Due Diligence in Employer-Employee Relationship

What is Due Diligence?

We often hear the term Due Diligence being used in mainstream media as well as being bandied about by corporate honchos when they address the media. In addition, most prospective employees are told by experts to do their Due Diligence on the firms they are applying to.

Apart from this, lawyers and especially corporate lawyers, as well as those involved in Big Ticket and Mega Deals, often use this term. So, what does Due Diligence mean and why is it important to employers, employees, and all entities, whether they are public sector firms or private sector players.

To start with, Due Diligence is the process of collecting and gathering information about a prospective employer, employee, partner with which one wants to conclude a deal, and for that matter, any deal, as well as using that information to understand whether the deal or the employment relationship would be without risks and indeed, beneficial to the inquiring party.

In other words, just as one would not purchase a defective item from a store, all entities do their Due Diligence to assess and judge whether the prospective relationship is indeed risk-free and there are no potential legal problems as well as anything that might jeopardize the relationship in the future.

Indeed, even prospective brides and grooms are being advised these days to do their due diligence on the future life partner so that there are no major problems down the line once they get married.

Why is Due Diligence so Important?

Why is Due Diligence so important especially in the present times? To answer this question, one has to understand that the contemporary world of business and life is indeed loaded with risks as well as having minefields (some hidden) in the path that one chooses.

For instance, prospective employers might be fly by night players who would demand money from the prospective employees and vanish without a trace after that.

On the other hand, prospective employees might have had a criminal background or would have been dismissed from their previous employers for unethical and other malfeasance behaviors.

While in the first case, the prospective employees would lose their money as well as mental peace, in the second example, there are serious repercussions for the employers wherein such employees might commit the same egregious behaviors which can lead to corporate and reputational scandals for the employers.

Indeed, if you are applying to a firm, check if the firm and its policies are to your liking and the offer that they have made to you does not contain any fine print that might “bury” the clause and conditions which can cause trouble for you in the future.

Similarly, if you are an employer, it makes sense for you to vet the applicant’s information and background thoroughly to understand whether he or she is what they say. Indeed, appearances can be deceptive and hence, it makes sense for both parties in a deal to not go by face value statements and instead, check if they are what they claim.

A Cautionary Note about Due Diligence

Having said that, it is also the case that once one starts digging, there is no end to the dirt that one can uncover on the prospective partner or employer or employee. Given the abundant store of information (some of it downright misleading and false) on the internet, employers need to be cautious about the kind of information that they posses on the prospective employees.

For instance, there is a debate going on in the United States about whether employers can use the information from the Social Media accounts of prospective employees to conduct background checks.

In addition, the recent move by the US Government to ask those applying for visas to provide details of their Social Media profiles has been criticized for the invasion of privacy and potential breach of confidentiality.

The point here is that with the cornucopia of information that is available online, there are chances for misuse and abuse and hence, Due Diligence must be seen and placed in this context. Indeed, while we are not advocating that partners and lawyers, as well as employers, desist from looking for information online or through other sources, what we advise is discretion and a sense of fair play.

On the other hand, Due Diligence is also needed and indeed, very important, to mega deals and corporate mergers and acquisitions.

Given the fast-changing market landscape of the present, it is very much the case that parties to a deal vet each other for potential legal and risk related Red Flags so that there are no misgivings or goof ups once the deal is consummated.

Indeed, this is very important for many reasons some of which are to do with the fact that parties to a deal might not be placing everything on the table and they might possibly be hiding something or not revealing the entire picture.

Moreover, financial Due Diligence is something that is equally, if not more important since mega deals often run into Billions of Dollars, and hence, even a slight error of judgment can cost the parties immense monetary and reputational damage.

Conclusion

Lastly, Due Diligence is a painstaking and time-consuming endeavor that must be conducted thoroughly and professionally. Just like one does not marry someone on a whim, it is better for parties to a deal to take their time and assess the pros and cons before concluding the deal. After all, it is better to be safe than sorry and not rush into something hastily and repent later.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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