Applying EOR in M&A Carve Outs to Address ‘Orphaned Employees’

Managing talent through a corporate transaction’s transition can make or break a deal. Merger and acquisition (M&A) transactions suffer an alarming failure rate of up to 90%, according to research published by Harvard Business Review, and up to 75% of acquired employees leave within the first three years, according to data published by Gallup

While any type of corporate transaction can be a complex process – from diligence to integration – the global M&A carve out deal can prove to be especially challenging in terms of talent management. That’s because carve outs often produce ‘orphaned employees.’ These workers, although included as part of the acquired asset, come without an in-country legal business entity to employ them. 

Many times, when a carve out deal is on the table, the details and implications for orphaned employees can initially be overlooked. When not planned for in advance, this situation can cause a real headache and throw off the timing of a deal or later emerge as an expensive surprise. Gaps in benefits and employee engagement can also impact talent retention and, thus, compromise the long-term success of a transaction. 

To avoid or alleviate the dilemma of having orphaned employees, organizations should weigh their options and develop a strategy ahead of time for how they will employ, manage and engage acquired talent in a carve out deal. 

Options for finding ‘orphaned employees’ a home

To bridge the gap, there are three main options to consider in engaging and paying orphaned employees: absorb them into your own local entity if one exists, establish a local entity to employ them or partner with an Employer of Record (EOR) provider, like GoGlobal, to employ them. 

Options for engaging and paying workers overseas

Option #1: Migrate them into your own local entity (if one exists) Option #2: Establish a local entity to directly employ them Option #3: Engage an Employer of Record (EOR) provider to employ them

Option #1: Migrate acquired workers into your own local entity

Absorbing workers into the organization’s own in-country entity, if one already exists, may be the most straightforward option for bridging the gap created when acquiring orphaned employees. However, buyers must consider how to align benefits across a cross-border workforce, especially if the talent at stake is a key asset for making the deal a success in the long term. 

Sometimes buying organizations make the mistake of not evaluating an existing benefits package and its value proposition. If acquired workers are presented with an inferior benefits package, it could cause problems with employee engagement. Eventually, key talent may even exit. 

There are times when the buyer may want to keep workers to ensure continuity of business. The work is transitioned over time, but they do not want that period to be indefinite. Employing the acquired workers in the buyer’s entity may make them harder to separate from the permanent workforce because of collective bargaining agreements and other considerations. The EOR model provides an easier, more temporary solution to enable easier separation.

Migrate acquired workers into your own local entity While absorbing workers into the organization’s already existing in-country entity may be the most straightforward option, the buying company may still have to deal with challenges in aligning benefits. If acquired workers are presented with an inferior package, it could cause problems with employee engagement and talent may even exit.

Option #2: Set up a new legal entity

Establishing a legal entity can take six months or longer in some countries, according to data from the World Bank, with India and China being two prominent examples where business incorporation can be an arduous process. Meanwhile, the transition service agreements (TSAs) in an M&A deal usually do not leave a lengthy runway to transfer employees to a new local entity. 

Apart from timing, there are also significant cost and overhead considerations. For example, incorporating and maintaining an in-country entity for a small headcount may not be cost-effective due to tax liabilities, tax preparations, compliance, payroll administration, HR management, etc. 

Considerations for setting up a new legal entity

Timing Costs & Overhead
Organizations, and even their professional service providers, can underestimate the time it takes to be operational. While the entity registration process appears straightforward, post-filing steps are often unknown and fluctuate due to specific circumstances. Furthermore, bank accounts often lag behind the entity setup because of ‘know Your client’ (KYC) and ‘anti-money laundering’ (AML) reviews. This can cause months of unexpected delays. Many countries require an annual audit, even for small operations, meaning organizations must not just pay taxes but also dedicate time to reporting. In addition to this, they must allocate resources to handle functions in compliance, payroll administration, HR management and more. 

Option #3: Engage an EOR provider to employ acquired workers

An EOR solution is often an ideal solution for addressing the issue of orphaned employees in carve out deals, serving either as a transitional bridge for larger headcounts or as a long-term solution for smaller headcounts in-country. Essentially, an EOR service provider, such as GoGlobal, will offer the legal vehicle to hire the workers. They will also be responsible for managing the payroll-related compliance and administration that come with employing locally. Notably, providers will vary in terms of experience and service capabilities to support a transaction, so it is important to conduct due diligence in the selection. 

Using an EOR provider can go wrong if the message isn’t managed well. The workers should clearly understand the purpose of the EOR model and the benefit of using the EOR provider’s platform. If the right provider is selected, workers will have access to local HR support and benefits. A carefully arranged Q&A session involving the service provider, the acquiring company and even the seller can alleviate fears of the worker.

