Ensuring a sound legal contract for your global payroll system Ensuring a sound legal contract for your global payroll system

Ensuring a sound legal contract for your global payroll system
24 May 2018

Underpinning every global payroll system is a legal contract. When it comes to negotiating this contract, there are a number of pitfalls that can not only delay implementation, but also make it difficult to win approval from key stakeholders.

This article will give you a number of pointers on key issues to consider when preparing your global payroll contract. It will also provide some practical tips to help you navigate successfully through this important project stage:

Why are legal contracts important?

Although it may seem self evident, it is worth restating why having a secure legal contract underpinning the relationship with your global payroll vendor is so critical. Basically, the contract governs the legal relationship between you and them. 

Any legal protections you require must be included in it or you will have no right to enforce them. Put another way, if your vendor makes promises about, for example, performance or functionality, they count for little unless reference is made to them contractually.

The pros and cons of having a single global payroll contract

One of the benefits of introducing a global payroll system is that it reduces the number of contracts you have to juggle with your various payroll vendors. This situation is helpful because each contract requires legal agreement, renewal usually on an annual basis, the involvement of your procurement department and separate invoicing and reporting arrangements. But introducing a global payroll system enables you to replace multiple vendor contracts with a single arrangement to cover your entire international payroll operation. 

The only downside to this scenario is that global payroll contracts are much more complex than single-country ones. As such, it is even more critical to ensure they are negotiated effectively. Any potential issues could have a wide-reaching impact as they may affect each of the countries in which you operate.

Winning approval

Until your legal contract is formally approved and signed, it is unlikely you will be able to begin your global payroll implementation. Your vendor will be unwilling to dedicate resources to it or invest time and money upfront until it has the security of a signed contract in place.

A global payroll contract will likely be several times larger than any previous one you have signed within the payroll function. The challenge is that in most companies, it is more difficult and complex to obtain approval for legal agreements that are of high value as the risks and sums involved are more significant. As a result, it may take much longer than has previously been the case to gain sign-off from all necessary internal parties.

Legal entities

As is usually the case in these scenarios, your global payroll contract will need to be agreed by a legal entity within the organisation. But deciding on and coordinating the appropriate one can be a complex matter in itself.

Because a global payroll system covers multiple countries, a high number of legal entities within your organisation may need to be involved. So how do you decide which one should ultimately be responsible for the contract?

As this decision is an internal corporate one that is often made by legal and tax teams, it is important to plan ahead and ensure the right decision-makers are involved. The decision is an important one and can affect the nature of the contract itself. For example, it may be desirable for a German entity contract to be governed by German law, a UK entity contract to be controlled by English law and so on.

Your choice of entity may also determine who will need to sign the contract. The executive who does so will need to have the necessary authority to act on behalf of the relevant legal entity.

Remember to protect your business

When negotiating legal contracts, companies usually focus on driving a hard bargain with their vendors. But you should also be sure to include important provisions to protect your business. If your global payroll rollout does not proceed to plan, a badly-worded contract can result in revenues and profits being hit unnecessarily.

So firstly, explore whether your contract penalises you for any implementation delays. Global payroll contracts often take a number of years and may be delayed for several reasons. For example, a delay in rolling the system out in one country can lead to knock-on effects elsewhere.

Secondly, how flexible is your contract should you need to add or remove countries from its scope? If your business makes acquisitions or divestments in future, they could affect the number of countries in which your global payroll system is implemented.

Once your system is introduced, the business may experience other changes. For instance, your employee headcount may rise or fall in certain countries due to changing market conditions or new business strategies.

As a result, it is important to build in a robust and fair change request procedure into your legal contract. Doing so should allow you the flexibility to propose changes to your terms as circumstances shift. One option is to build in volume-related discounts should your business increase in size during the lifetime of the contract.

Negotiation is key

A legal contract is the end result of a negotiation between two parties. If you find it difficult to negotiate with your vendor, this should be cause for concern. The issue is that, if they are difficult to deal with before the contract is signed, what will they be like to work with once it is finalised?

It is impossible to predict all of the business changes that will occur during the lifetime of your contract, so it is very important to find a vendor that is prepared to support you along the way. This means finding one that will always be willing to help you achieve your commercial goals and make the changes necessary to accommodate them.

 John Galvin

John Galvin is founder and CEO of award-winning international expansion company Galvin International, which has offices in the US and UK. His firm helps clients expand globally by providing one-stop commercial and compliance services in more than 100 countries. John is a former multinational CFO with over 20 years of international commercial and finance experience, and was named Global Consultant of the Year 2016/17 at the inaugural Global Payroll Awards.

