To PEO or not to PEO in M&A Transactions

Posted by Andrew Heller, Jennifer Zheng June 21, 2020.

Professional Employer Organizations (PEOs) can be a valuable solution in Mergers, Acquisitions and Restructuring transactions.

Companies engaged in Mergers, Acquisitions, Divestitures or Restructuring (M&A) activities face highly complex strategic and operational challenges.  To effectively navigate these challenges, back and front office functions should choreograph critical decisions with limited time and data.  Such decisions are the cornerstone for the success of an M&A transaction, as they impact the overall risk profile for these corporate life events.  Professional Employer Organizations (PEOs) can help businesses reduce the risk and accelerate the timeline.

When deciding how to structure a transaction, decisions made by the leadership and corporate development teams likely have HR, Finance, IT, Legal and Tax implications.  For example, if acquiring a business that has operations in a country with a small employee footprint and no existing legal entity to absorb that business unit, what options exist?  Does your business have enough time, structure, and/or budget to quickly set up employment via legal entity or other structures (e.g., branches, representative offices)?  Does the business have the infrastructure to support hiring, processing payroll, providing benefits and supporting other HR activities in that jurisdiction?  What if your business is trying to establish operations in a country that is not granting new business licenses due to the current pandemic situation?

When faced with such questions, many companies – regardless of their size and footprint – consider engaging with Professional Employer Organizations (PEOs) for support.  Depending on the overall circumstances and business needs, PEOs can be a highly effective option to promote speed of execution and reduce complexity of the transaction.

So, what makes PEOs an asset in the M&A space, and what should leaders watch out for when deciding to PEO or not to PEO?

Related linksFollow us @DeloitteHC.Stay connectedWhat are PEOs?

PEOs are specialized companies that provide various HR services to their clients, including payroll, benefits (through pre-negotiated benefits plans with insurance companies), workers’ compensation, and HR compliance. In addition, PEOs have established legal entities, company IDs, and payroll registrations in various jurisdictions around the globe, removing common Tax and Legal barriers to help companies complete M&A transactions on an accelerated timeline.  In order to do so, clients must enter into a specific co-employment agreement with the PEO, resulting in the PEO being the employer-of-record in the applicable country.

What are Typical PEO Services?

PEO levels of service and offerings have increased to match market demands of more robust and technological advanced solutions.  Note that services below are now always included in the ‘out-of-the-box’ or standard contract; some PEOs may charge an additional fee to support specific HR processes such as Recruiting, Selection and Enhanced Talent Management (e.g., Job Postings, Compensation and Job Benchmark Analysis, Applicant Tracking Solutions).

When to Consider Engaging with PEOs4 in M&A?

PEOs should be considered by businesses engaging in domestic or international M&A to support reducing the overall transaction risk profile, including:

Support the speedy stand-up of operations, most notably when the corporate infrastructure previously supporting the transferring employees is not included with the transaction (e.g., Private Equity buyer during carve-out / stand-up transaction)Remove the need and/or reduce the duration for Transition Service Agreements (TSAs) beyond the transaction close date. Efficiently support countries with a small employee footprint (US or non-US), most common when:Buyer desires to maintain a limited in-country employee headcount in the short term and/or longer term vs. exiting in-country operationsBuyer’s long-term business strategy for small headcount countries is not yet confirmed, and time is needed to define strategyBuyer strategy is to slowly enter into a new geographic market as a result of the transaction, but not part of the transactionBy leveraging a PEO for the reasons above, leaders can focus their time and resources on strategic priorities tied to the success of the transaction, like business development, cultural integration and talent retention.

What are Key Items to Know when Engaging with a PEO?

Co-EmploymentPEOs require the business to enter a ‘co-employment’ relationship.  Under the terms of this agreement, the client’s employees are co-employed by the PEO, and the PEO assumes certain responsibilities for the client’s employer rights and risks, such as issuing payroll tax forms under its Employer Identification Number and collecting, depositing and reporting employment taxes with local jurisdiction, state or federal authorities. The day-to-day management responsibilities are still retained by the client organization, including management of day to day business operations, budget setting, employee performance management, and more.  Note, some PEOs will not support Independent Contractors (ICs), resulting in employer arrangements required for ICs outside of the PEO relationship.

