Case Study: Converting Full Time Employees to Contractors during Mergers and Acquisitions

Summary

This paper reviews how three US based companies converted groups of full time employees in five countries to contractors during an acquisition.  Topics include risk mitigation, global compliance considerations and questions to ask when navigating this complex transaction.

Background

Three clients: A major consumer products company, an international investment finance company, and an energy generation company, made acquisitions in South America (Colombia and Brazil) and Asia (Thailand, Malaysia, Singapore).  During the acquisition process, they identified several key employees who were crucial to the operation that needed to be retained.  However, the companies were not purchasing the legal entities and were not established in country, nor did they have the expertise to manage the employment of those workers.  The companies turned to CXC Global, a Contractor Management Organization (CMO) for help.

Objectives

The objectives for the companies was to compliantly engage and retain these key workers so the acquisition would grow and prosper.   The companies had several options including the establishment of a new entity in country, conversion of the workers to contractors, or outsourced employment of the workers to a third party.  Regardless of the method chosen, all three clients required:

  • Cost transparency to manage a program
  • Understanding of statutory tax requirements
  • Knowledge of paid time off and termination notice requirements
  • Ability to pay contractors in their local currency
  • Benefit and retirement plans in excess of local statutory obligations
  • Seamless transition of the workers to prevent disruption of work

Client Challenges

The challenges facing these companies were that:

  • They did not have a physical entity in the country to manage the contractors’ payroll and compliance
  • They did not know local employment standards or payroll requirements
  • They could not match the benefits provided to the workers by their former organizations
  • They did not have a processes in their US operations for purchasing and wiring foreign currency

Questions

Each client had common concerns and questions that needed to be addressed.  Some examples included:

  • How do I make sure that we don’t violate the local government’s laws when hiring these workers?
  • What does the government require me to provide to these workers in terms of statutory benefits like social security or health benefits?
  • How much notice do I have to give employees before changing their employment terms?
  • Do I owe these employees vacation payments, 13th salary payments, separation pay, or pension payments?
  • What are the local customs for employee – employer relationship we should be aware of?

The Solution – Global Reach, Local Support

CXC’s approach was to design a contract between CXC Global USA and each of the three clients that established CXC Global as the managing entity, supported by the local CXC Global office in country which managed onboarding, compliance and payroll.  This provided local US based support for contracting and administration support, with local in country support for employment and compliance matters.

CXC Global USA took responsibility for working with the local CXC offices, advising on the statutory requirements and benefits due the workers, paid time off requirements, and termination notices and was able to report back to the three companies how they could compliantly onboard the contractors, manage payroll, provide full indemnity to the clients in-country against risk and most importantly ensure compliance.

In the client’s request for capabilities of paying the contractors in local currency, CXC Global undertook currency management.  This allowed the contractors to be paid in local in-country currency and CXC Global USA to invoice the three US based clients in USD, providing a seamless solution for accounts payable and full compliance within their own purchase order systems.

Contractor Benefit

The contractors had a local in-country CXC resource dedicated to them, to help with onboarding and any questions during the transition from full time to contractor.  They were offered the existing benefit plans CXC Global had in-country for CXC’s existing workforce population.  CXC Global directed the contractors to local insurance brokers; government and privatized, for benefits CXC Global could not procure on behalf of the contractors, allowing them to individually purchase what was needed.  The approach had the added advantage of enabling the contractor to have these costs reimbursed as an approved expense, rather than as an additional expense to the employer.

Each contractor retained the same wage level and was paid on the same schedule in accordance with local laws.  As CXC Global contractors, the contractors were also granted access to CXC Global Resources, which provides tax return assistance, CXC Financial planning services, CXC Travel support and other benefits offered to CXC contractors in local countries and regions.

Implementation

CXC Global USA provided each client with a dedicated Account Manager as their primary local point of contact.  The Account Manager worked with the local CXC Global offices in each country to answer any questions regarding employment laws, payroll schedules, onboarding and termination.  A consolidated invoice for all contractors enabled a single invoice to be delivered to each client in USD, simplifying the payment process.   CXC USA then managed payroll and statutory costs with the local CXC offices around the world.  Additionally currency risk was managed by CXC by using a 90 day average rate, allowing Controllers and Financial Managers to plan costs by quarter.

The Result

  • 100% retention rate of contractors across all three companies.
  • Expanded local support and offerings for contractors.
  • Enhanced currency management and conversion.
  • Created reporting of spend by contractor type, spend by country, spend by currency.
  • Approval by client leadership to expand the M&A program with CXC Global supporting contractors globally.

Mergers and Acquisitions are inherently complex transactions.  There are many moving parts.  Add in global considerations and the complexity skyrockets.  Global employment considerations are especially difficult, as the transaction affects a worker’s employment.  Fear, uncertainty and doubt at the local level can derail a transaction as workers worry about their livelihoods.  CXC’s experience combined with its locally owned and operated support team has proven to be invaluable in cases like this.

To learn more, click here to visit our website or contact our leadership team or in the US call (800) 588 0292.

Follows us on twitter and linked-in.

Leave your details below and one of our global specialists will contact you directly.

[contact-form to=”john.smith@cxcglobal.com” subject=”Web Inquiry”][contact-field label=”Name” type=”name” required=”1″][contact-field label=”Email” type=”email” required=”1″][contact-field label=”Message” type=”textarea”][/contact-form]

Share
Tweet
Share