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
osborneclarke.com
2
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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
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?
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Credit risk? PWP?
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Employment law – AWR equal pay class actions?
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Tax? MSC/offshore intermediaries/umbrella risk?
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Database theft?
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Unfair degree of risk pushed on supplier by hirers?
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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?
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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.
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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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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?
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…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
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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:
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take a risk, or rely on local [uncheckable/unregulated] partners
• no capital value, and damage key client relationships?
• sleep at night?
• Option Three:
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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)
osborneclarke.com
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
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
Reality
Some suppliers can offer worldwide, painfree 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 In some countries there are reliable local specialist payroll providers but
employee leasing companies to pay
in many there are providers who say they will administer tax and social
contingent workers.
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
osborneclarke.com
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…
osborneclarke.com
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
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)
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?
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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?
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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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HMRC assessment under MSC
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German assessment for false self-employment
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US litigation against hirers
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?
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Dutch chain law liability
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
Local issues which may worsen the risk – which will affect the
priority with which risk need to be treated

Criminal penalties for hirer?
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Tradition of class actions?
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Activist unions?
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Class action practical risk – many similar workers?
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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
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Christian Union claims in Germany
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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?
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
Co-employment risk for hirer with
statutory labor law liabilities to CW e.g.
termination payments
Standard types of solution (extract)
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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 noncompliant
Work out hirer liability under local law and back by appropriate indemnities
from suppliers with insurance/balance sheet strength
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
osborneclarke.com
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
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 coemployment.
•
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"
Advised on the disposal of the
Advertising and E-Solutions business
of Tribal Resourcing Limited to TMP
Worldwide
Acting for former shareholders of
Wynnwith Group Ltd on joint venture
& acquisition from Administrators of
business of Wynnwith
Advised on the acquisition of IT
recruitment company, Atlan
Advised on the €14.6m acquisition of
German recruitment company,
Headway
Winner of Recruitment International's "Most
Transformational Deal of the Year 2010"
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
kevin.barrow@osborneclarke.com
Frances Lewis
Consultant,
T +44 20 7105 7032
frances.lewis@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.
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.
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.
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.
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.
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.
Thomas Leister
Partner, Munich
T +44 49 89 5434 8064
Thomas.leister@osborneclarke.co
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