What labour risks should you surface before a business succession or M&A? Checking unpaid overtime, social-insurance gaps and disguised contracting

Bottom line first: The labour risks to look at before a business succession or M&A are unpaid overtime, social-insurance gaps and disguised contracting, which readily become off-book liabilities and rebound on the buyer or successor after the deal. Unpaid overtime is viewed on the premise that, because the statute of limitations on wage claims is for the time being three years (Labour Standards Act Article 115 and supplementary provisions), up to three years can be claimed back. A social-insurance gap can, because the limitation on collecting premiums is two years (Health Insurance Act, Employees' Pension Insurance Act), trigger up to two years of retroactive premiums. If outsourcing is judged to be disguised contracting, there are risks such as the deemed offer of a labour contract under Worker Dispatch Act Article 40-6. Surfacing these before the deal is labour due diligence (labour DD). Share-transfer contracts, representations and warranties, and disputes are the area of an attorney, tax DD and succession tax of a tax accountant, and registration of a judicial scrivener; labour DD and remediation are a Shakai Hoken Roumushi's, each contracted separately as an independent business entity.

This page focuses on how to surface and estimate the labour matters that readily become off-book liabilities before a succession. It does not enter into specific tax or contract determinations.

What does labour due diligence before a succession look at?

Labour DD is the work of surfacing, before the deal, the "labour matters that readily become off-book liabilities" that do not appear on the financial statements, and grasping the sense of the amounts and the route to remediation. What it looks at is the reality of working hours and wages, the enrolment status of social and employment insurance, the reality of outsourcing contracts, the state of work rules and labour-management agreements, and the presence of unused annual leave and disputes over harassment or industrial accidents.

Matter looked at	Why it readily becomes an off-book liability
Unpaid overtime (defective fixed overtime pay, nominal managers, loose time management)	Not on the books; can be claimed back within the limitation period
Social- and employment-insurance gaps or wrong status classification	Retroactive premiums arise, and pension records need correction
Worker-ness of outsourcing (disguised contracting)	If judged to be workers, unpaid wages, social insurance and a deemed contract can arise
Defects in work rules and the 36 Agreement	Directly affects the basis for premium wages and the legality of overtime

The scheme of the succession (share transfer, business transfer, merger, company split) changes who these risks remain with. In a share transfer, the company succeeds as it is, so the labour risks remain with the company; in a business transfer, the scope succeeded is specified. The treatment of labour contracts on a company split is in Succession of labour contracts on a company split or business transfer. Under any scheme, grasping the reality first is itself the premise for price negotiation and a remediation plan. The social-insurance procedures after a succession are in Social-insurance procedures after a business succession or M&A.

How far back can unpaid overtime become an off-book liability within the limitation period?

The statute of limitations on wage claims is five years in principle, but for the time being it is three years (Labour Standards Act Article 115 and supplementary provisions). It applies to wage claims whose payment date falls on or after 1 April 2020, and unpaid premium wages (Article 37) are estimated on the premise that they can be claimed back within this period. Where fixed overtime pay does not meet the requirements, or an employee treated as a manager is a "nominal manager" without the reality, the unpaid amount swells.

Matter	Point that readily becomes an off-book liability
Limitation on wage claims	For the time being three years (Labour Standards Act Article 115 and supplementary provisions). Retirement allowance is five years
Fixed overtime pay (deemed overtime)	Whether the amount and hours are stated and the gap from actual overtime is settled. Lacking the requirements means unpaid premium wages
Nominal manager	Without the reality of a manager (Labour Standards Act Article 41 item 2), premium wages arise
Grasp of working hours	Without objective records, the employer is disadvantaged if working hours are contested

The requirements for fixed overtime pay to work validly are in Requirements for valid fixed overtime pay and settling the difference, and the line for managers in Nominal managers and premium wages. How much unpaid overtime is expected turns greatly on the records of working hours, the wage rules and the number of people, so we do not conclude on the amount here (unverified).

What retroactive risk arises if a social- or employment-insurance gap is found?

If an employee who should have been enrolled in social insurance (health insurance and employees' pension insurance) was not, coverage applies retroactively and premiums arise. Because the limitation on collecting premiums is two years (Health Insurance Act, Employees' Pension Insurance Act), the range going back is in principle capped at two years. Premiums are shared between labour and management, but recovering the past employees' share from them is difficult in practice and tends to remain as the employer's burden, which is why it becomes an off-book liability.

