UK and International MSP - key legal
and commercial issues
Frances Lewis – 27 June 2012
osborneclarke.com
Agenda
• Introduction
• MSP contracting models: UK and beyond
• Adapting contracts for international MSP
• Key compliance issues for international MSP
• Final word
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Introduction
• 35% global US companies want global contingent workforce programmes by
2014
• Global staffing projects increasingly driven by hirer demand
• US hirers and staffing companies worried about European legislation
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Introduction
• General overview of the common themes – not country-specific
• Each country has its own regime – there is NO one size fits all
– Different laws
– Different enforcement regimes
– Different levels of risk
– Different attitudes to the use of temporary workers = tolerance
• There are ways to reduce risk to acceptable level BUT this usually requires
investment and careful management
• "Compliant" UK and overseas operations will add value to your business
• Workplace tax is becoming a high profile issue = valuation issue
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Key issues – where do you start?
What type(s) of recruitment business do you want to do?
• Contract or permanent/both?
• If contract, what type of workers and at what level?
• What is your preferred supply model – a question of chicken and egg?
• Is your preferred model potentially prohibited?
– e.g. Belgium - prohibition on putting your "employees" at the
disposal of a third party. Disguised employee risk?
– is a licence or registration required?
• Don't assume that overseas advisors will be familiar with UK staffing
models
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MSP contracting models
• UK MSP arrangements usually involve:
– MSP acting as contractual (and payment) intermediary
– …in relation to the supply by second tier staffing companies of all
contingent workers
• B2B independent contractors/freelancers/SOW contractors
• leased employees/agency workers/"temps"
• BUT in many countries this "MSP acting as principal" option is not:
– lawful - e.g. German Federal Employment Agency considers that AUG
leases may not operate in a chain
– available – many staffing companies would not accept the prime contractor
role for fear of inheriting tax and employment law risk
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MSP contracting models
• "Principal" contract structures have been agreed in mainland European
countries over the years:
– usually involve a salesman at MSP offering more than can be delivered
because he/she is desperate to win the hirer's account in US/UK
– = implementation problems - end up with MSP pulling out/asking for the
deal to change
– some MSPs have just taken a risk and e.g. rely on unreliable/non-
compliant local partners to pay contingent workers = lack of compliance
– ("Principal" model may, with some adjustments, be ok if you just use
genuine independent contractors)
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MSP contracting models
• "Agency" model of MSP
– MSP manages local staffing companies on behalf of hirer and (perhaps) fills
some vacancies itself
– Local staffing companies in fact have contracts direct with hirer, but the
MSP "runs" those contracts and manages invoicing (consolidated invoicing
etc.) E.g. AUG supplies in Germany
• "Margin only" model of MSP
– MSP appoints local recruitment companies to source contingent workers
– Local recruitment company is paid margin only and MSP actually engages
and supplies the workers to the hirer
• Each country has its own variations of the agency and margin only models often involving payment intermediaries
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MSP contracting models
• Benefits of "agency" MSP model:
– Local compliance with licensing requirements
– Reputable staffing companies happy to supply
– (If MSP becomes insolvent e.g. Chimes the hirer's money is safe – reduces
supply chain risk + MSPs often prefer because their credit risk reduces and
profit ratio increases)
– (If hirer falls out with MSP no need for novation of contracts with all second
tier)
• Downside of "agency" MSP model
– (No "one butt to kick")
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MSP contracting models
• Benefits of "margin only" MSP model:
– Local compliance with licensing requirements
– Reputable staffing companies happy to supply
– Removes credit risk for second tier who should be happy to supply
– (Hirer has "one butt to kick")
• Downside of "margin only" MSP model:
– (If MSP becomes insolvent e.g. Chimes the hirer's money is not safe)
– (If hirer falls out with MSP = major novation exercise)
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Adapting contracts for international MSP
• Global master services agreement with:
– All-pervasive terms and conditions which will apply wherever the service is
provided e.g. general pricing, general services, term/termination, IPR,
confidentiality, some boilerplate
– Template for local country agreements setting out what can be agreed
locally country by country
– Timetable for roll out country by country (be careful about big-bang!)
• …supplemented by local country agreements governed by global agreement
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Adapting contracts for international MSP
• Local country agreements governed by global agreement deal with:
– Local basis of "agency", "principal" or "margin only" appointment of MSP's
local entity with appropriate amendment of relevant service descriptions
– Local compliance obligations of MSP in terms of checking specific supply
chain risk backed by indemnities for liabilities which their checks should
have prevented
– Local risk apportionment depending on local:
• laws
• enforcement regimes
• sizes of penalties/risks of class actions
• recruitment cultures and different attitudes to contingent workforces
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Key international compliance issues
• In country advice and from who?
– Local lawyers; Accountants - do they understand staffing and the
types of supply you intend to make?
– Management/payroll companies – independent or sales pitch?
– Local tax, social security and labour law authorities?
• NB the advice should deal with all relevant risk issues
• Don't get too hung up on labour law issues – tax and social security
usually pose a bigger risk
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Key international compliance issues overview
• Labour law issues*
• Wage withholding issues* – income tax and social security
• Any licences or registrations required*?
• Local regulations*? E.g equivalent to UK Employment Agencies
Act/Conduct Regs; AWD
• IPR and data privacy laws?
