International expansion Getting it right without costing the earth

Deepa Adhikari– Recruitment International Conference – Oct 2014

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About Osborne Clarke

"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

• International law firm with 15 offices across Europe and 3 in the US

• The leading legal advisers in Europe and beyond to the recruitment industry: Allegis, Manpower, Swift, Matchtech, Harvey Nash, CDI, Advantage, Empresaria

• In 2012-4 have advised staffing companies on RPO, MSP and staffing projects in 46 countries in Europe, Asia, Latin America and Africa:

• every major European country

• China, HK, India, Singapore, Brazil, South Korea, Russia, Iraq, Saudi and Qatar and

• places as diverse as Angola, Tanzania, Azerbaijan, Chad, Ecuador, Kenya, Ethiopia and Columbia

• 2013 SIA risk methodology for major UK and US hirers

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Agenda – international expansion

• Why get it right? What's at stake?

• 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

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Why get it right? What's at stake?

• Compliance and legal risk in UK are 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?

– Employment law – AWR equal pay class actions?

– Tax? MSC/offshore and onshore 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]

– [Some higher risk but generally in narrow areas like construction]

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Why get it right? What's at stake?

• Why is compliance and legal risk outside the UK a more serious issue?

– Regulatory and tax/criminal investigations?

• Bribery Act and FCPA: 3 SFA investigations; 2 UK staffing co directors prosecuted

• sanctions? Russia?

• licence and immig: closure in country; reputational risk; Japan, China, Singapore

• tax/soc sec e.g. Germany and Switzd: criminal convictions for UK directors

– Credit risk

• enforce payment terms? cashflow problems if ID not 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.

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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)

• (watch credit risk)

• (get a sanctions policy in place if relevant)

– …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?

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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 Management Information

• credibly manage supply chain, labor law and tax risk in every major country (SIA: 70% of major hirers with global program by 2018)

– [250 global hirer companies on the OC compliance webinar for SIA in 2013!]

– 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?

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But how do I get it right?

• So, ensuring "best practice" 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 (and the UK?!).

• "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".

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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] payroll partners etc.

• no capital value, and damage key client relationships?

• sleep at night?

• Option Three:

– risk based approach with standard global framework of methodologies

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Why use global framework as basis of solution?

Objective: each staffing co should have

– 2-4 types of standard + centrally designed + cross-border solution

– …which can be rolled out with minor local adjustments

• in 90% of countries

• for 90% of CW roles

• for 90% of hirers

– Take an "under the radar" risk on "outliers" OR only do "outliers" when the volumes justify a bespoke solution?

– = SAP approach?

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Where do I start?

• What will a standard, centrally designed, cross-border solution need to look like?

• The biggest barriers to cost effective international solutions which satisfy clients are

INCORRECT ASSUMPTIONS

BY

HIRERS AND SUPPLIERS

ABOUT

WHAT THE TRUE AND MATERIAL RISKS ARE GLOBALLY

• = Step 1 – dispel myths

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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.

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Common assumptions about global CW risk 2

Assumption Reality

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.

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 being offered 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

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Methodology: how to build your framework 1

1 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…

2 Prioritise those risks

• using a standard methodology,

• based on the extent of exposure country by country,

• and then…

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Methodology: how to build your framework 2

3 Risk response

• part 1: 2-4 high-level "standard" global solutions: 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 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

• part 4: train staff (and hirers) – not all the solutions will be quite like typical UK contract staffing

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Identifying the risks – standard risks

As mentioned before

•Regulatory and tax/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

– sanctions e.g.Russia

•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.

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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

(2) The type of industry in which your client operates

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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)

• tradition of class actions or not?

• tax debt transfer laws, so that payroll partner/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.

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Methodology: mapping solutions against risks

• Map out the

– priority risks for your clients' types of worker

– in key countries

on a table

• …and work out which 2-4 standard solutions cover

– as many workers

– in as many countries

– for as many clients as possible.

• For example (extract) …

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Dealing with the risks 1

Examples of standard types of risk worldwide (extract)

Standard types of solution (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 

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

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 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

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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

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Dealing with the risks 3

• 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

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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. Will the volumes/margins you are being paid cover compliance 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. 

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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.

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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 given the types of worker you supply and type of hirer you have

• 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

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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

Advice on global compliance and 2013 private equity investment

Advised on acquisition of nursing staffing businesses of Pinnacle plc for £2.75mShortlisted 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

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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

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OC team

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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.

Kevin BarrowPartner,T +44 20 7105 7030kevin.barrow@osborneclarke.com

Deepa is a Senior Associate in the Contingent Workforce team in Osborne Clarke's Recruitment sector.

Deepa is based in the London office and specialises in advising end users and recruitment companies (both online recruiters and 'bricks and mortar' recruiters) on all aspects of the recruitment process, payroll outsourcing and HR outsourcing. Typical issues that Deepa advises on include the regulatory issues faced by recruitment businesses and tax issues relating to temporary and contract staff. Deepa also works on international flexible workforce projects, advising clients how to frame their recruitment services across the world.

Deepa has been involved in consultations with the UK Government about legislation affecting the use of temporary staff and has spoken on this topic at various industry events. Deepa has written a number of articles on contingent workforce issues.

Deepa trained at Osborne Clarke and qualified as a solicitor in March 2011

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.

Deepa AdhikariAssociate,T +44 20 7105 7182Deepa.adhikari@osborneclarke.com

Thomas LeisterPartner, MunichT +44 49 89 5434 8064Thomas.leister@osborneclarke.com