The demand for companies to grow quickly and cost-effectively often promotes short-term, nearsighted solutions, which can trigger complex and potentially costly challenges further down the road. For example, while hiring a worker as an independent contractor (IC) is a nimble, cheap solution that contains fixed costs, it is not suitable for permanent employment. And if not done properly, it can also expose a company to legal issues.
When a company is preparing for a corporate transaction like an IPO, merger or acquisition such missteps are likely to come into full view under the microscope. During such transactions, regulators apply due diligence to identify red flags in compliance for misclassified workers. Not only are misclassification situations potentially costly, but they may also delay or altogether terminate exits, sales or IPO transactions.
As a company looks ahead and prepares for a cross-border corporate transaction, an Employer of Record (EOR) service might be the right solution for efficiently achieving business goals and reducing the risks of misclassification – while saving time, money and hassle in managing a global workforce. The following are considerations for how an EOR strategy can empower international corporate transactions.
Talent management can make or break a cross-border corporate transaction
It’s important to note that successful corporate transactions hinge on the company’s team being fully capable, motivated and on board to fulfill the buyer’s mission. Far from an easy or fail-safe process, M&A transactions, for example, suffer an alarming failure rate of up to 90%. A failed talent strategy is often at the core of an M&A flop, with nearly half (47%) of key employees leaving the company within a year of the transaction and up to 75% exiting within the three years. In short, how you manage talent before, during and after a transaction can make or break the deal.
But at the same time, managing cross-border talent is costly and arduous, rife with roadblocks in regulatory compliance, contracts, tax, benefits, currency exchanges, language barriers and cultural nuances. Moreover, transferring employees involved in the transaction abroad traditionally means setting up a local legal entity, which will significantly impact timeframes and budgets.
No legal entity, no problem
Corporate transactions, especially carve out M&A transactions, can leave employees without a legal entity to employ them. However, setting up an entity to rehire “orphaned employees” can take several months or even upwards of a year. Meanwhile, transition service agreements (TSAs) usually do not leave a lengthy runway to transfer employees to a new local entity.
Partnering with an EOR allows companies to avoid setting up a legal entity in the country. Effectively, the EOR takes over all employee transfer tasks and can be used either as a temporary gateway to complete the transaction or as a long-term solution to sustain global operations.
Circumventing the common pitfalls in classifying foreign employees
To understand how an EOR solution can bolster corporate transactions, it’s first necessary to understand the most common pitfalls companies face when it comes to classifying foreign workers as ICs.
Permanent establishment: Making direct payments to workers in a country abroad increases the possibility of inadvertently creating a permanent establishment, which raises risks for tax liability, compliance issues, fines and penalties.
Audit: If local labor authorities believe your company has misclassified an employee as an IC, you are at risk for an audit in the country. An audit may also be triggered if an IC files for unemployment or if a whistleblower reports misclassification.
Mismanagement: ICs are responsible for performing the services as outlined in a contract or scope of work (SOW) agreement. A key feature of the arrangement is that ICs maintain a certain amount of autonomy in their workflow and operations. The relationship becomes employer-employee in the eyes of local labor authorities once the company tries to control how the IC performs the work, provides on-the-job training or requires them to use company equipment or workplace facilities.
Working with an EOR allows companies to circumvent these pitfalls so they can nimbly hire internationally and enhance the viability of a corporate transaction. The following chart outlines the features of an EOR hiring strategy versus an IC hiring strategy.
|Employer of Record
|Higher risk for permanent establishment and employee misclassification
|Lower risk as the employee is on the EOR’s legal payroll
|ICs withhold and pay their own taxes
|EOR withholds taxes from employee’s payroll
|ICs set their own working hours
|EOR works with client to set employee’s working hours
|ICs set their own working location
|EOR works with client to set employee’s working location
|Lower security for IC, subject to contract and SOW terms
|Higher security for employee, subject to local labor laws
|ICs manage their own workflow and operations
|EOR works with client to manage employee’s workflow
|Varies (subject to different pay for different projects as well as deductions for expenses)
|ICs pay for their own benefits
|EOR administers statutory benefits to employee and works with client to provide supplementary benefits if desired
Retain teams, safeguard compliance and gain speed in global hiring
When a corporate transaction is on the negotiating table, misclassification risks and the transfer of employees are often not the top priorities. But once transaction terms are settled, deals tend to move fast and buyers find themselves in a race against the clock. Keeping employees on the seller’s payroll post-sale is burdensome and can result in an estranged, uncommitted workforce. Therefore, it is crucial to transfer employees to the buyer’s human capital ecosystem in a timely and compliant manner. A robust EOR strategy can ease the transition by enrolling team members in benefit programs that meet or exceed previous terms while maintaining compliance.
A company can gain speed, flexibility and turnkey hiring across its international footprint by using a single EOR for all countries. Because of these advantages, leading global companies are making EOR a critical pillar of their M&A strategy.