Labor is one of the complex and noteworthy aspects that require careful consideration during the legal due diligence process of M&A transactions (mergers and acquisitions). Failing to identify or inadequately assessing labor issues may result in disputes, legal consequences, or unexpected post-transaction costs. To assist investors in recognizing and mitigating risks, this article will focus on 05 key considerations in labor legal due diligence, ensuring a smooth and efficient mergers and acquisitions process.
1. Reviewing the employment contracts of the target company
One key factor in labor due diligence is reviewing the target company’s employment contracts. Employment contracts serve as the legal basis for determining employees’ rights and obligations. Therefore, it is essential to thoroughly examine these contracts to ensure they do not violate the provisions of the Labor Code.
The Buyers require the target company to provide all current labor contract templates, including definite-term, indefinite-term, and probationary contracts. These contracts must fully comply with the content requirements as prescribed in Article 21 of the prevailing Labor Code 2019 (“Labor Code”).
During the due diligence process, in case of detecting incomplete labor contracts or clauses violating the law, the Buyers shall request the target company to amend and re-sign contracts with the relevant employees. This not only ensures the target company’s compliance with legal regulations but also mitigates the risk of being administratively sanctioned or facing future lawsuits.
2. Ensure compliance with internal labor regulations
The internal labor regulations are a mandatory document for enterprises. If an employer has at least 10 employees, they shall have written internal labor regulations and register them at the provincial labor authority where business registration is applied for.
In accordance with the Labor Code, the contents of the internal labor regulations must not contradict labor laws and relevant laws. The internal labor regulations shall clearly stipulate the contents according to Clause 2, Article 118 of the Labor Code.
In the M&A transaction, the Buyers need to verify whether the target company has established and registered its internal labor regulations. If the target company has not yet implemented this, the Buyers should require immediate rectification before completing the transaction. Non-compliance with labor regulations can lead to administrative sanctions and may even pose risks to the target company’s labor relations.
3. Evaluating the regulations on the insurance regime
Compulsory insurance coverage for employees is a crucial factor to assess in M&A transactions. The target company must fulfill its obligation to pay social insurance, compulsory health insurance, and unemployment insurance premiums payable for employees in accordance with the regulations of law.
The Buyers shall request the target company to provide complete documentary evidence demonstrating fulfillment of employee insurance obligations. Simultaneously, this information needs to be meticulously verified with the social insurance authorities to ensure accuracy and transparency. In the event the target company has not fulfilled its insurance obligations completely, the Buyers should require full rectification before proceeding with the M&A transaction.
In accordance with regulations of law, if mandatory insurance contributions for employees are not fully paid, the target company may face administrative fines of up to hundreds of millions of dongs and be liable for interest on late insurance payments. This not only affects the financial situation but may also pose significant risks to the transaction if not addressed promptly.
4. Verifying foreign labor status and work permits
Many enterprises, especially in sectors like technology, energy, construction, and finance/banking, often employ foreign employees. Therefore, the legality of work permits for all foreign employees at the target company is a crucial element in legal due diligence. The Labor Code states that foreign workers who wish to work in Vietnam must obtain a work permit unless they fall into work permit exemption categories.
The Buyers should diligently verify the target company’s full compliance with labor permit regulations and processes. Employing unlicensed foreign employees exposes the enterprise to administrative sanctions and creates significant contractual negotiation risks. Critically, this can impact post-acquisition integration and operations, hindering optimization of post-transaction benefits.
5. Reviewing the labor management book
According to Article 12 of the Labor Code, as guided by Article 3 of Decree 145/2020/ND-CP, the labor management book is a mandatory document for all enterprises commencing operations, and the employer shall regularly enter and update it to fully reflect employee information. Failure to create a labor management book or to display and enter all information about the employee in the labor management book may be administratively sanctioned. The Buyers must grasp the target company’s labor situation, including the number of employees under each contract type and other relevant details, to facilitate accurate planning and strategizing for necessary actions.
During the process of legal due diligence, the Buyers should request the target company to provide the labor management book and verify whether it contains complete information about the employees. If the target company does not have a labor management book or has one with incomplete information, the Buyers should require the target company to rectify the issue before completing the transaction.
Legal due diligence on labor matters in M&A transactions not only helps employers minimize legal risks but also protects the legitimate rights and interests of enterprises after the completion of the M&A transaction. A thorough understanding and full implementation of key considerations during the due diligence process will help ensure legal compliance and create a stable, efficient working environment for employees. Therefore, employers should proactively examine and assess labor-related matters carefully to prevent potential issues arising after the transaction and to maintain the sustainable development of the enterprise.
6. Conclusion
Behind every successful M&A deal is not just strategy—but clarity. By taking a closer look at five essential labor-related factors, investors can better understand the true landscape they’re stepping into and make decisions with confidence, not just caution.
At PLF Law Firm, we’ve walked alongside many businesses through the complexities of Vietnam’s legal terrain. With deep local insight and a practical approach, we’re here to help ensure that every step—especially those often overlooked—is taken with certainty.
Article time: 06/05/2025
PLF Law Firm
