Succession of labor contracts in a company split or business transfer (the Labor Contract Succession Act and the Article 5 consultation)

In short: In a company split and a business transfer, the way a labor contract carries over is the opposite. In a company split, under the Labor Contract Succession Act (Act No. 103 of 2000), the labor contract of a worker mainly engaged in the succeeded business moves comprehensively to the succeeding company without the person's consent. In a business transfer, under Article 625, paragraph 1 of the Civil Code, it cannot be moved without each individual worker's consent. For a company split, three procedures are prescribed by law — notification, the Article 5 consultation and the Article 7 measure. This article sorts out how labor contracts and the employee procedures change by the method of succession. Labor-management consultation, notification and integrating work rules is for a Shakai Hoken Roumushi; the registration of a company split is for a judicial scrivener; a dispute over a disadvantageous change is for an attorney; and tax is for a tax accountant.

"With no successor, we are thinking of splitting the company (or selling part of it)," and "can we take the employees over as they are?" — these are consultations we receive from the owners of small and medium enterprises. This page is for owners considering a company split or business transfer and for the workplaces that hold the employees to be succeeded, and sorts out the difference in the succession of labor contracts and the required procedures. Handling an individual dispute over a disadvantageous change or a refusal to renew is outside the scope of this article.

How does the succession of labor contracts differ between a company split and a business transfer?

Even with the same "moving a business," the way a labor contract moves is the opposite.

	Company split	Business transfer
Transfer of the labor contract	Comprehensive succession (if set in the split contract etc., it moves without the person's consent)	Specific succession (each individual worker's consent is required)
Basis	Labor Contract Succession Act (Act No. 103 of 2000); the split procedure of the Companies Act	Civil Code Article 625, paragraph 1 (an employer may not transfer its right to a third party without the worker's consent)
Worker involvement	There is a mechanism of notification and objection (Articles 4 and 5)	Individual consent to the transfer (without consent, the worker stays with the original company)
Working conditions	In principle carried over to the succeeding company as they are	Decided by a new agreement with the transferee (former conditions are not automatically carried over)

Because a company split has the special law of the Labor Contract Succession Act, a worker mainly engaged moves over, in principle, as they are. A business transfer follows the Civil Code's principle — it does not move unless the person consents. Which one you choose completely changes the procedures you must go through toward the employees — that is the starting point. For an overview of the social-insurance procedures at an M&A, see business succession, M&A, labor and social insurance.

For the notification and the Article 5 consultation of the Labor Contract Succession Act, when, to whom and what do you do?

In a company split, in time order you need two procedures — first the "Article 5 consultation," then the "notification." The names are similar, but the basis, the target and the timing all differ.

Procedure	Basis	Target	Timing	Content
Article 5 consultation	Supplementary Provisions, Article 5 of the Act partially amending the Commercial Code etc. (Act No. 90 of 2000)	Workers engaged in the succeeded business (individually)	By the day the split contract etc. begins to be kept at the head office	Explain the outline of the post-split company, whether the person is "mainly engaged," whether the contract is succeeded, and the expected duties; and hear the person's wishes
Notification (Article 2)	Labor Contract Succession Act, Article 2	The mainly-engaged workers plus other workers whose succession is set in the split contract etc.	Up to two weeks before the day of the shareholders' meeting that approves the split	Notify in writing the presence or absence of succession, the deadline to raise an objection, the applicable category, etc.

On top of these two, workers have the right to raise an objection.

• Article 4: A worker who is mainly engaged in the succeeded business but was excluded from succession in the split contract etc. is succeeded to the succeeding company if they raise an objection
• Article 5: A worker who is not mainly engaged but was made a target of succession is not succeeded, and stays with the original company, if they raise an objection

If the Article 5 consultation is not carried out at all, the effect of the succession may be denied (the general approach of the IBM Japan case, Supreme Court judgment of 12 July 2010). Not skipping the order of the procedures is the practical key.

What does the Article 7 measure (workers' understanding and cooperation) require in practice?

Whereas the Article 5 consultation is a consultation carried out "individually with the workers of the target business," the Article 7 measure is an effort duty to obtain "the understanding and cooperation of the whole body of employed workers" (Labor Contract Succession Act, Article 7).

• It is carried out by a method equivalent to consultation with the labor union, or with a person representing a majority of the workers
• It explains the background and reasons for the split, the prospect of performing debts, and the criteria for judging whether someone is a mainly-engaged worker
• Its target is not limited to the workers involved in the split; it is the whole body of employed workers

The Ministry of Health, Labour and Welfare's "Guideline for the appropriate implementation of the measures the splitting company and the succeeding company etc. should take" (Ministry of Labour Notice No. 127 of 2000) sets out the concrete way to carry out the Article 5 consultation and the Article 7 measure. Understand that the Article 5 consultation (individual) and the Article 7 measure (whole) are different things, and both are required.

What to watch for when integrating work rules and working conditions after succession?

After the labor contract moves, if the succeeding company (or the transferee) has existing employees, two sets of work rules and working conditions stand side by side. How you align this is the biggest problem after succession.

• In a company split, because working conditions are in principle carried over as they are, a double state arises with the succeeding company's existing regulations
• To lower working conditions after succession (a disadvantageous change), in principle the workers' agreement is required, and a change by work rules calls for reasonableness
• The duty to create and file work rules arises from ten or more workers on a regular basis (from how many employees are work rules mandatory)

Rushing the integration and making a unilateral disadvantageous change is the part most likely to lead to a later claim of invalidity and a dispute. Building the integration schedule and the way to obtain agreement into the design stage of the succession is the key point.

