Transcript International expansion Getting it right without costing
International expansion Getting it right without costing the earth
Kevin Barrow – Recruitment International Conference – Nov 2013
osborneclarke.com
About Osborne Clarke
• • • • International law firm with 16 offices across Europe and two in the US We are the leading legal advisers in Europe and beyond in the recruitment industry 2013 SIA risk methodology for major UK and US hirers In 2012-2013 have advised staffing companies on RPO, MSP and staffing projects in 45 countries in Europe, Asia, Latin America and Africa: • • every major European country Singapore, HK, China, India, Brazil, South Korea Russia, Iraq, Saudi and Qatar and • places as diverse as Angola, Tanzania, Azerbaijan, Chad, Ecuador, Kenya, Ethiopia and Columbia "an acknowledged expert in the HR outsourcing field and highly regarded for specialist advice to staffing companies and end users of their services."
Legal 500
"the acknowledged experts [in recruitment]."
Legal 500
1
2
osborneclarke.com
osborneclarke.com
Agenda – international expansion
• • • • • • Why get it right? What's at stake?
Benefits of a standard framework for assessing and managing global risk Common (incorrect) assumptions about global risk The methodology: how to build your framework for assessing and managing global risk Identifying the risks Dealing with the risks
osborneclarke.com
Why get it right? What's at stake?
• – – – – – Compliance and legal risk in UK rarely a bet the company issue?
– Regulatory investigations? Depends on the types of supply you do? UK regulator generally pragmatic. Staffing and recruitment are mature industries?
– Credit risk? PWP? Employment law – AWR equal pay class actions?
Tax? MSC/offshore intermediaries/umbrella risk?
Database theft?
Unfair degree of risk pushed on supplier by hirers?
Blady bla bla bla – [Should all be manageable, if good legal advice taken]
osborneclarke.com
Why get it right? What's at stake?
• Why is compliance and legal risk outside the UK a more serious issue?
– • • • Regulatory and criminal investigations? Bribery Act and FCPA: 3 SFA investigations; 2 UK staffing co directors prosecuted licence and immig: closure in country; reputational risk; Japan, China, Singapore tax/soc sec e.g. Germany and Switzerland: criminal convictions for UK directors – • • Credit risk enforce payment terms? ID available?
currency control: China, Angola, Algeria etc.
– • • Employment issues equal pay class actions? US and Germany. Profit warnings employer of record - termination payments/liable for worker mistakes etc.
– Tax/soc sec - chain liability is the norm: hirers and staffing co's liable for contractors
osborneclarke.com
Why get it right? What's at stake?
• Is it viable to aim to be "under the radar" ?
– – • • perhaps initially but don't take Bribery Act risk anyway, and remember you are liable for facilitation payments by your local partners (e.g. tax, work permit, licence, currency withdrawal) (and watch credit risk) …and, otherwise, maybe you can take calculated risks with compliance?
– • …but why are you in business as the owner of a staffing company? = long term capital value and exit?
osborneclarke.com
Why get it right? What's at stake?
• • • To exit you need a buyer or investor!
Buyers: major US (and Japanese?) recruitment co's and private equity investors – not natural legal-risk takers – listed, or PE backed (non execs very risk averse) – • • trade and PE buyers VERY aware that hirers want global suppliers which: offer US/UK style cost effectiveness and MIS credibly manage supply chain, labor law and tax risk in every major country (SIA: 70% of major hirers with global program by 2018) – • • • buyers want to invest in companies with "proper" international footprint and sustainable future profitability no value placed by buyer/investor on non-compliant local operations? staffing company buyer will want licensed operation rather than margin only/virtual office/SOW/pure "perm" solution? local "partners" – how secure? Local contractor Bribery/tax/chain liability issues?
[250 companies on the OC compliance webinar for SIA in March!]
osborneclarke.com
But how do I get it right?
• • So, investing in international compliance is an investment decision as well as a "sleep at night" decision But how much should you invest?
• • Supplies of CWs are subject to a wide range of differing local cultural factors, empl laws, tax laws and recruitment regulation – substantial legal and tax differences even between neighbouring countries in the EU and other trading unions, and – sometimes major regulatory differences from region to region within one country e.g. Belgium and Australia.