Item	Content
Range of retroactive coverage	The limitation on collecting premiums is two years (Health Insurance Act, Employees' Pension Insurance Act)
Burden of premiums	Shared between labour and management, but the employer's burden tends to be heavy as the past employees' share is hard to recover
Layers where gaps arise easily	Short-hour, fixed-term, officers, secondees, and others where status classification is hard
Pension records	Retroactive correction of insured records is needed

Gaps arise most easily for short-hour workers where the three-quarters rule and expanded coverage are hard to judge (Social insurance for short-hour workers and the three-quarters rule). When the representative or officers change on a succession, procedures also arise for officers' social insurance (Representative change and officers' social-insurance procedures). The retroactive amount and the range of persons turn on the reality of enrolment, so we do not conclude on the individual case here (unverified).

What happens after a succession if outsourcing is judged to be disguised contracting?

Even if the form is outsourcing or subcontracting, if the reality is the provision of labour under direction, the person may be judged to be a worker. If judged a worker, unpaid wages, premium wages, social insurance and annual paid leave arise, and further, as "disguised contracting", the deemed offer of a labour contract under Worker Dispatch Act Article 40-6 item 5 can become an issue. This is a system under which, where someone receives the provision of worker-dispatch services under the name of subcontracting or the like with the purpose of evading the Worker Dispatch Act, the recipient is deemed to have offered a labour contract to the worker; where a state of disguised contracting has continued daily and continuously, the purpose can be presumed.

Angle of judgement	Content
Worker-ness	Judged by whether work requests can be refused, whether direction is received, time/place constraints, the nature of remuneration, etc.
Deemed offer for disguised contracting	Worker Dispatch Act Article 40-6 (receipt with the purpose of disguised contracting is a deemed offer of a labour contract)
Rebound after the succession	Retroactive unpaid wages and social insurance, and the burden of direct employment, can arise after the deal

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The line between outsourcing and employment is in The line between outsourcing and employment (worker-ness), and what the ordering company should check under the Freelance Act in What an ordering company should check under the Freelance Act. Whether there is ultimately worker-ness or it amounts to disguised contracting is a legal judgement that turns on the reality of the contract and individual circumstances, so we do not conclude here (unverified).

How do defects in work rules or the 36 Agreement affect the succession?

Defects in work rules or the 36 Agreement bear directly on the basis for premium wages and the legality of overtime, pushing up the risk of unpaid overtime and guidance. To have workers do overtime or holiday work requires concluding and filing a 36 Agreement (Labour Standards Act Article 36), and work rules carry a duty to prepare and file at a worksite constantly employing 10 or more (Article 89). If defective rules are carried over as they are when aligning labour conditions after the succession, the succeeding side bears the remediation cost.

Document	Basis	If defective
36 Agreement	Labour Standards Act Article 36	Lacks a lawful basis for overtime/holiday work. Watch for missed filing and exceeding the cap
Work rules	Labour Standards Act Articles 89 and 90	The basis for premium wages, holidays and wages is unclear. 10 or more carry a duty to prepare and file
Labour-management agreement (variable working hours, etc.)	Each basis article	If a variable system becomes invalid, overtime premiums arise

The cap on overtime a 36 Agreement allows is in How far can a 36 Agreement allow overtime, and the duty for work rules in From how many employees are work rules mandatory. How to unify differing labour conditions after a succession is in Unifying labour conditions and work rules after a succession. How far remediation is needed is judged by matching the current rules against the reality of operation (unverified).

What can 四葉社会保険労務士事務所 do?

What this office takes on is the labour due diligence of surfacing, before a business succession or M&A, the matters that readily become labour off-book liabilities, and showing the sense of the amounts and the route to remediation.

• Surfacing unpaid overtime (validity of fixed overtime pay, nominal managers, the reality of time management, and a rough figure within the limitation period)
• Checking the enrolment status of social and employment insurance and grasping the risk of retroactive coverage and the persons concerned
• Organising the worker-ness and disguised-contracting issues of outsourcing contracts
• Checking defects in work rules, the 36 Agreement and labour-management agreements, and the route to post-succession remediation and unifying labour conditions
• Organising, by succession scheme, who the labour risks remain with

Share-transfer contracts, representations and warranties, and disputes are the area of an attorney; tax DD and succession tax that of a tax accountant; and company registration that of a judicial scrivener. 四葉社会保険労務士事務所 accepts labour DD and remediation as an independent business entity, and contracts separately with the attorney, tax accountant and judicial scrivener. It does not enter into specific tax or contract-clause determinations.

