The Role of Employer of Record in Mergers and Acquisitions

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Mergers and acquisitions (M&A) are a common business strategy, with over 500,000 deals completed globally since 2010 and a record-breaking deal value of approximately 5.9 trillion U.S. dollars in 2021.

In these transactions, retaining critical talent and ensuring the right people are in key roles is essential, as 50 to 60% of post-merger initiatives intended to capture synergies are strongly related to IT.

One challenge during M&A is the smooth transfer of employees from the target company to the acquiring company, especially when the latter has no physical presence in the destination country.

In such cases, companies often turn to an employer of record (EOR) to handle the legal responsibilities of employing the acquired workforce during the transition, which may last for months or even a year.

Read on to explore the crucial role of EORs in Mergers and Acquisitions in detail.

The Role of Employer of Record in M&A 

An Employer of Record (EOR) can play several roles in mergers and acquisitions. Here are some of the roles an EOR may play: 

Streamlining M&A Employee Transitions

In order to address the challenges that arise during M&A deals, particularly with strict deadlines and navigating different countries’ regulations, companies have found various solutions.

Some key approaches include:

Transition Services Agreement (TSA):

A solution that allows the seller to manage HR, payroll, benefits, and other mandates for a set period after the deal closes, bridging the gap between closing the deal and establishing a local legal entity.

Employer of Record (EOR):

A third-party provider that manages clients’ employment and benefits obligations, even if they don’t have a local legal entity. This enables companies to legally hire acquired employees without going through the time-consuming process of setting up a local presence.

By utilizing these strategies, businesses can effectively navigate the complexities of M&A deals and ensure a smooth transition for both parties involved.  

Exploring New Markets 

Mergers and acquisitions provide an opportunity for companies to test new markets and evaluate various aspects of their potential expansion. Key considerations include:

Market size analysis:

Estimating the potential customer base and growth opportunities in the new market.

Product and service feasibility:

Assessing the viability of introducing new products and services to the target market.

Geographical and cultural factors:

Understanding the impact of location and cultural dynamics on business operations and success.

However, companies must also be aware of the risks associated with venturing into uncharted territories:

Liquidation costs:

If a local corporation is used and operations fail, the company may incur significant expenses to wind down the business.

When pursuing mergers and acquisitions in new markets, companies should thoroughly assess both opportunities and risks.

Strategies for Cross-Border M&A Carve-Outs

Cross-border M&A carve-out deals present unique challenges that require companies to choose the most suitable approach for their situation.

Key factors to consider include the following:

Employer of Record (EOR) advantages:

EORs can provide a fast solution for onboarding employees in a foreign market, especially when dealing with a smaller workforce or a single contract-signing deal maker.

Subsidiary creation:

In some cases, creating a subsidiary may be the only viable option, particularly when the foreign office has a larger number of employees.

EOR limitations:

Not all countries accept EORs, and some have enacted legislation to limit their use, such as Mexico’s recent restrictions on outsourcing non-core activities.

Post-EOR considerations:

Companies must plan for the transition period after utilizing an EOR, as the shift to a smaller in-country presence may affect insurance providers and employee sentiment.

In cross-border M&A carve-out deals, companies can achieve better results by carefully evaluating these factors and planning for the future.

Preventing Employee Misclassification in M&A Transactions 

Companies must be cautious about employee classification when navigating mergers and acquisitions to maintain compliance and avoid potential risks. Key considerations include:

Understanding the dangers:

Recruiting workers as independent contractors can result in withheld benefits, severe fines, and reputational damage for the company.

Implementing proper categorization:

To prevent improper classification and its consequences, utilize an Employer of Record (EOR) service to ensure compliance and mitigate risks.

In M&A transactions, companies can safeguard compliance and protect their reputation by properly classifying employees.