"But how do I start? Our key clients operate in 6 countries and I can't be expected to become an expert in each – I find it hard enough to understand the UK".
osborneclarke.com
But how do I get it right?
• • • Option One: – • • • take separate full advice from insured professional advisers in each country break the bank/non scaleable and fails to use know how learned in other markets $10-$40k per country just to get the right advice and legal set up? probably get told "it's illegal" in some countries and have to start again Option Two: – • • take a risk, or rely on local [uncheckable/unregulated] partners no capital value, and damage key client relationships?
sleep at night?
Option Three:
–
risk based approach with standard global framework of methodologies
osborneclarke.com
Key benefits of a global framework for international expansion
• Benefits of a global framework include being able to roll out in all countries: – …risk management that appeals to YOUR type of clients – reassures them with something which looks standardised and which addresses the CW risks associated with their type of CW – …standardised systems which reduce cost, and benefits of lessons learned in developed staffing markets about compliance – standard workarounds cover most types of country
= generic, centrally designed, cross border “solutions” (but allowing for local country variation)
Where do I start?
The biggest barriers to cost effective international solutions are
INCORRECT ASSUMPTIONS BY HIRERS AND SUPPLIERS ABOUT WHAT THE TRUE RISKS ARE GLOBALLY
• Step 1 – dispel myths
osborneclarke.com
osborneclarke.com
Common assumptions about global CW risk 1
Assumption Reality Co-employment risks are the most serious risk in the US, and so labor law risks relating to contingent workers must be the biggest issue outside the US as well, especially in countries with lots of labor protection law.
It is not necessarily true that co-employment is the most serious risk in the US, and it certainly is not true that it's the biggest risk outside the US, even in Europe. Many countries e.g.in Asia have a more laissez-faire attitude to worker rights than the US and Europe. Tax is probably a more serious risk in most countries.
Local managers are aware of key local risk issues.
Local managers are often aware of risks but not always the right ones, in the right order of priority, and sometimes turn a blind eye to risks which it is traditional to downplay in that country, but which are serious from a corporate perspective such as corruption, PR and safety issues.
Applying standard US/UK systems and MSP arrangements to local supplies will eradicate risk. The locals just need to learn how to be more American/British! In some countries it is illegal to use US/UK MSP models. And even where it is not, they may not be the most suitable contractual structures. Usually arrangements will need to be tailored country by country to deal with local compliance issues, using a global "umbrella" framework agreement.
osborneclarke.com
Common assumptions about global CW risk 2
Assumption
Some suppliers can offer worldwide, pain free solutions at the drop of a hat using existing local operations in every country. And if they can't, it won't take them long to set that up because I am such an important client.
Reality
No supplier finds global MSP easy – laws are changing constantly and in many countries it is not easy to know what compliance means because local legislators and tax authorities have not yet really worked out what "contingent working" actually means, and how it should be regulated and taxed. Therefore no supplier can guarantee 100% compliance in every country, and in many countries it takes several months to set up a properly licensed and compliant operation, at a general cost of $10-40k per country. Will the volumes/margins you are offering cover that cost?
The best thing to do is appoint a supplier who is prepared to indemnify the hirer against all tax and other risk and let the supplier take all risk.
Suppliers cannot insure against many key risks and so the indemnity (to the extent it is enforceable under US, UK or local law) is of questionable value, and any supplier who offers an unlimited blanket indemnity is mad, bad or desperate.
It is safe to rely on local payroll providers and employee leasing companies to pay contingent workers.
