After a Foreign Acquisition: The Order of HR Integration

After a foreign company buys a Japanese one, the order in which you integrate HR matters more than the design you integrate toward. Japanese labor law lets you change some things with little friction and makes others very hard. Roughly: the closer a change gets to money employees have already earned, the more likely it ends in a dispute. Retirement allowances are at the far end of that line.

Does the acquisition change anyone's employment contract?

Usually not. If you buy the shares, the employer is still the same Japanese company. Contracts, work rules and any collective agreement stay exactly as they were. Only the shareholder changes.

In a merger, employment contracts pass in full to the surviving company. A 2016 guideline from Japan's Ministry of Health, Labour and Welfare (MHLW) on business transfers and mergers says the working conditions in those contracts are kept as they are. In a business transfer, each employee's individual consent is needed under Article 625 of the Civil Code.

So the deal itself doesn't harmonize anything. Bringing the Japanese company onto the group's grades and pay is the Japanese company changing its own work rules. That falls under the Labor Contract Act.

This is a common problem. RECOF data, as cited by an M&A advisory firm, counts 372 acquisitions of Japanese companies by foreign companies in 2025 (I have not seen the original table). In each one, someone in HR is being asked by the new owner when the group grading system will go live in Japan.

What does Japanese law require before you change work rules for the worse?

It requires that the change be reasonable. Otherwise you need each employee's agreement.

Article 9 of the Labor Contract Act says an employer cannot change working conditions to the employee's disadvantage by changing the work rules without the employee's agreement. Article 10 is the exception: the new rules have been made known to employees, and the change is reasonable in light of the degree of disadvantage, the need for the change, the appropriateness of the new content, the state of negotiations with unions and other circumstances.

In integration terms, "the group system is better" is a weak argument. You need to show why the change is necessary, who loses and by how much, what you offered in return and how many times you sat down with the union. If it goes to a dispute, those are the things that get laid out on the table.

The order I'd use

Start furthest from accrued money and work toward it.

HR integration in Japan gets harder at each step, and retirement allowances, as money already accrued, are the most likely to end in a dispute

Basis: Labor Contract Act Articles 9 and 10; Supreme Court judgment of February 19, 2016 (Yamanashi Kenmin Shinyo Kumiai case); MHLW guideline on business transfers and mergers (2016). Order is the author's judgment

1. 1Evaluation processChanges how and by whom people are rated. No direct effect on pay, so it goes first
2. 2Bonus distributionAlready varies with results, so wider spreads are easier to justify
3. 3Grades and base payMapping to group grades; anyone whose base pay drops has suffered a disadvantageous change
4. 4Retirement allowanceAn expectation built up year by year. Cuts need strong reasons, and signed consent may not hold
5. 5Union and collective agreementAgreed terms can't be changed unilaterally; bargaining can't be refused without just cause

Move evaluation and bonus first, grades slowly, and the retirement allowance last, for future service only.

Evaluation goes first because you're changing a process. A new rating form and calibration meetings feel strange, but the number on the payslip stays the same.

Bonus is second. Japanese bonuses already move with company results, and work rules often say so. Widening the spread inside that range is explainable.

There's a public example. Taiwan's Hon Hai Precision Industry completed its 388.8 billion yen investment in Sharp on August 12, 2016, and Tai Jeng-wu became Sharp's president the next day. In November Sharp announced a special president's bonus for employees who delivered results, under the banner of reward and punishment. A March 2017 report said the bonus pool would be four months' pay, distributed by contribution from a maximum of eight months to a minimum of one. The new owner's first move was the bonus.

Grades and base pay are where the real risk starts. Group grade structures tend to have fewer, wider bands than Japanese ones, so mapping always puts some people into a lower grade. If even one person's base pay goes down, that's a disadvantageous change for them. The usual fix is to keep current pay and carry the gap as an adjustment allowance that shrinks over a few years. Transitional measures like that count toward reasonableness.

Why retirement allowances are the dangerous one

Because they accumulate with every year of service. Cutting them is close to rewriting the past.

On February 19, 2016, Japan's Supreme Court decided a case that arose in exactly this setting. A credit cooperative was being absorbed in a merger to avoid collapse. Its retirement allowance rules were changed along the way, and employees signed consent forms. Under the new rules, total payouts fell to half or less, and after deducting pension-related amounts, people resigning voluntarily could get close to nothing. The Supreme Court sent the case back. It said that for changes to wages or retirement pay, the fact that an employee signed isn't enough. A court has to ask whether there are objective, reasonable grounds to find the employee acted of their own free will, looking at how large the disadvantage was, how consent was obtained and what information and explanation came first.

For a buyer, that's a practical warning. Integration plans often reach the retirement allowance and schedule a round of consent forms. A signature doesn't make you safe. Employees need to understand concretely how much they lose, ideally from a number calculated for each person.

What I'd recommend is leaving the accrued part alone. Freeze allowances earned up to a cutover date under the old rules, and accrue under the new plan from that date on. Headquarters will find two plans running side by side annoying. It is annoying. It's also far cheaper than a group lawsuit.

If there's a union

Terms in a collective agreement bind directly for union members, and the company can't change them on its own. Refusing a union's request to bargain without just cause is an unfair labor practice under Article 7 of the Labor Union Act. The MHLW guideline also asks companies to consult the majority union or a majority representative in a business transfer.

Japan's union rate has fallen to about 16%. But if the company you bought has a union, whether the integration plan moves often comes down to how the union takes it. Why unions still carry weight in Japanese pay at that rate is in Japan's Union Rate Is 16%. Why the Shunto Still Sets Pay.

Take both systems apart before you connect them

A headquarters pay system is usually one piece: grades with salary ranges, and ratings that drive raises and bonus. The Japanese system is a different piece, with seniority, job and various allowances mixed into base pay. Bolt the two together and every mismatch becomes someone's disadvantageous change.

It goes better if you separate them first. Grade for the person, allowance for the role, bonus for results, and move each one on its own schedule. That's the idea behind three-track pay. Once they're separate, the bonus can follow group rules from year one, role allowances can move with new roles, grades can converge over time and the retirement allowance changes only going forward. If headcount reductions come later, that's a different set of rules and costs, covered in What it costs to let someone go in Japan.

Back to Sharp. The reports don't say whether moving bonuses first was a deliberate sequence, and I couldn't trace how grades and retirement pay were handled afterward. From the outside you only see the first move. It landed on the spot least likely to start a fight.

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