Consultations are free of charge. Fees are in the fee schedule; see also our services and how a consultation proceeds.

Frequently asked questions

Q. How many years of unpaid overtime can be claimed back?
A. The statute of limitations on wage claims is five years in principle, but for the time being it is three years (Labour Standards Act Article 115 and supplementary provisions). It applies to wage claims whose payment date falls on or after 1 April 2020. Where fixed overtime pay does not meet the requirements, or there are "nominal managers" without the reality of a manager, the unpaid amount swells. The actual amount turns on the records of working hours, the wage rules and the number of people.

Q. If a social-insurance gap is found, how far back does it go?
A. The limitation on collecting premiums is two years (Health Insurance Act, Employees' Pension Insurance Act), so the retroactive range is in principle capped at two years. Premiums are shared between labour and management, but the past employees' share is hard to recover and tends to remain as the employer's burden, so grasping it before the succession matters.

Q. What happens after the succession if an outsourced person was a worker?
A. If the reality is labour under direction, they are judged a worker, and unpaid wages, social insurance and annual paid leave can arise. Further, as disguised contracting, the deemed offer of a labour contract under Worker Dispatch Act Article 40-6 can become an issue. Whether there is worker-ness or it amounts to disguised contracting is a legal judgement that turns on the reality of the contract and individual circumstances.

Q. Does labour DD differ between a share transfer and a business transfer?
A. It does. In a share transfer, the company succeeds as it is, so the labour risks remain with the company; in a business transfer, the scope succeeded is specified. A company split or merger also treats labour contracts differently. Under any scheme, grasping the reality first and reflecting it in price negotiation and a remediation plan is common. Structuring the contract itself is an attorney's area.

Basis for this article

• Labour Standards Act (Act No. 49 of 1947) Article 36 (agreement on overtime and holiday work — the 36 Agreement), Article 37 (premium wages), Article 41 item 2 (a person in a supervisory or managerial position — a manager), Article 89 (duty to prepare and file work rules), Article 90 (hearing a majority representative's opinion), Article 115 (the statute of limitations on wage claims is five years in principle, for the time being three years under the supplementary provisions; retirement allowance is five years; applies to wage claims whose payment date falls on or after 1 April 2020)
• Health Insurance Act (Act No. 70 of 1922) and Employees' Pension Insurance Act (Act No. 115 of 1954) — the requirements for covered worksites and insured persons and retroactive coverage; the limitation on collecting premiums is two years
• Worker Dispatch Act (Act No. 88 of 1985) Article 40-6 (the system of a deemed offer of a labour contract; item 5 = disguised contracting, where a contract is concluded under the name of subcontracting or the like other than worker dispatch with the purpose of evading the Worker Dispatch Act and the like)
• Act on the Succession of Labour Contracts on a Company Split (Labour Contract Succession Act), the Civil Code and the Companies Act — the difference in the treatment of labour contracts by succession scheme (share transfer, business transfer, merger, company split)
• Small and Medium Enterprise Agency, "Business Succession Guidelines" and "SME M&A Guidelines" — the view on preparation and due diligence before a succession (accessed 3 October 2026)
• The rough amount of unpaid overtime, the range of retroactive social insurance, the worker-ness or disguised-contracting status of outsourcing, and whether work rules or the 36 Agreement need remediation turn on the records of working hours, the reality of the contract and individual circumstances. This article does not conclude on the individual case (unverified)

This article is general information. Individual determinations are made by a qualified professional after a consultation. 四葉社会保険労務士事務所 can advise on surfacing unpaid overtime, social-insurance gaps, disguised contracting and defects in work rules or the 36 Agreement, and on the route to post-succession remediation and unifying labour conditions. Share-transfer contracts, representations and warranties, and disputes are an attorney's area, tax DD and succession tax a tax accountant's, and company registration a judicial scrivener's; 四葉社会保険労務士事務所 accepts labour DD and remediation as an independent business entity and contracts separately with the respective qualified professionals. Frequently asked questions are collected in the FAQ. Written by Joji Uramatsu (Shakai Hoken Roumushi, Gyoseishoshi, Registered Real Estate Transaction Specialist).