• Transfer pricing – e.g Swiss and German tax authorities have strict
rules about this
• Insurance – discuss with your broker
• Foreign exchange controls? E.g. Nigeria, China
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Key international compliance issues labour law
• Deemed employment risk?
– in many jurisdictions the courts will look at the reality of the
relationship between end user and contractor
– therefore contracts provide some useful protection but not all
– try to ensure that contracts are consistent throughout supply chain,
• if the supply at the contractor end is a B2B supply ensure that it is
reflected in the contract with end user client and in practice
– many different employment tests but most focus on:
• degree of end user authority over the contractor/temp
• degree of integration into end user client business
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e.g GERMANY - Criteria for personal dependence
vs. own responsibility
Subject to orders
regarding location,
time, subject
Common treatment of
contractors and employees
with similar duties
Integration into
business
Reporting duty
Duty to accept
offered
assignments/
contracts
Entrepreneurial
presence at the
market
criteria
Integration into
shift
plan
Formal criteria :
• deduction of wage tax,
social security, personal files
• continued payment when
sick, during holidays
• registered business /
Company
15
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Labour law issues continued..
• Who will be liable if supply = disguised employees?
– recruiter or end user client or both?
• How is claim likely to come about?
– individual claimant or authority investigation?
– How active is enforcement regime?
• What are the employer obligations in that country?
• Can you structure the supply to reduce deemed employment risk?
– depend on type and level of work
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Key international compliance issues - wage
withholding
Who will pay the contractor/temp?
• If agency worker supply you will probably be the wage withholder
• Management/payroll company? – wage withholder
• If B2B contractor
– individual freelancer or limited company (or equivalent)?
– tax and social security rules for each - where will tax/ss be payable?
– who will advise the contractors?
– authorities and courts will usually assess on a case by case basis
– there may be no IR35 equivalent!
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Key international compliance issues - wage
withholding
• Regional tax and social security authorities:
– are the rules the same from region to region?
– e.g. Switzerland – tax enforcement varies between regions. Which
will you do business in?
• What are the risks of contractor/re-classification?
– does agency face tax/social security liability or shared liability?
– chain law consequences, e.g. the Netherlands?
– what is the end user client's attitude to tax/ss risk? – often assume
that you are employing the contractors/temps
– disguised employment risk will also increase tax/ss risk
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Key international compliance issues management companies
• Advisable to rely on local management/companies?
– can offer a quick and cost effective way of starting operations in a
new country
• HOWEVER
– thorough independent due diligence required if they are to be relied
on for compliance purposes
– understand how they comply with local labour, wage withholding,
licensing and regulatory law requirements – does it reflect or
undermine your supply model?
– early global RPOs relied too heavily on local payroll providers – how
financially/compliant stable are they?
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Key international compliance issues - licence
requirements?
• National or regional requirements?
• Contract or perm?
– e.g. Belgium, Hong Kong – need licence for perm but not contract
• "Established" in country? – how does this affect licensing
requirements?
• If contract – B2B or agency worker or "grey"?
• Just in case? e.g. AUG
• What are the consequences of not having appropriate licence?
– usually fines, orders to cease business and prohibition on future
recruitment business
– Germany – prohibition and/or fine if operate without a AUG licence
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Key international compliance issues licence requirements?
• Cost and formalities involved?
• Does a management/payroll company require a licence or
registration?
– Singapore – management companies probably need a licence
– Germany – should not rely on management company's AUG licence
– margin-only solution?
• Key due diligence issue for potential investors and buyers
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AUG licence contractual nexus
Employment
Contract
Agency
Worker
Agency
Staffing Company
works for/at
customer
Leasing
Contract
Customer
Company
performs employer‘s
rights to give directions
22
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Final word
• Overseas compliance can be complex and expensive
• Things change. Keep MSP contracts flexible with:
– Anticipation of law and tax changes
– Mechanisms for agreeing changes
• Your competitors may not have invested in compliance but question
whether you want to look attractive to an investor/buyer and users
• Seek joined-up, industry-informed, independent advice
• Don't underestimate tax issues and beware of "simple" solutions.
• But don't feel everyone else has got them completely taped – they
haven't!
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Recruitment team
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Kevin Barrow
Partner
EPI - Recruitment
Frances Lewis
Consultant
EPI - Recruitment
Kerry Viner
Solicitor
EPI - Recruitment
T +44 (0) 20 7105 7030
M +44 (0) 7711 604971
kevin.barrow@osborneclarke.com
T +44 (0) 20 7105 7032
frances.lewis@osborneclarke.com
T +44 (0) 20 7105 7274
kerry.viner@osborneclarke.com
osborneclarke.com
Recruitment team
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Height = 5.39cm
Width = 5.81cm
[insert photo here]
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[insert photo here]
Height = 5.39cm
Width = 5.81cm
Deepa Parekh
Solicitor
EPI -Recruitment
Andrew Saul
Partner
Corporate
Richard Brown
Partner
Advisory
T +44 (0) 20 7105 7182
deepa.parekh@osborneclarke.com
T +44 (0) 20 71057372
andrew.saul@osborneclarke.com
T +44 (0) 20 71057544
richard.brown@osborneclarke.com
Summary
Global staffing
programmes are often
hard to get right
But expertise and best
practice is developing