In some countries there are reliable local specialist payroll providers but in many there are providers who say they will administer tax and social security deductions, but do not do so, often instead operating illicit offshore tax schemes for paying workers. If it sounds too good to be true, it probably is. And you can be liable for Bribery Act offences by your local subcontractors
Methodology: how to build your framework 1
osborneclarke.com
1 2 Identify
• standard types of risk on a thematic basis, which apply in most countries relevant to your key clients and which apply to the types of workers supplied by you , • • using standard checklists, and then…
Prioritise
those risks • • • using a standard methodology, based on the extent of exposure country by country, and then…
Methodology: how to build your framework 2
osborneclarke.com
3
• • •
Risk response part 1: high-level "standard" global solution
: map risks against those standard types of solution which have been found to work in most countries, and then…
part 2: adapt solutions
on a country by country basis according to the level of risk and specific local issues (and this may include
adapting MSP models
to be locally compliant) and then…
part 3: risk apportion
agree with hirer who is responsible for which parts of which solutions in particular countries, and map that out in local country agreement and back to back to workers/local subcontractors
osborneclarke.com
Identifying the risks – standard risks
• • • •
As mentioned before
Regulatory and criminal investigations – – – Bribery Act and FCPA: 3 SFA investigations; 2 UK staffing co directors prosecuted licence and immig: closure in country; reputational risk; Japan, China, Singapore tax/soc sec e.g. Germany and Switzerland: criminal convictions for UK directors Credit risk – – enforce payment terms? ID available?
currency control: China, Angola, Algeria etc.
Employment issues – – equal pay class actions? China, US and Germany employer of record - termination payments/liable for worker mistakes etc.
Tax/soc sec - chain liability is the norm: hirers and staffing co's liable for contractors
osborneclarke.com
Identifying the risks – refining down what really matters to you and your clients
The types of standard solution that will work for you will depend on
• • • • • •
(1) The type of worker engaged by your clients
SOW (generally much lower risk worldwide) independent contractor i.e.1099/PSC contractor leased employee controlled by hirer i.e. W2/PAYE worker equivalent within Agency Worker Directive type legislation managed service employee controlled by supplier local vs not locally domiciled short term vs longer term • • •
(2) The type of industry in which your client operates
heavily regulated or not safety critical or not high confidentiality, IPR or security requirements
osborneclarke.com
Identifying the risks – refining down what really matters to you and your clients
The types of standard solution that will work for you will depend on
• • • • • •
(3) Type of country
(and of course some countries fall into more than one category) settled and (mainly) accepting legal and social environment for CWs e.g. US, UK, Australia, Japan – better credit risk social model/protected labor markets e.g. much of Europe fast developing entrepreneurial economies with some sort of settled legal environment e.g. Singapore and Hong Kong fast developing economies with currency control and not much of a settled legal and social environment for CWs e.g. much of Asia and Africa tradition of class actions or not?
tax debt transfer laws, so that supplier liabilities pass to hirer?
(4) Number of CWs in country
! Legal costs of working out what compliance requires, and obtaining a licence etc., for 2 CWs will probably exceed the exposure to claims if you have accidentally got something wrong there.
osborneclarke.com
Identifying the risks – refining down what really matters to you and your clients
Examples of standard types of risk worldwide (extract)
Liability for worker tax because of
tax misclassification
of contingent worker as independent contractor – is there tax debt transfer legislation, or hirer primary liability?
HMRC assessment under MSC German assessment for false self-employment US litigation against hirers
Local issues which may worsen the risk – which will affect the priority with which risk need to be treated
Criminal penalties? Fines on top of tax liability? Retrospective? Activist tax authorities? Chain tax law Class actions by authorities – many similar workers?
Burden of proof on hirer?
Liability for worker tax because of
failure of local payroll partner
to deduct tax in case of “leased employees” Is hirer primarily liable for tax?
Dutch chain law liability Criminal penalties? Fines on top of tax liability? Retrospective? Activist tax authorities? Chain tax law?
Class actions by authorities – many similar workers?
Burden of proof on hirer?
Transfer of debt in insolvency?
osborneclarke.com
Identifying the risks – refining down what really matters to you and your clients
Examples of standard types of risk worldwide (extract) Co-employment risk
for hirer with statutory labor law liabilities to contingent worker e.g. termination payments
Equal pay rights for cw's/fixed pay scales
and benefit entitlements (e.g. medicare and pension) of contingent workers Christian Union claims in Germany New China legislation
Local issues which may worsen the risk – which will affect the priority with which risk need to be treated
Criminal penalties for hirer? Tradition of class actions?
Activist unions?
Class action practical risk Burden of proof on hirer?
– many similar workers?
Criminal penalties for breaches? Tradition of class actions?
Type of industry Class actions by authorities – many similar workers?