Who handles the labor-management consultation, the registration, the dispute and the tax?

The labor side of a company split or business transfer divides by responsibility. Deciding who does what at the outset prevents gaps in the procedures.

What is done	Whose domain
How to carry out the Article 5 consultation and the Article 7 measure; preparing the notification documents; integrating the work rules and working conditions after succession; the procedures for acquiring and losing labor- and social-insurance qualifications	Shakai Hoken Roumushi (this office)
The registration of a company split or organizational restructuring	Judicial scrivener
A dispute over the validity of a disadvantageous change, a refusal to renew, or a transfer; labor tribunal proceedings and litigation	Attorney
Tax accompanying the restructuring and judging the qualified-restructuring requirements	Tax accountant

Designing the labor-management consultation, the notification, the integration of work rules, and the insurance procedures is the work of a Shakai Hoken Roumushi. Registration is handled by a judicial scrivener, disputes by an attorney, and tax by a tax accountant, so they are separated as different roles.

What can 四葉社会保険労務士事務所 do?

四葉社会保険労務士事務所, in Kohinata, Bunkyo City, handles how to carry out the Article 5 consultation and the Article 7 measure accompanying a company split or business transfer, preparing the notification documents to workers, integrating the work rules and wage regulations after succession, the procedures for acquiring and losing labor- and social-insurance qualifications, and designing the labor-management consultation. For social insurance at an M&A or business succession, see business succession, M&A, labor and social insurance; for putting work rules in order, see from how many employees are work rules mandatory. Consultation is free. For fees, see the fee schedule; for frequently asked questions, see the FAQ.

Frequently asked questions

Q. In a company split, is the employees' consent not needed?
A. As a rule, a worker mainly engaged in the succeeded business moves to the succeeding company without the person's consent, under the Labor Contract Succession Act. However, for that, the procedures of notification (Article 2), the Article 5 consultation and the Article 7 measure are prescribed by law, and the effect may be contested if these are not gone through. Even where consent is not needed, please consider the procedures to be required.

Q. What is needed to take over employees in a business transfer?
A. A business transfer requires each individual worker's consent (consent to the transfer) under Article 625, paragraph 1 of the Civil Code. Employees who do not consent stay with the original company. Working conditions are also decided by a new agreement with the transferee; the former conditions are not automatically carried over.

Q. How do the Article 5 consultation and the Article 7 measure differ?
A. The Article 5 consultation is a consultation carried out individually with workers engaged in the succeeded business, based on Article 5 of the Supplementary Provisions of the Commercial Code amendment act (by the day head-office keeping begins). The Article 7 measure is an effort duty to obtain the understanding and cooperation of the whole body of employed workers, carried out by consultation with the majority representative and the like. The target and timing differ, and both are required.

Q. To align working conditions after succession, may we cut wages?
A. A disadvantageous change of working conditions in principle requires the workers' agreement. Even a change made by work rules calls for reasonableness. A unilateral cut is the part most likely to lead to a later claim of invalidity and a dispute. Judging an individual case's validity and handling a dispute is the work of an attorney; this office handles designing the integration and putting in order the way to obtain agreement.

Sources

• Act on the Succession to Labor Contracts upon Company Split (Act No. 103 of 31 May 2000; last amended by Act No. 87 of 2005) = Article 2 (notification to workers), Article 4 (objection by a mainly-engaged worker), Article 5 (objection by a worker other than a mainly-engaged one), Article 7 (the effort duty to obtain the understanding and cooperation of employed workers)
• Act partially amending the Commercial Code etc. (Act No. 90 of 2000), Supplementary Provisions, Article 5 = the so-called "Article 5 consultation" (individual consultation with workers engaged in the succeeded business)
• Civil Code (Act No. 89 of 1896), Article 625, paragraph 1 = an employer may not transfer its right to a third party without the worker's consent (the basis that individual consent is required for the transfer of a labor contract in a business transfer)
• Companies Act (Act No. 86 of 2005) = the procedures for a company split (incorporation-type and absorption-type)
• Guideline for the appropriate implementation of the measures the splitting company and the succeeding company etc. should take regarding the succession of the labor contracts and collective agreements concluded by the splitting company (Ministry of Labour Notice No. 127 of 27 December 2000) = the concrete way to carry out the Article 5 consultation and the Article 7 measure
• The general approach that the effect of succession may be denied where the Article 5 consultation was not carried out at all = IBM Japan (company split) case, Supreme Court Second Petty Bench judgment of 12 July 2010. Whether an individual case qualifies is judged differently depending on the circumstances
• The provisions are confirmed from e-Gov Law Search and materials published by the Ministry of Health, Labour and Welfare (as of September 2026)

This article does not decide whom to consult. Designing the Article 5 consultation and the Article 7 measure, preparing the notification documents, integrating the work rules and working conditions after succession, and the labor- and social-insurance procedures are the work of a Shakai Hoken Roumushi. The registration of a company split is the work of a judicial scrivener; a dispute over the validity of a disadvantageous change or a transfer is the work of an attorney; and the tax of the restructuring is the work of a tax accountant. For fees when consulting 四葉社会保険労務士事務所, see the fee schedule; for frequently asked questions, see the FAQ.

This article is general information. A judgment on individual circumstances is made by a qualified professional after a consultation. Written by Joji Uramatsu (Shakai Hoken Roumushi, Gyoseishoshi, Registered Real Estate Transaction Specialist).