Labour Due Diligence

Mar, 03 2020


The term “due diligence” includes the assessment of the company in various areas, including verification of the reliability of the firm, its financial documents and the conduct of inspections in the field of labour law. It is often used before entering into contracts, company acquisition or making investments.

All investors want a clear view of whether they are about to make a good investment, and the extent of the key risks. The main aim of labour due diligence is to conduct an inspection of the relevant company in order to identify inconsistency of the company’s documents with the labour legislation, eliminate existing violations, summarize all details of general management structure and draw attention to the problems in the relationship between employees and employer, reduce risks of administrative and criminal liability and minimize them.

Who needs labour due diligence?

Such a check of the company is necessary when buying and selling the firm, checking the reliability of the counterpart in case of contractual relationship. The inspected company must comply with labour legislation, including the labour code of the Russian Federation, presidential decrees and government resolutions. In such cases due diligence is beneficial for:

  • Persons and enterprises for which it is important to follow the provisions of labour and tax law;
  • companies who would like to pass labour inspection without any fines and penalties;
  • those firms who want to minimize and avoid labour risks.

Areas of inspection

Depending on the customer’s needs, due diligence may be conducted for assessment of company’s human resources. It is common practice to buy a company while retaining employees, especially those in senior positions. In this case, it is particularly important to assess the relationship between employees and the employer, working conditions and the existence of legally binding payments. Due diligence is designed to help to avoid adverse consequences of non-compliance with labour legislation.

Within the framework of labour due diligence, the review period typically covers last three years. Labour Due Diligence analyses application of norms of current Labour legislation in the following areas:

  • Managing and reporting business structures;
  • Recruitment process, including the presence of employment contracts with employees and senior management, their contractual rights and obligations, and legal agreements regarding termination of employment relatons;
  • Presence of contracts of civil law nature with individuals and the possibility of recognition of such contracts as employment contracts;
  • Analysis of staff by department or function and level of employees turnover;
  • General current staff relations;
  • High-professional employees and the strategies to retain them;
  • Collective agreements and other local regulations of the company;
  • Social insurance;
  • work time schedule and work time registration;
  • Details of recent salary and wage reviews;
  • Pensions.

Main stages of labour due diligence

When conducting due diligence, the terms and conditions of the standard employment contract with specialists of the companies, the list of dismissed employees from management and the legality of payments made as a result of termination of employment relationships are analysed. There are five main stages of legal due diligence of the enterprise:

  1. Gathering information about the company and employment relations.
  2. Selection and sorting the received information by the types of analysed documents.
  3. Analysis of selected employment documents, local regulations.
  4. Checking whether there are any legal proceedings involving relevant company, whether there are arrears in wages, social security payments and insurance fees or any other violations in order to identify potential employee claims against the company.
  5. Preparation of a written report based on the results of the labour due diligence procedure.

VALEN lawyers are high professional specialists with long-term experience in the field of labour law. We are ready to conduct procedure of labour due diligence and to provide you with legal advise on issues relating to recruitment procedure, draft employment contracts, help to avoid adverse consequences and minimise risks of penalties as a result of labour inspections.

You can contact our lawyers using any available method of communication and visit VALEN office by appointing a meeting by phone +7 (495) 7-888-096

Author of the article
Labour Due Diligence
Valentina Khlavich
Managing Partner
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