Nurturing Talent Retention 

During mergers and acquisitions, it’s crucial to address talent management to ensure the long-term success of the combined organization. Key steps to promote talent retention include:

Recognizing the challenge:

Be aware that, according to an EY study, 47% of key employees leave after a major transaction, and 75% depart within three years.

Prioritizing talent management:

Focus on employee retention strategies during M&A discussions to prevent the “brain drain” phenomenon.

Leveraging an Employer of Record (EOR):

  • Utilize an EOR to facilitate communication and provide stability for employees during the transition.
  • Take advantage of EOR services for handling payroll and other employee-related tasks, reducing costs, and mitigating turnover risks.

Businesses must implement these strategies during M&A transactions to foster talent retention and ensure the deal’s success.

Simplify M&A HR Operations with Global Employer of Record Companies 

Human resources professionals face several challenges during mergers and acquisitions, including adapting to new legal and regulatory requirements, implementing novel systems and procedures, and providing assistance and training to employees from diverse cultural backgrounds.

These businesses may be complex and challenging to manage when spanning many countries, bringing myriad risks and obstacles that threaten their success.

Global Employer of Record firms may streamline these processes for their clients by handling HR and staff management on a global scale. 

Acquiring Knowledge about Local Labor Laws

Every nation is different when it comes to taxes, working conditions, and visa requirements. Employee perks and entitlements are also reported and regulated differently among nations.

A Global Employer of Record is familiar with, can understand, and follows all applicable local legislation to ensure legal compliance on all fronts.

Controlling Complicated Tasks

It might be difficult and time-consuming to oversee staff in multiple legal systems. Using a Global Employer of Record may save time, energy, and money. They have the manpower and knowledge to handle international payroll and tax challenges.

Benefits management, onboarding, talent acquisition, and immigration support are just some of the duties that may be delegated to a Global Employer of Record.  

Neglecting HR management during M&A can lead to non-compliance with local laws, disengaged employees, the departure of valuable personnel, and increased litigation risk.

A Global Employer of Record can help mitigate these risks by providing expertise in local labour regulations, providing employee training programs, and developing effective compensation packages.

This can help ensure all parties involved in the M&A transaction comply with local regulations and that employees are satisfied with their job conditions. 

EOR as a Solution to Challenges in Classifying Foreign Workers as ICs

When companies classify foreign workers as independent contractors (ICs), they may face several common pitfalls. These include:

  • Misclassifying workers as ICs when they are actually employees
  • Risk of creating a permanent establishment in a foreign country if a worker is misclassified as an independent contractor when they are actually an employee.
  • Companies that misclassify workers as ICs may be subject to audits by tax authorities or labour regulators.

Working with an EOR provider can help companies avoid these pitfalls and ensure that they are operating legally and efficiently in foreign countries. Here’s a table comparing the features of an EOR hiring strategy versus an Independent Contractor (IC) hiring strategy:

FeatureEOR Hiring StrategyIC Hiring Strategy
Worker StatusEmployees of the EOR providerIndependent Contractors
Legal LiabilityEOR provider assumes legal liabilityThe company assumes legal liability for ICs
Tax ComplianceEOR provider handles tax withholding and filingICs responsible for their own tax filing
AdministrativeEOR provider handles payroll and benefitsICs responsible for their own invoicing and admin
FlexibilityLimited flexibility in worker classificationMore flexibility in worker classification
CostHigher cost due to EOR provider feesLower cost due to no EOR fees
Legal ComplianceEOR provider ensures legal complianceICs responsible for their own legal compliance

A Comprehensive Approach to M&A Success: The Value of an Employer of Record

Recognizing the importance of an Employer of Record (EOR) can be a game-changer in mergers and acquisitions.

By collaborating with an EOR, businesses can experience numerous advantages, such as seamless transitions, adherence to local laws and regulations, and reduced HR and payroll responsibilities.

When engaging in a merger or acquisition, weigh the benefits of partnering with an EOR to streamline the process and enhance the likelihood of a favourable outcome.

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