Ask the Expert: How do M&As affect global payroll? Ask the Expert: How do M&As affect global payroll?

Ask the Expert: How do M&As affect global payroll?
31 Aug 2014

SafeGuard World International looks at your frequently asked questions on how mergers and acquisitions impact global payroll processes.

How does a merger, acquisition or divestiture differ in a scenario that entails global employees?

The newly formed company will need to determine whether or not it can maintain the existing process for the global employees who will be transitioned to the new company. If the employees were historically being payrolled by the original company directly, then they will need to find a new solution, a scenario where many newly formed companies find a global payroll outsourcing company to help them accelerate the process.

They will also need to find solutions to provide benefits etc. If the selling company was using a third party to execute the payrolls, then the newly formed company may be able to set up a new process with that third party. However, all of the administration will need to be transferred from one company to another and new service agreements will have to be secured.

If the newly formed company acquires employees in locations where they have no presence or establishment, can they use a third party employment agent to be the new employer of record?

Yes. This is a possible path in the vast majority of countries. However, it may affect the way the employment is transferred.

In some cases, moving the employee outside of the immediate parties involved in the divestiture can trigger a termination requirement from the original employer, as opposed to a transfer of ownership. This can then have cost considerations for the original employer, especially where severance payments or accrued vacation need to be paid. It is critical to obtain legal advice on these matters to ensure that each decision made does not incur penalties and have other negative consequences.

How much lead time is needed for human capital considerations when managing a change of ownership through divesture and the like?

An absolute minimum of two months is recommended as many legal processes will include a 30 day consultation or notice period for the worker to evaluate the new employment before deciding whether or not to accept it. Also recreating ‘like for like’ employment scenarios is very challenging, especially when the new or separated entity is not as large as the body it separated from, as benefits and provisions such as pension schemes might not be as easy to procure.

If the new company does not have legal entities in each country for the employees to transfer to, more time should be allowed, as this then involves understanding the ramifications of transferring to a third party employment agent, which can also affect how the existing employment scenario is ended and have consequences for the selling party.

Are there any rules of thumb or general considerations that are consistent globally when managing the transfer of employees?

Yes. Essentially a good rule to follow is that the employees cannot be adversely affected by the transfer. So, if they have excellent and very expensive health insurance, then that will need to be matched or continued under the new ownership. Some countries are more complex than others with regards to the laws they have governing transfer of employment, but if you work towards this high level of understanding then you are less likely to make a major mistake.

What else should the new company know and what information will they need to obtain from the original company in order to execute a compliant payroll system?

The new company will need to review the Transition Service Agreement (TSA) carefully to determine which company retains the tax liabilities, as well as which company is responsible for retaining the records, for how long and when will they be transitioned entirely to the new company. The new company will also need to obtain all of the payroll data and accompanying tax ramifications. Importantly, the new company will also need to determine if there are any existing agreements between a local payroll company that need to be considered.

By Christine Draeger

SafeGuard World International looks at your frequently asked questions on how mergers and acquisitions impact global payroll processes.

How does a merger, acquisition or divestiture differ in a scenario that entails global employees?

The newly formed company will need to determine whether or not it can maintain the existing process for the global employees who will be transitioned to the new company. If the employees were historically being payrolled by the original company directly, then they will need to find a new solution, a scenario where many newly formed companies find a global payroll outsourcing company to help them accelerate the process.

They will also need to find solutions to provide benefits etc. If the selling company was using a third party to execute the payrolls, then the newly formed company may be able to set up a new process with that third party. However, all of the administration will need to be transferred from one company to another and new service agreements will have to be secured.

If the newly formed company acquires employees in locations where they have no presence or establishment, can they use a third party employment agent to be the new employer of record?

Yes. This is a possible path in the vast majority of countries. However, it may affect the way the employment is transferred.

In some cases, moving the employee outside of the immediate parties involved in the divestiture can trigger a termination requirement from the original employer, as opposed to a transfer of ownership. This can then have cost considerations for the original employer, especially where severance payments or accrued vacation need to be paid. It is critical to obtain legal advice on these matters to ensure that each decision made does not incur penalties and have other negative consequences.

How much lead time is needed for human capital considerations when managing a change of ownership through divesture and the like?

An absolute minimum of two months is recommended as many legal processes will include a 30 day consultation or notice period for the worker to evaluate the new employment before deciding whether or not to accept it. Also recreating ‘like for like’ employment scenarios is very challenging, especially when the new or separated entity is not as large as the body it separated from, as benefits and provisions such as pension schemes might not be as easy to procure.

If the new company does not have legal entities in each country for the employees to transfer to, more time should be allowed, as this then involves understanding the ramifications of transferring to a third party employment agent, which can also affect how the existing employment scenario is ended and have consequences for the selling party.

Are there any rules of thumb or general considerations that are consistent globally when managing the transfer of employees?

Yes. Essentially a good rule to follow is that the employees cannot be adversely affected by the transfer. So, if they have excellent and very expensive health insurance, then that will need to be matched or continued under the new ownership. Some countries are more complex than others with regards to the laws they have governing transfer of employment, but if you work towards this high level of understanding then you are less likely to make a major mistake.

What else should the new company know and what information will they need to obtain from the original company in order to execute a compliant payroll system?

The new company will need to review the Transition Service Agreement (TSA) carefully to determine which company retains the tax liabilities, as well as which company is responsible for retaining the records, for how long and when will they be transitioned entirely to the new company. The new company will also need to obtain all of the payroll data and accompanying tax ramifications. Importantly, the new company will also need to determine if there are any existing agreements between a local payroll company that need to be considered.

By Christine Draeger