HR due diligence before closing the M&A deal
This is a practical guide to HR due diligence in mergers and acquisitions. Here’s what to review, common red flags, and why this phase matters more than ever.
When businesses approach a merger or acquisition, there’s usually a strong emphasis on financials, legal structure, and market fitment. But one part of the deal that is often overlooked is the HR due diligence process. And that oversight can cost companies far more than they anticipate.
Getting the people part of the equation right can be the difference between a smooth integration and months of employee churn, compliance issues, and stalled productivity.
In this article, we’ll explore what HR due diligence really involves, what to look for, and the common pitfalls to avoid, especially in cross-border M&A where the complexity increases tenfold.
What is the need for HR due diligence?
When planning a merger or acquisition, overlooking the people aspect can prove very costly. HR due diligence helps identify employment risks, compliance gaps, and workforce dynamics that are not visible on a balance sheet.
This process is essential for understanding how the target company operates at a human level, from leadership structures and contractual obligations to culture and employee morale.
Due diligence assesses whether the people, policies, and practices of the target business can align with those of the acquiring company, and if not, what all it will take to get there.
Key areas to review during HR due diligence
While no two deals are the same, there are some common areas that demand close attention to during the due diligence process:
1. Contracts and employee data
Start with the fundamentals. Ensure all employees have written contracts and that these are compliant with local employment laws in their jurisdiction. Look for inconsistencies in contract types and confirm that terms such as notice periods, probation clauses, working hours, and benefits entitlements are both legally compliant and fairly applied.
Also, assess how employee records are stored and maintained. Are they digitised and secure? Are data retention practices aligned with local privacy regulations such as GDPR in Europe or LGPD in Brazil? Poor data hygiene or undocumented agreements can lead to disputes and costly remediation efforts.
2. Compensation and benefits
Analyse how the target company compensates its workforce, including base salaries, bonuses, commissions, profit-sharing, stock options, retirement contributions, and fringe benefits. Compare this against legal minimums and local market norms.
Look for red flags such as outdated compensation bands, inconsistent bonus structures, or inequities across gender, geography, or job level. Also assess benefit design. Are there pension shortfalls? Is private health insurance offered in markets where public healthcare is insufficient?
Benefits are a significant component of total reward and directly affect morale, retention, and employer brand. Harmonising them post-deal will be much harder if disparities and gaps aren’t understood upfront.
3. Organisational structure and headcount
Understanding reporting lines, business units, and the depth of the management bench is critical. You’ll want to map out any potential redundancies, see where roles overlap, and identify key people who hold institutional knowledge, especially if employee retention is a priority.
Go beyond the org chart. Evaluate the real influence of teams, informal hierarchies, and the current leadership’s role in daily operations.
Headcount numbers should be validated against function and geography. Understand which departments are over- or under-staffed, and identify any ‘key man risks’ where one individual holds critical knowledge.
Also, assess role clarity. See if the job titles are aligned with actual responsibilities. Misalignment here can cause friction post-merger, especially when roles are consolidated or leadership changes.
4. Statutory compliance and liabilities
Check for any unresolved disputes, labour court cases, or compliance gaps related to employment taxes, working time rules, collective bargaining obligations, or union consultation requirements. In some countries, non-compliance carries significant risk, financial as well as reputational.
Compliance lapses can derail deals. Review the target’s obligations under local employment law. This includes social security contributions, minimum wage adherence, holiday pay, record-keeping obligations, and safe workplace practices.
Investigate any pending employment tribunal cases or unresolved disputes with employees or former staff.
Special attention should be paid to jurisdictions with strong worker protections, such as France, Germany, Spain, Brazil, etc. where missteps in consultation, termination, or restructuring processes can lead to significant financial and reputational risk. Non-compliance with mandatory works council consultations or collective agreements, for example, can lead to delays, injunctions, or invalid terminations.
5. Employee relations and workplace culture
Quantitative data like turnover rate, absenteeism, or results from engagement surveys (if available) offer a window into workforce sentiment. But qualitative insights matter too: observe how employees interact, how information flows, and whether the decision-making style is top-down or collaborative.
Incompatibility in workplace norms, such as attitudes to hierarchy, remote work, or internal mobility, can slow down or even derail integration if left unaddressed.
Where possible, conduct leadership interviews or employee focus groups to gain a clearer picture of the cultural dynamics that aren’t visible on paper.
6. Union and Works Council Agreements
In many jurisdictions, particularly across Europe, union and works council consultation is not optional. It is a legal requirement to inform, consult, and sometimes obtain approval before making organisational changes, including mergers, redundancies, or benefit alterations.
During due diligence, identify any collective bargaining agreements (CBAs), works council structures, and the history of negotiations. Assess the strength of employee representation, frequency of consultations, and likelihood of resistance to post-deal changes.
Neglecting this aspect can result in legal delays, strike action, or even the reversal of business decisions.
What to ask while doing due diligence in a cross-border M&A context
Cross-border transactions come with layers of complexity that go beyond typical HR due diligence. Every country has its own legal, cultural, and operational norms, and overlooking even a small difference can lead to costly outcomes.
Here’s what HR teams and leadership should actively assess when dealing with international acquisitions:
1. Are local employment laws aligned or significantly different?
Each jurisdiction has its own rules on hiring, firing, severance, working hours, benefits, and union engagement.
Dismissals must be socially justified, based on behaviour, performance or operational requirements, and works council approval is mandatory. In such cases, only socially justified terminations are possible, if compelling operational requirements which preclude the continued employment of the employee in the establishment or the conduct of the employee has not been appropriate.