Burden of proof on hirer?
Activist unions?
Activist regulators?
osborneclarke.com
Dealing with the risks 1
Examples of standard types of risk worldwide (extract)
Hirer liability for worker tax because of tax misclass of CW as indecontractor – is there tax debt transfer, or hirer primary liability?
HMRC assessment under MSC/German assessment for false self-employment Hirer liability for worker tax because of failure of local payroll partner to deduct tax in case of “leased employees” Is hirer primarily liable for tax?
Dutch chain law liability
Standard types of solution (extract)
Focus on the type of worker you are using – genuine ICs under local law?
Move to genuine SOW for as many as possible Standard 1099/IR35 style checks and repeat spot checks in every country – W2/umbrella for fails Work out what hirer liability might be under local law and back by appropriate indemnities from suppliers with insurance/balance sheet strength tasked with carrying out status checks - use technology Standard checks and repeat spot checks in every country on the payments/deductions made Don’t rely on payroll partners without checking them out – many are non compliant Work out hirer liability under local law and back by appropriate indemnities from suppliers with insurance/balance sheet strength Co-employment risk for hirer with statutory labor law liabilities to CW e.g. termination payments Focus on the type of worker you are using – genuine ICs under local law?
Move to genuine SOW for as many as possible Standard checks and repeat spot checks for IC status checks and for statutory compliance for others – use technology Work out hirer liability under local law and back by appropriate indemnities from suppliers with insurance/balance sheet strength
Dealing with the risks 2
• If going to any developing market, it is an absolute priority to deal with: – • • • Bribery Act risk assessment including vetting of any local partners tailored policy Bribery Act training – • • • Credit risk policy re "getting paid in new countries" ring-fencing via corporate structure and corporate governance rules, and special client terms e.g. paid in advance/PWP/margin only/get paid in UK
osborneclarke.com
osborneclarke.com
Dealing with the risks 3
• • •
Adapt standard solutions
on a country by country basis according to the level of risk and specific local issues Risk-prioritisation methodology can be adapted for most countries and, following that, the methodology of the solutions map can be applied for those countries Special approach for staffing co's appointed under global master services agreements or as MSPs
osborneclarke.com
Dealing with the risk 4
• – Clients should not be surprised if you tell them: you cannot do for them in [e.g. France] exactly what you do for them in the UK. In some countries it is illegal to use US/UK MSP and staffing models – that you will make a loss on what they are asking you to do in [little country x or new country y]. No supplier finds global supplies easy – local legislators and tax authorities have not yet really worked out what "contingent working" actually means, and how it should be regulated and taxed, and in many countries it takes several months to set up a properly licensed and compliant operation, at a general cost of $10-30k per country. Will the volumes/margins you are being paid cover that cost?
– you cannot agree a blanket indemnity for all risks in all countries. Suppliers cannot insure against many key risks and so the indemnity (to the extent it is enforceable under US, UK or local law) is of questionable value, and any supplier who offers an unlimited blanket indemnity for any serious risk is likely to be mad, bad or desperate.
osborneclarke.com
Dealing with the risk 5
• • • And remember that in some countries there are reliable local specialist payroll providers and employment intermediaries … but in many there are providers who are not insured and/or who say they will administer tax and social security deductions, but do not do so, often instead operating illicit offshore tax schemes for paying workers; and if it sounds too good to be true, it probably is. You will need to carry out spot checks in countries where you could end up paying the tax bill or carrying Bribery Act risk , or appoint an adviser who will do spot checks for you.
osborneclarke.com
Summary
• • • • • Don't make too many
assumptions
about risk – many types of CW risks are lower overseas than they are in the US/UK. Tax is generally a bigger risk than co employment.
Work out what
generic risks
will cause you and your client damage country by country, against specialist checklists. And then
prioritise
the risks which will have most serious impact on you and are most likely to happen to you. Don't necessarily adopt local suggestions for risk management – start by applying standard
global "solution" methodologies
to those risks,
and adapt
those methodologies to cater for local country peculiarities. This allows for some standardisation, and shares best practise, AND CUTS COST
Don't let hirers dump
all risk on suppliers – reputable ones won't agree.
