Cross-border M&A: Understanding employee transfer obligations

12 September 2017

In a global business environment where low interest rates prevail, it’s no surprise that the world is awash in mergers and acquisitions.

In the US, the average value of a merger or acquisition announced in 2016 was about $104 million — less than 2015’s high of $115 million, but far more than the $77 million average from 2000 to 2014. In Europe, the Middle East and Africa, M&A activity hit an 11-year high in January, and cross-border deals reached their highest level since 2006.

Mergers and acquisitions can create efficiencies and help companies expand into new markets. But businesses need to guard against the heady feeling that a potential merger can bring and be scrupulous about due diligence. Despite all the successes, studies have shown that 70 percent to 90 percent of acquisitions fail live up to expectations.

Cross-border deals, which often involve venturing into a new setting with unfamiliar laws, languages and customs, are tricky, especially when it comes to acquiring foreign employees. Many companies tend to overlook the differences, leading to wildly inaccurate budget forecasts or even litigation. Here are some of the most significant HR aspects of cross-border deals to watch for.

Employees in asset deals and carve-outs

Asset deals (also often referred to as “carve-outs” or “spin-offs”) are very different from stock deals, in which the entire legal entity is transferred. In an asset deal, only parts of the organization are transferred, and the assets may include not only physical and intellectual property, but employees. You must ensure that a legal entity is in place when the deal goes through so that the newly-acquired employees can be registered with local tax authorities, and payroll and benefits can be set up on time.

Carve-out deals often include a transition services agreement (TSA), which allows the acquired company to continue providing payroll or other services for a set time after the transfer. If you intend to enter into one of these agreements, review it carefully before negotiations. It will help you get an idea of your costs to provide the same services once the transition ends.

Employee rights

If you’re in the US, it’s highly likely that the country you’re moving to gives employees more rights than you’re used to seeing. The US system of at-will employment, for example, gives employers the right to dismiss workers with no notice for almost any reason, and that system virtually does not exist outside the US. And many countries grant employees a higher level of protection than the US in the event of an ownership transfer.

Across the EU, the European Commission’s Acquired Rights Directive (ARD) formalizes the principle that when a business (or part of it) is sold, employees in that part of the business also transfer to the new owner with their employment rights intact. The UK has a set of regulations called Transfer of Undertakings Protection of Employment, or TUPE, that provide comparable worker protections.

Brazil, Colombia, India, Singapore, South Africa and South Korea have similar laws that preserve workers’ employment terms and service histories under the new owner.

In countries that do not provide such worker protections, employees governed by the transfer may be terminated when the deal goes through. If you want to keep them, you will have to rehire them under new terms of employment.

Collective bargaining agreements

Collective bargaining agreements (CBAs) are common throughout Europe and South America, and it is virtually impossible when taking on transferred employees to avoid complying with an existing CBA. You should familiarize yourself with any CBA in place before negotiations begin to gain an idea of costs and obligations before you proceed.

Make things easier with a transfer of employment letter

The size, nature and complexity of an acquisition will help determine the final transfer documentation to be used. In places with comprehensive employee contracts, it is sometimes easier and safer to confirm transfer with a simple “transfer of employment” letter stating that all existing employment terms and conditions will continue unchanged than it is to recreate the terms in a new contract. But typically you can’t just do this yourself — contracts often need to be written in the local language and authorized by specified signatories. Learn the rules in your transfer country to save yourself a major headache later on.

Dealing with immigration sponsorship

Not all of the workers you acquire may be citizens of the transfer country — they may be immigrants with work permits. Generally, work permits are not transferrable, and you will need to ensure that the correct immigration process is followed with local authorities to ensure legal continuity of employment. The clearance process can take months, and during that time the affected workers may expect to receive a salary, even though they cannot start working again until the process is completed.

Do your homework and get help

As this brief overview shows, employment conditions are very different in other parts of the world than they are in the US. Thorough due diligence should identify the number and status of employees included in the transfer and provide an understanding of the employment laws, collective bargaining agreements and benefits in the transfer country as far in advance of negotiations as possible so that you can accurately estimate costs and avoid mistakes. The best course is to create an HR audit team to map out the compliance needs of the new entity. A proactive approach will smooth the transition and help you avoid penalties. Above all: Plan ahead and expect unforeseen issues.