France similarly demands consultation with Comité Social et Économique and adherence to strict severance rules.
In contrast, most U.S. states operate “at-will” regimes, allowing termination at any time without cause, though employees may still access litigation via statutes like the ones for anti-discrimination.
Understanding these contrasts is critical to building transition strategies that are both compliant and culturally appropriate.
2. Will employee transfers trigger new legal obligations?
When roles shift across borders, so do the legal frameworks around them. Transferring an employee from one country to another may require new employment contracts, work permits, or visa renewals.
In some cases, existing benefits and tenure may not carry over legally even if the employee remains with the same company group.
Countries such as Belgium, France, Spain, Italy, Poland, and Romania require non-EU employers posting workers to comply with local labour laws.
The transferring employees also need to have a fixed monthly salary comparable to the top one-third of local PMET (Professionals, Managers, Executives, and Technicians) salaries, starting from SGD $5,000 and increasing progressively with age, up to $10,500 for those in the mid-40s. Candidates in the financial services sector need even higher salaries to qualify.
HR teams need to track the legal implications of intra-company transfers early in the process.
3. Are there disparities in benefits and entitlements across regions?
Pension plans, leave entitlements, healthcare, and bonuses often differ by location.
Unifying or reconciling benefits packages post-acquisition without triggering dissatisfaction or legal exposure is a task that requires both strategic and legal input of someone familiar with both said locations.
4. Will changes to reporting or leadership structures create regulatory or cultural challenges?
Shifting decision-making authority or leadership structures can have implications in certain jurisdictions. In some countries, changes to job roles or reporting lines require employee consent or consultation with works councils.
Moreover, companies with strong hierarchical cultures may react differently to flatter or decentralised management models. These changes, if not handled carefully, can impact productivity and employee retention at the top-most levels.
5. How will data protection and employee record-keeping be managed post-merger?
Data privacy laws like the GDPR in Europe impose strict rules on employee data storage, processing, and transfer, especially across borders. Merging systems or migrating employee data must comply with local laws, and failure to do so could result in significant fines or reputational damage.
HR teams should involve legal counsel to ensure that data practices are compliant from day one.
6. What are the local norms around communication and employee relations?
Employee communication strategies that work in one market may not work out or may even create confusion in another market.
In Japan, for instance, corporate announcements often follow formal hierarchies and etiquette where most major decisions might be made behind closed doors. In contrast, in Scandinavian countries, transparency and early involvement of employees are more common.
Adapting communication to local expectations can help reduce uncertainty and foster trust during transitions.
Avoid these red flags while conducting due diligence
Not all HR issues uncovered during due diligence are minor or fixable after the deal closes. Some may expose the buyer to significant legal, financial, or reputational risks, or even alter the value of the transaction. Here are some red flags to watch for, that require immediate attention:
1. Misuse of fixed-term or temporary contracts
A workforce that appears lean on paper may, in reality, be made up of a large number of fixed-term or temporary workers who’ve been with the company for years. In many jurisdictions, these workers are legally considered permanent employees if their contracts are repeatedly renewed or if the nature of their work is ongoing. This can trigger unexpected obligations around notice, severance, and redundancy protections and in some cases, claims of unfair dismissal if contracts are terminated without cause.
2. Hidden liabilities in pay and classification
It’s not uncommon to find that unpaid overtime has accumulated, contractors have been misclassified, or benefit plans have been administered in ways that violate local laws. These aren’t clerical errors at this scale, they’re legal liabilities that can lead to lawsuits, penalties, or tax audits. Misclassifying a contractor, for instance, can result in retroactive benefits, pension contributions, and even fines from labour authorities.
3. Discrepancies between written and actual policy
If company handbooks, employment contracts, and internal practices don’t match, this could create confusion or open the door to legal challenges.
For example, a contract might specify limited sick leave, while internal HR practice has been to allow unlimited days informally. These inconsistencies can undermine trust and make it difficult to enforce policy changes post-acquisition.
4. Missing or inadequate employee data protection
Data privacy compliance is a critical area of risk. If employee records are stored without proper consent, or if there is no policy in place governing access, retention, or cross-border transfer of this data, the acquiring business could inherit regulatory exposure. This is especially risky in multinational deals where personal data might move across jurisdictions with strict privacy laws.
Why you should start HR due diligence early
HR is often brought into the M&A process after major deal terms are already negotiated. That’s a missed opportunity as well as an increased risk. Early HR involvement can:
- Flag potential cultural mismatches before they affect integration.
- Surface any hidden liabilities that can impact reputation or the purchase price.
- Help craft a talent retention plan from day one.
It also sends a message, to both leadership and employees, that the people involved in both companies are central to the success of the deal.
What happens after due diligence?
The HR team’s role doesn’t end with due diligence. Post-merger, it becomes about translating insights into actions: aligning contracts, harmonising policies, managing change communications, and designing the go-forward structure.
What’s uncovered in due diligence forms the foundation of post-merger integration. And if done right, it gives HR the leverage it needs to manage change with clarity and confidence.
How Beyond Borders HR Can Help You
In the rush of deal-making, don’t treat HR due diligence as a formality. The most successful integrations happen when people risks are taken seriously from day one.
Whether you’re acquiring talent, entering new markets, or integrating different workplace cultures, HR’s insights shape whether the new business will succeed in reality, and not just on paper.
Planning an M&A undertaking soon? We can help you with conducting due diligence and other HR aspects of your deal as well.
Contact us today to learn more about how we can assist you with the HR aspect of Mergers & Acquisitions.
