HR diligence has two purposes: to find liabilities attached to how people have been employed, and to work out who has to stay for the business to keep working. The second is usually the more consequential for the price.
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The compliance half of HR due diligence in mergers and acquisitions
Worker classification where contractors are used, wage and hour practice, overtime treatment, benefit plan documents and any filing obligations, immigration status where relevant, and any claims or complaints open or recently closed. Classification is the exposure that recurs most often in small companies, and it is quantifiable, which means it becomes an indemnity rather than a surprise.
The retention half
Who is critical, what they are paid against the market, whether they are on agreements or at will, and whether any restrictive covenants would actually be enforceable. Buyers frequently ask for key people to be committed before closing, which means a conversation with those people, which means telling them about the sale.
Preparing an HR due diligence checklist
An employee list with roles, start dates, pay, hours and status. Copies of agreements and any handbooks. Benefit plan documents. A short honest note on anyone whose departure would matter and what would keep them. Doing this early also forces the decision about when and how the team is told, which is better made deliberately than under time pressure.
Questions people ask about HR due diligence
When do employees find out?
Key people usually after the letter of intent under their own arrangements; the wider team usually once the deal is certain rather than probable.
Do employees transfer automatically?
In a share sale they stay with the entity. In an asset sale they are typically terminated and re hired by the buyer, subject to state rules.
What is the most common exposure?
Contractors who should have been employees, followed by wage and hour practice.