labor unions are also subject to this requirement.

Employees, organization chart

In the case of M&A of small and medium-sized companies, the weight of each employee is important, so it is necessary to check the age, length of service, gender, and position of each employee through the employee register, and also consider each employee’s resume, professional qualifications, and salary amount. If the average length of service is short or the average age of employees is extremely young, it is easy for employees to change jobs. On the other hand, there may be a risk that the company is not being renewed and is stuck in a rut.

Interviews with key personnel

In cases where there are so-called “key persons” who have special professional abilities, technical development skills, organizational skills, sales skills, etc., it is necessary to interview key persons individually to confirm their sense of belonging to the company and their willingness to continue to perform their duties for the company in the future. In one M&A of a small to medium-sized company, the sales manager of the target company almost single-handedly generated all of the company’s sales.

In another case where a part of a large company was acquired through a corporate split, out of 40 employees to be succeeded, about 10 were identified as key persons, and if any of these key persons left the company within one year of the corporate split, a contract was made to reduce 30 million yen per person from the purchase price. In that case, a considerable number of key persons quit within a year, and there was a dispute between the acquiring company and the party being acquired as to how the amount should be adjusted. Whether or not the so-called key personnel are firmly rooted in the company and whether or not they continue to be loyal to the company after the acquisition is an extremely important factor in the acquisition of a company.

Work rules and employment contracts

It is also important to check employment regulations and employment contracts. In the case of permanent employees hired for an indefinite period of time, they are not required to have a written employment contract, and it is more common for them to have no written employment contract. However, companies are obligated to clearly state working conditions even for workers without a fixed term, and are required to provide a written notice of working conditions to new employees at the time of hiring that outlines basic working conditions, such as working hours, work location, basic salary, and vacation time. On the other hand, for part-time or fixed-term employment contracts, the Labor Standards Law requires that an employment contract be drawn up, so an employment contract is usually prepared. During the legal audit process, we will check whether the working conditions are clearly indicated and, for part-time employees, etc., whether an employment contract has been concluded.

Most companies with 10 or more full-time employees are required to have work rules, and most companies with less than 10 employees probably have work rules because they are highly beneficial in defining the basic rights and obligations of employees. Without employment regulations, it may be difficult to dismiss an employee who has caused problems because the requirements under the employment regulations are not clear. Employees are also forced to worry that the terms and conditions of their employment may be changed at any time without their permission, making it difficult for them to perform their work with peace of mind.

Annual paid leave

When we check the contents of employment regulations, we often find that there are inadequacies in the provisions regarding annual paid leave. Under the law, employees who have worked for the company for six months or more are required to receive at least 10 days of annual paid leave in principle, and the number of annual paid leave days increases each year to 12 days, 14 days, and so on.

If an employee does not use his or her annual paid vacation days, the company may decide whether or not the unused paid vacation days will be carried over to the following year. In most companies, it is only allowed to carry over one year of unused vacation days to the next year. For example, if you used 10 paid vacation days in 2014, 12 days in 2015, and 14 days in 2016, and you used only 5 paid vacation days in 2014, you would be entitled to 17 vacation days in 2015, including the 5 days carried over and the original 12 days. On the other hand, if you took 10 days off in 2017, you would have used 5 days in 2016 and 5 days in 2017, so you would have 7 days of paid annual leave carried over to 2018, and you would have 21 days of paid vacation in 2018, which is the sum of the original 14 days and 7 days.

Until recently, workers were often too busy to take annual paid leave even if they wanted to, or the atmosphere in the company prevented them from taking annual paid leave. In recent years, however, workers have become more aware of their rights, and they are actively applying for annual paid leave. It is practically difficult to restrict the use of annual paid leave.

On the other hand, since many national holidays have been defined in recent years, the number of days off due to national holidays other than Saturdays and Sundays has also become extremely large. The actual number of working days is considered to be about 20 days per month. From this point of view, taking more than 20 days of annual paid vacation would mean taking almost the entire one month off as vacation every year, which would be considered too much vacation from the management’s point of view. Whether or not to defer annual paid leave is a matter that must be determined carefully, taking into consideration the legal provisions, the number of national holidays, and the situation of temporary leave during the year-end and New Year vacations.

In addition, there are many companies that do not permit the carryover of annual paid vacation but have adopted a system to buy back unused paid vacation days. Considering the current situation, this system may be more realistic.