Government Recognition and RegulationIn the US, PEOs need to be certified and recognized by the federal government in certain countries and should be accredited by Employer Services Assurance Corporation (ESAC) to demonstrate that they follow industry best practices and are financially reliable.  Additionally, there is a voluntary certification program with the IRS, but depending on the state of operations, PEOs are required to apply for a secondary registration with the Department of Labor Standards (DLS). 

Outside of the US, international PEOs legally fall under general employment or contractor law. To ensure compliance, international PEOs create channels of communication with the relevant country employment authorities in which they operate. When assessing the feasibility of a non-US PEO, it is important to understand jurisdiction-specific nuances that could impact go-forward plans (e.g., European industry specific Works Councils, and implications when attempting to mirror employee benefits).

Integration with other Platforms and VendorsWhile we’ve seen PEOs expand their services and solutions and increased ability to securely connect to other platforms and vendors via custom APIs, some PEOs do not have integrations with other HR vendors and applications (e.g., time and attendance to HRIS; domestic PEO HRIS system to an international PEO HRIS system). A manual approach for some data transfers could cause delays, dual data maintenance and/or data integrity challenges.

Employee Benefit PlansBy leveraging economies of scale, most U.S. PEOs can offer small businesses access to big-business employee benefits, including a wide range of health and welfare, retirement plans and other benefits.  Through its PEO, a small company can get group benefit insurance with a smaller headcount and at a lower price than they would achieve on their own.

Outside of the US, PEOs have connections with brokers around the globe that can match specific group or individual benefit plans at a lower cost, ranging from flexible spending medical in Singapore to Sodexo lunch cards in Czech Republic. As noted in France example above, mirroring benefits may be a challenge in certain jurisdictions.

Cost for ServicesFee structures can vary based on PEO and the scope of services, from a standard Per Employee Per Month (PEPM) fee to a percentage of total compensation. Frequently, the cost of operating a PEO model might be a percentage of the gross-up wages of all employees in the country, and add-on modules may be an additional PEPM cost.  Clients may elect to pay for additional, non-standard PEO services or find alternatives to supplement service gaps with other third-party vendors and/or internal resources, particularly for strategic HR insights, change and communications support, performance management and customized benefits solutions. 

How Can Deloitte Help?

Deloitte can advise organizations consider legal entity, employment and tax strategies, including PEO solutions for applicable markets. We have in-depth knowledge for how to strategize, identify, implement and exit a PEO model, and cross-functional insights re: HR, Finance, IT and Tax implications. See the approach below, which highlights key activities throughout the complex process. 

Andrew Heller is a Managing Director in Deloitte Consulting LLP and has over 17 years of industry and consulting experience focused on leading HR workstreams across the M&A or Restructuring lifecycle during due-diligence, Day 1 readiness, post-merger integration and transformation planning / execution.Jennifer Zheng is a Senior Consultant in Deloitte Consulting LLP’s Human Capital M&A and Restructuring practice, supporting clients from Due Diligence through Post-Merger integration in M&A transactions and divestitures.1Each PEO will offer different services so this is not an exhaustive list. However, most PEOs will still require you to manage some processes in-house including executive compensation, compensation plan administration, Board of Directors and Executive compensation committee; sourcing and selecting candidates; succession planning; disciplinary and termination decisions2Source: Deloitte Consulting LLP, 20203US only 4The information and considerations listed below are not legal advice. Please note that the appropriate legal, regulatory and tax advice should be considered before deciding on legal entity set-up.
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Author: hrtimesblog
Date/time: 22nd July 2020, 06:03

About Christian

Talent Scout, Human Resource Management, Talent Management , Learning & Development, Organisational Development, Change Management, Psychology, Neuropsychology.

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