Engage an EOR provider to employ acquired workers Tip: When selecting an EOR provider to support with a carve out deal, be sure to ask them about their M&A experience. This includes transactions and relevant references. It is also advisable to speak directly with the team that will be involved hands-on in managing the project, so you can gauge their level of understanding, expertise and how the arrangement will operate.

EOR transition methodology

If an EOR is identified as the right solution for engaging talent, it is important to consider how the transition to the EOR model will take place. If done properly, the EOR model can be an overall benefit to the end client, intermediaries and employees. If done haphazardly, it can be a time and money drain with regrets by all parties. 

Firstly, there are different reasons for transitions to occur and they usually fall into three categories: an M&A transaction, a consolidation of providers or addressing vendor service issues. 

The approach to a transition must be tailored for each situation

A tailored approach is key. There are different reasons for transitions to occur and they usually fall into three categories:
  • M&A transactions
  • A global or regional consolidation of providers
  • Addressing existing vendor service issues

These scenarios each mark a sensitive and potentially volatile moment for an organization and its workforce. The steps taken ahead of the transition must be appropriate for the situation at hand, especially given the nuances and factors at play. For example, during an M&A transaction, employees often feel apprehensive about their job security or satisfaction. At the same time, employers are generally distracted by the numerous details of the transaction beyond just HR matters. 

By understanding how a transition impacts both employees and employers, an approach can be taken to drive positive communication and account for nuances. 

The type of transition will modify the approach

Type Employees Employers Communication  Nuances
M&A (particularly carve out transaction with ‘orphaned employees) Employees are usually nervous about the future. Sometimes operations suffer.

During chaos and transitions, talent may be tempted to exit. 

Employers are distracted with ‘big picture’ issues beyond HR matters. Additionally, time zones and language barriers may impede communications.  Communication is generally centralized via a project management office (PMO) due to mattes beyond HR. Frequent, consistent communication is recommended. A TSA may present time limitations. It is important to address other matters such as office space, laptops, mobile devices, etc. All employees’ concerns should be identified and addressed.  
Regional / Global Consolidations Employees usually do not want change. It is therefore important to offer a ‘carrot’ where possible (e.g. COVID-19 insurance). Employees need to feel that the transition is better for them in long-term, or they may become passively resistant.  Employers benefit greatly from smooth employee transitions during a consolidation.  Frequent and consistent communication must be pushed out to local or regional teams. Weekly project updates usually suffice, unless dealing with resistance.  The consolidation is usually an employer-driven decision. Hence, extra care must be extended to employees to address concerns. 
Addressing existing vendor service issues in an EOR model Workers are already dissatisfied, hence the desire to enhance service quality. Fundamentally, employees want local language support and responsive service. Employers are often concerned that a change won’t improve the situation. The EOR provider must identify employer pain points (with survey data) and deploy senior staff locally to lead communication.  Frequent and consistent communication must be pushed out to local or regional teams. To reduce employee skepticism, a prompt in-person meeting is recommended.  This is usually an employee-driven decision, hence extra care must be provided to the employer to ensure they receive a return on the investment. 

Vetting an EOR partner

When it comes to selecting an EOR partner to facilitate an M&A transaction, there are several key questions to ask:

  • What level of local expertise and global hiring experience does the EOR team have?
  • Have their team members handled a similar M&A carve out transition before?
  • Will the hiring company receive support in their time zone? 
  • Will the hired workers (client-employees) receive support in their time zone and in their native language?
  • Has the EOR worked with organizations similar to the hiring company before?
  • Do they understand privacy laws and compliance?
  • Do they have an easy-to-use platform? 
  • How will they communicate with the new hires?
  • Do they have an onboarding process? 
  • How are hiring requirements (background checks, drug tests, etc.) handled?
  • How are contracts handled? 
  • Do they fully understand termination rights and other local labor laws?

Empower M&A strategy with an EOR

Given the rapid pace and complexity of carve out deals, it is often a race against the clock to determine how to best keep orphaned employees on board. In many scenarios, an EOR solution is the most agile way to engage acquired talent. 

Namely, keeping employees on the seller’s payroll post-sale is burdensome and can result in an estranged, uncommitted workforce. Moreover, a robust EOR strategy can ease the transition by enrolling team members in benefit programs that meet or exceed previous terms – while maintaining compliance and reducing overhead.

In any event, it is crucial to transfer employees and make them part of the team in a timely and compliant manner. Effectively, the EOR takes over all employee transfer tasks and assumes the liabilities and responsibilities of administering global payroll. An EOR solution can be used either as a temporary gateway to complete the transaction or as a long-term solution to sustain global operations. 

Because of its numerous advantages, many leading global organizations are making the EOR model a critical pillar of their M&A strategy.

Feel free to contact us with your questions about applying our proven EOR solution to M&A carve out deals.