Getting proper risk management in place worldwide
takes time and costs money
.
osborneclarke.com
Recruitment Sector Corporate Transactions
Advised on acquisition of international IT recruitment specialist Aston Carter
Winner of Recruitment International's "Most Transformational Deal of the Year 2011"
Acting for former shareholders of Wynnwith Group Ltd on joint venture & acquisition from Administrators of business of Wynnwith
Winner of Recruitment International's "Most Transformational Deal of the Year 2010"
Advised on the acquisition of IT recruitment company, Atlan Advised on the €14.6m acquisition of German recruitment company, Headway Advised on the disposal of the Advertising and E-Solutions business of Tribal Resourcing Limited to TMP Worldwide Advised on acquisition of nursing staffing businesses of Pinnacle plc for £2.75m
Shortlisted for Recruitment International's "Most Transformational Deal of the Year 2010"
Advised on significant mid-market investment by Horizon Capital in European IT staffing and services company Ciklum Advised leading US recruiter Yoh on the acquisition of UK IT recruitment company Connections
osborneclarke.com
Recruitment Sector Corporate Transactions
Advising Geometric Global Ltd (leading Indian engineering company) on the acquisition of 3 Cap Technologies (German technical recruitment company) Advised the shareholders on its sale to Associated Newspapers Ltd, part of the DMGT group, for c.£36m Advised on €54m transfer of tech development business units in Alcatel Lucent and redeployment of staff across Europe, and €45m transfer of "Fixclas" tech development business units in Alcatel Lucent Advised on 6 global MSP and RPO deals Advised on a 5 year outsourcing deal with BT. The deal, the largest of its type in Europe at the time, involved transfer of the management of several thousand contract and temporary personnel worldwide Advised on the joint listing on the London and Oslo Stock Exchanges and associated share placing Advising on acquisition by Allegier (leading German IT company) of leading (#3) German IT staffing company tecops personal GmbH in Germany) Advising MITIE on the acquisition of Enara Group Limited for £110m
osborneclarke.com
OC team
Kevin Barrow Partner,
T +44 20 7105 7030 [email protected]
Frances Lewis Consultant,
T +44 20 7105 7032 [email protected]
Thomas Leister Partner, Munich
T +44 49 89 5434 8064 [email protected]
m Kevin is a partner in Osborne Clarke's recruitment and resourcing team. He advises on national and global flexible workforce projects, including business process, HR and recruitment process outsourcing, as well as business protection, tax and regulatory advice relating to contingent workers , SOW workers and contract staff.
Kevin has advised on global staffing , VMS and MSP projects involving Allegis, CDI, Yoh, Advantage, Harvey Nash Group plc, Matchtech Group plc, and many other suppliers and users of recruitment and staffing services.
Kevin is an acknowledged expert in the recruitment sector and speaks regularly at industry conferences and seminars. He regularly contributes to international webinars and conferences for SIA and is regularly involved in consultations with the UK Government about employment and tax legislation affecting the use of temporary and contract staff. Frances is head of the firm's recruitment sector team, specialising in advising end users and recruitment companies on all aspects of the recruitment process, payroll outsourcing and HR outsourcing. She advises on the liability and insurance aspects, as well as the regulatory issues faced by recruitment businesses. Frances is also experienced in advising on the employment status of contingent workers, TUPE and on the employment law aspects of outsourcing and other commercial deals.
She has advised the CBI and APSCo on the Agency Workers Directive, is regularly consulted by HM Treasury and HMRC in the UK on the tax regime relating to contingent workers and independent contractors, and delivers seminars both to clients and internally. Thomas is a partner in Osborne Clarke's employment practice in the firm's recruitment and resourcing team in Germany. He advises on employment aspects of mergers and acquisitions, consequences of transfer of business, as well as all aspects of laws governing works councils and collective bargaining law. He specializes in employment, regulatory, and social insurance law regarding contingent workers and independent contractors.
The German Osborne Clarke team advises foreign staffing firms which intend to supply/use contingent workers in the German market and on equal pay issues relating to contingent workers in Germany. Osborne Clarke regularly advises on large staffing projects and Managed service Provision contracts in Germany and in Europe. 29