Employment contracts for foreign companies

In foreign-affiliated companies, it is almost a matter of course to have an employment contract, which usually stipulates in detail the terms and conditions of employment and termination of employment. Whether or not severance pay is provided, stock options, and the burden of social security-related expenses are also stipulated in detail. In the case of a labor dispute in a foreign-affiliated company, the first thing to do is to check the contents of the employment contract to see what rights and obligations have been created by it. For example, it is necessary to confirm whether or not the dismissal is justified, whether or not severance pay will be provided if the dismissal is justified, and what will happen to stock options. However, labor law is said to be a mandatory law, and even if the company is based overseas, if the employee was working in Japan, Japanese law will apply. This is because under private international law, the laws of the place of employment, not those of the legal entity’s home base, apply to the legal relations of workers. Even if the employment contract stipulates the exclusive jurisdiction of a foreign court, the application of this rule is excluded and the jurisdiction of Japan is applied.

Therefore, the content of the employment contract is of primary importance with regard to labor relations in foreign companies, but since Japanese labor law is compulsorily applied, it is also necessary to confirm Japanese labor law. For example, under Japanese labor law, justifiable cause is required for dismissal of an employee, and dismissal without justifiable cause is invalid. The four requirements for dismissal for cause established by the Supreme Court still apply to dismissal for cause. Even if the employment contract stipulates that overtime pay is included in the basic salary, the Japanese courts will decide whether and to what extent working hours are included in the special allowance and whether or not overtime pay should be paid for overtime in excess of that amount based on Japanese law. The decision as to whether or not overtime should be paid is to be made by a Japanese court in accordance with Japanese law.

Overtime work and Notification of Agreement on Overtime/Holiday Work

Except in the case of variable working hours or exceptions for sales personnel, employees are legally allowed to work eight hours per day (although it is possible to set shorter hours), and companies are not free to order employees to work overtime. In order for a company to order its employees to work overtime, it must conclude a so-called Notification of Agreement on Overtime/Holiday Work with the employees’ representative or union, and submit this to the Labor Standards Inspection Office. During the legal audit, we will check whether there is a Notification of Agreement on Overtime/Holiday Work and whether a copy of the Notification of Agreement on Overtime/Holiday Work has been stamped with a seal of acceptance by the Labor Standards Inspection Office.

The employee representative who signs the Notification of Agreement on Overtime/Holiday Work is supposed to be a person selected by a majority of the employees, but in many small and medium-sized enterprises, it is usual for the management to select a person who is likely to represent the employees and have that person sign the agreement. If there is a union, the agreement must be signed with the union representative, but if there is no union, there is no need to create one. The Notification of Agreement on Overtime/Holiday Work must specify the maximum number of overtime hours that can be ordered in a month, for example, 40 hours per month, and the employee’s overtime hours must actually remain within that range.

Memorandum of Understanding regarding duty of confidentiality, non-competition, and attribution of employee inventions

A company has a variety of important information, such as customer information and product manufacturing methods, which could cause serious losses to the company if leaked to competitors or other companies. It is also unacceptable for a company to allow an employee who has left the company to start a new company using the company’s confidential information. Therefore, many companies conclude nondisclosure agreements with their employees, requiring them not to leak company information to outside parties and not to use the company’s confidential information for any purpose other than the company’s business purposes.

On the other hand, it is not possible to deter a company employee from working for a rival company after leaving the company or starting his own company and starting a business that competes with the company’s business, unless a non-compete agreement is concluded. Of course, when an employee leaves the company, the company may ask the employee to sign a non-compete agreement, but the employee may not sign it voluntarily. Therefore, it is preferable to obtain a written agreement regarding a memorandum of non-compete agreement at the time of employment with the company. In many of the cases we have handled, when an employee resigned from a company, the company asked the employee to sign a non-compete agreement, and when the employee refused, the company stopped providing severance pay, and the employee filed a lawsuit demanding payment of the severance pay. Such disputes could have been prevented if a non-compete agreement had been signed at the time the employee joined the company.

Relationship with personal information protection regulations Labor-Related Documents

Recently, many companies have detailed personal information protection regulations due to the activities of various consultants. The personal information protection regulations of such companies are supposed to have the company president as the chief administrator to check for inappropriate handling of personal information. In addition, a personal information protection committee is supposed to be established to determine whether the inventory of personal information is being properly conducted and whether personal information is being handled inappropriately. Although very detailed regulations are in place, it is important to check whether the company is actually operating in accordance with the regulations.