International expansion Getting it right without costing the earth

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International expansion Getting it right without
costing the earth

• Kevin Barrow Recruitment International
  Conference Nov 2013

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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 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

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(No Transcript)
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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

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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

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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 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

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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)
• (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?

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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 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!

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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".

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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/unregul
  ated partners
• 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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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)

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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

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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 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
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Methodology how to build your framework 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
• 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 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

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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

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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
• 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

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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)
• 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.

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Identifying the risks refining down what
really matters to you and your clients
Examples of standard types of risk worldwide (extract) Local issues which may worsen the risk which will affect the priority with which risk need to be treated
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   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?  

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Identifying the risks refining down what
really matters to you and your clients

Examples of standard types of risk worldwide (extract) Local issues which may worsen the risk which will affect the priority with which risk need to be treated
Co-employment risk for hirer with statutory labor law liabilities to contingent worker e.g. termination payments Criminal penalties for hirer? Tradition of class actions? Activist unions? Class action practical risk many similar workers? Burden of proof on hirer?
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 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?
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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 Dont 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

• 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

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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 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. 

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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.
• 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
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
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"
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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
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
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
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OC team
Kevin BarrowPartner, T 44 20 7105
7030 kevin.barrow_at_osborneclarke.com
Frances LewisConsultant, T 44 20 7105
7032 frances.lewis_at_osborneclarke.com
Thomas Leister Partner, Munich T 44 49 89 5434
8064 Thomas.leister_at_osborneclarke.com
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.