The Strategic Relevance and Distinctive Nature of Labor Due Diligence in M&A Transactions

Labor Due Diligence constitutes a critical stage within the broader scope of legal and compliance assessments conducted in corporate Mergers and Acquisitions (M&A). It entails a systematic examination of the target company’s employment practices, labor liabilities, and overall compliance with labor and social security legislation, aiming to produce a legal risk mapping that informs transaction structure, pricing, indemnity clauses, and post-closing contingencies.

While the due diligence process is typically conducted under strict confidentiality with respect to third parties, it is simultaneously governed by the principle of full disclosure between the contracting parties, ensuring transparency and mitigating the risk of hidden or undisclosed liabilities (undisclosed contingencies).

The purpose of labor due diligence is to provide both the seller and the buyer with a robust evidentiary basis to assess legal exposure and make informed, risk-adjusted decisions. Labor matters, however, demand a tailored approach due to the evidentiary dynamics and normative peculiarities of Brazilian Labor Law, particularly in light of the principle of primacy of reality (princípio da primazia da realidade). According to this principle, in labor litigation, factual reality prevails over the formal content of documents—a divergence from the civil law paradigm where written instruments often dominate evidentiary weight.

In practice, this means that even if a company maintains formally compliant documentation—such as employment contracts, time sheets, and pay slips—its legal position may still be undermined by testimonial evidence provided by employees in judicial proceedings. Such testimony may be sufficient to rebut documentary evidence, thereby triggering labor contingencies unforeseen by a purely formalistic review.

This does not render compliance with formal requirements futile. On the contrary, deficient documentation substantially increases litigation risk and evidentiary vulnerability. However, labor compliance must go beyond formal recordkeeping—it requires an effective governance structure in human capital management, operational practices aligned with labor standards, and preventive legal oversight of employment policies.

Therefore, comprehensive labor due diligence in M&A transactions should not be limited to documental review and data room uploads. It must include qualitative methodologies, such as stakeholder interviews, walkthroughs with HR personnel, and on-site assessments, always conducted with strict confidentiality and in coordination with deal strategy.

Moreover, legal practitioners must also assess exposure to administrative proceedings (e.g., labor audits by the Ministério do Trabalho or Receita Federal), structural weaknesses in internal processes (such as payroll or personnel file management), and latent liabilities not yet judicialized. These aspects may significantly impact purchase price adjustments, the negotiation of representations and warranties, and the structuring of indemnity provisions.

Given the complexity and sensitivity of labor exposure, this component of due diligence should be led by counsel with proven expertise in labor and employment law, litigation risk analysis, and transactional advisory, combining academic rigor with pragmatic experience, discretion, and strategic insight.

 

By Flavia Montoni Pontes