In an exclusive article for DealStreetAsia, Globalization Partners general manager Charles Ferguson writes on how the employer of record model can eliminate regulatory roadblocks and bureaucratic hurdles to hiring talent, while entering a new market.
Once the decision was made for a private equity firm to take on a major South American chemical manufacturer as a joint venture partner, it seemed like clear sailing to the finish line. However, the task of transferring employees in a cost-efficient, timely, and sensitive manner turned out to be less than straightforward.
Everyone was raring to go, but as part of the new joint venture, some of the chemical manufacturer’s employees would need to transition to the private equity holding company. These employees, based in Argentina and Brazil, had to be transferred in less than six weeks. In this time, all parties needed to be briefed on the complexities of labor law in Argentina and Brazil.
The manufacturer was naturally concerned with the wellbeing of its employees and, in particular, how to keep their benefits whole. This is by no means an uncommon situation faced by many companies considering cross-border mergers, carve-outs, spin-offs, or acquisitions. During any M&A transaction involving employee transfers, companies in both Asia Pacific and South America tend to manage acceptance arrangements.
In contrast to many European regulations for employee transfers, where the buyer must provide the same conditions of employment, pay, and benefits for the sellers’ employees, in Asia-Pacific and Latin America the buyer must negotiate with the transferring professionals to reach a new agreement on benefits. This adds complexity to employee transfers. In this joint venture, if the chemical manufacturer’s employees had not accepted the new conditions, they would have needed to be given severance packages.
So, how did the private equity firm manage benefits offers for the transferring professionals? In order to match benefits packages and ensure local compliance, a global Employer of Record called Globalization Partners provided extensive consultation to both joint venture parties throughout the pre-transaction stage.
An Employer of Record simplifies global business by enabling companies to hire talent around the world without the complexity of setting up international branch offices or subsidiaries. The private equity firm brought on Globalization Partners, which carried out a benefits analysis prior to the employee transitions. The analysis stage included education for both the private equity firm and manufacturer on how benefits and regulations differed in each country.
This resulted in a happy solution for both parties. Employees were engaged through Globalization Partners’ subsidiaries on an ongoing basis, eliminating the need for the buy-side client to set up costly subsidiaries in Latin America. Moreover, the transfer was managed in less than six weeks, in line with their Transition Service Agreement deadlines. Neither the companies nor their intellectual property were put at risk, and individuals in Brazil and Argentina were spared lengthy benefits renegotiations.
Bringing on team members in countries where companies don’t have an entity can be the biggest blocker during international employee transfers. In order to employ local staff in many countries, companies need to register their business with the local tax authority, they need to open up bank accounts and have paid-up capital of about US$100,000, and they have to apply for an employment license with the labor bureau. The list of requirements, deposits, capital, and all these other pieces can be as long as my arm.
During a joint venture or other partnership that would require employees to transition between companies, the last thing leaders want is to spend months or years on paperwork and red tape in unfamiliar countries. During employee transfers, companies often spend six to 18 months building up from discovery to implementation in another country. Even when accelerated, the administrative burden required to smooth the path for seamless employee transfer falls squarely on the buy side’s team, which is likely already strapped for resources and time.
The risk of losing talent, or at best seeing a drop in employee engagement and potential long-term retention, is a real concern if transitions end up dragging out. For this reason, a global Employer of Record helps companies speed time to value.
Managing transitions quickly is important. As is sensitivity to local expectations, so companies must consider their onboarding process carefully before entering a transaction. Designing an onboarding experience for specific cases, like carve outs or spin-offs, takes time and resources. And buyers and sellers must ensure sensitivity during staff transition or risk putting employee engagement in jeopardy. The private equity firm in this example, decided to hand over hiring and all subsequent HR management to Globalization Partners because they knew this was the path to an excellent onboarding experience for their employees, regardless of their location.
To support during international transactions, Globalization Partners takes on all the burden of compliance, tax, and HR admin such as onboarding, and has in-country experts on hand to answer questions from the transferring employees and provide invaluable legal support to companies during benefits negotiations. To keep company transitions on track, Globalization Partners also has the largest team of employment attorneys in the Employer of Record industry to recommend risk management strategies around contracts.
More than half of all executives interviewed for McKinsey’s September 2020 Global Survey said that they expect economic conditions in their own countries to be better six months from now, indicating a positive shift in economic sentiment. This optimism could lead companies to join forces, and with a trusted partner like Globalization Partners, executives may feel more confident exploring global ventures and expanding internationally.
Ernst & Young also released data that supports –Asia-Pacific centric growth: in October 2020, only 45 percent of surveyed executives said they expect the global M&A market to improve, while 57 percent of respondents expect an upturn in the M&A market throughout Asia. An above average 52 percent of Ernst & Young’s respondents stated an intention to pursue M&A transactions in the next 12 months.
No doubt 2021 will see many companies taking advantage of the opportunity our virtual-first reality presents to test new markets and explore global partnerships– particularly in the Asia-Pacific region. While doing so, they can rest assured that the complexities of employee transfers that may slow expansions, can be avoided by joining forces with an Employer of Record like Globalization Partners.
Globalization Partners can help you with cross-border transactions and international hiring. Contact us to ensure your employee transfers go smoothly and you can speed time to value