 

Underpinning every global payroll system is a legal contract. When it comes to negotiating this contract, there are a number of pitfalls that can not only delay implementation, but also make it difficult to win approval from key stakeholders.

This article will give you a number of pointers on key issues to consider when preparing your global payroll contract. It will also provide some practical tips to help you navigate successfully through this important project stage:

Why are legal contracts important?

Although it may seem self evident, it is worth restating why having a secure legal contract underpinning the relationship with your global payroll vendor is so critical. Basically, the contract governs the legal relationship between you and them. 

Any legal protections you require must be included in it or you will have no right to enforce them. Put another way, if your vendor makes promises about, for example, performance or functionality, they count for little unless reference is made to them contractually.

The pros and cons of having a single global payroll contract

One of the benefits of introducing a global payroll system is that it reduces the number of contracts you have to juggle with your various payroll vendors. This situation is helpful because each contract requires legal agreement, renewal usually on an annual basis, the involvement of your procurement department and separate invoicing and reporting arrangements. But introducing a global payroll system enables you to replace multiple vendor contracts with a single arrangement to cover your entire international payroll operation. 

The only downside to this scenario is that global payroll contracts are much more complex than single-country ones. As such, it is even more critical to ensure they are negotiated effectively. Any potential issues could have a wide-reaching impact as they may affect each of the countries in which you operate.

Winning approval

Until your legal contract is formally approved and signed, it is unlikely you will be able to begin your global payroll implementation. Your vendor will be unwilling to dedicate resources to it or invest time and money upfront until it has the security of a signed contract in place.

A global payroll contract will likely be several times larger than any previous one you have signed within the payroll function. The challenge is that in most companies, it is more difficult and complex to obtain approval for legal agreements that are of high value as the risks and sums involved are more significant. As a result, it may take much longer than has previously been the case to gain sign-off from all necessary internal parties.

Legal entities

As is usually the case in these scenarios, your global payroll contract will need to be agreed by a legal entity within the organisation. But deciding on and coordinating the appropriate one can be a complex matter in itself.

Because a global payroll system covers multiple countries, a high number of legal entities within your organisation may need to be involved. So how do you decide which one should ultimately be responsible for the contract?

As this decision is an internal corporate one that is often made by legal and tax teams, it is important to plan ahead and ensure the right decision-makers are involved. The decision is an important one and can affect the nature of the contract itself. For example, it may be desirable for a German entity contract to be governed by German law, a UK entity contract to be controlled by English law and so on.

Your choice of entity may also determine who will need to sign the contract. The executive who does so will need to have the necessary authority to act on behalf of the relevant legal entity.

Remember to protect your business

When negotiating legal contracts, companies usually focus on driving a hard bargain with their vendors. But you should also be sure to include important provisions to protect your business. If your global payroll rollout does not proceed to plan, a badly-worded contract can result in revenues and profits being hit unnecessarily.

So firstly, explore whether your contract penalises you for any implementation delays. Global payroll contracts often take a number of years and may be delayed for several reasons. For example, a delay in rolling the system out in one country can lead to knock-on effects elsewhere.

Secondly, how flexible is your contract should you need to add or remove countries from its scope? If your business makes acquisitions or divestments in future, they could affect the number of countries in which your global payroll system is implemented.

Once your system is introduced, the business may experience other changes. For instance, your employee headcount may rise or fall in certain countries due to changing market conditions or new business strategies.

As a result, it is important to build in a robust and fair change request procedure into your legal contract. Doing so should allow you the flexibility to propose changes to your terms as circumstances shift. One option is to build in volume-related discounts should your business increase in size during the lifetime of the contract.

Negotiation is key

A legal contract is the end result of a negotiation between two parties. If you find it difficult to negotiate with your vendor, this should be cause for concern. The issue is that, if they are difficult to deal with before the contract is signed, what will they be like to work with once it is finalised?

It is impossible to predict all of the business changes that will occur during the lifetime of your contract, so it is very important to find a vendor that is prepared to support you along the way. This means finding one that will always be willing to help you achieve your commercial goals and make the changes necessary to accommodate them.

 John Galvin

John Galvin is founder and CEO of award-winning international expansion company Galvin International, which has offices in the US and UK. His firm helps clients expand globally by providing one-stop commercial and compliance services in more than 100 countries. John is a former multinational CFO with over 20 years of international commercial and finance experience, and was named Global Consultant of the Year 2016/17 at the inaugural Global Payroll Awards.