Spotlight on Carve-Out M&A Deals: Finding a Home for Orphaned Employees

thoughtful female employee thinking about mergers and acquisition deal

In the world of global business expansion, cross-border carve-out mergers and acquisitions (M&A) deals are making waves and gaining popularity among companies seeking to broaden their horizons. These deals involve acquiring a business unit or asset located in a foreign country which unlocks new opportunities for growth and success. 

However, like any big move in business, carve-outs also come with unique challenges – particularly when it comes to managing the talent that comes along with the acquisition.

One major issue that arises from cross-border carve-out deals is the dilemma of having ‘orphaned employees.’ These are employees who come with the acquired asset but without a local business entity to actually employ them. This can present a significant problem for both the acquiring company and the employees themselves.

In this blog post, we’ll delve into the challenge of managing orphaned employees in cross-border carve-out deals and explore potential solutions for retaining top talent. In particular, we’ll examine the advantages of Employer of Record (EOR) hiring as a means of bridging the gap and engaging acquired workers. 

Orphaned employees: ignore at your own risk

When a cross-border carve-out deal is executed without bridging the gap for the orphaned employees, it can have serious consequences for both the acquiring company and the employees themselves.

From the perspective of the buying company, the lack of a local entity to employ these workers can lead to significant legal, financial and operational challenges. Without a proper infrastructure in place to handle employee-related matters such as payroll, benefits and taxes, the acquiring company can run into serious compliance issues with local labor laws. This can result in costly fines, legal battles and reputational damage that can be hard to recover from. 

Additionally, without a clear employment structure, there may be confusion around which company is responsible for the employees – which can lead to significant financial liabilities.

For the employees, being orphaned can create uncertainty and anxiety around their job security, benefits and career prospects. They are likely to feel profoundly disconnected from the buying company and may lack the support and resources they need to succeed in their new role. This can lead to demotivation, low productivity and, ultimately, a high rate of talent exodus. 

A high turnover rate can be especially damaging to the acquired asset as it can lead to a loss of institutional knowledge and experience – as well as reputational damage for the buying company.

Three options for hiring overseas talent

It is essential that companies engaging in cross-border M&A deals take steps to ensure employees are properly supported – and that all legal and financial requirements are met. This principle especially applies when a carve-out deal is on the table. 

Below are three options and key considerations for engaging and paying workers acquired as part of a cross-border carve-out:

Hiring Options Key Considerations
Option #1: Migrate them into your own local entity (if one exists) While absorbing workers into the organization’s already existing in-country entity may be the most straightforward option, the buying company may still have to deal with challenges in aligning benefits. 

If acquired workers are presented with an inferior package, it could cause problems with employee engagement and talent may even exit.

Option #2: Establish a local entity to directly employ them Organizations, and even their professional service providers, can underestimate the time it takes to be operational. While the entity registration process appears straightforward, post-filing steps are often unknown and fluctuate due to specific circumstances. 

Furthermore, bank accounts often lag behind the entity setup because of ‘know your client’ (KYC) and ‘anti-money laundering’ (AML) reviews. This can cause months of unexpected delays.

Many countries also require an annual audit even for small operations, meaning organizations must not just pay taxes but also dedicate time to reporting. In addition to this, they must allocate resources to handle functions in compliance, payroll administration, human resources (HR) management and more.

Option #3: Engage an EOR provider to employ them When selecting an EOR provider to support with a carve-out deal, be sure to ask them about their M&A experience. This includes transactions and relevant references. 

It’s also advisable to speak directly with the team that will be involved hands-on in managing the project so you can gauge their level of understanding, expertise and how the arrangement will operate.

How Employer of Record hiring can help

EOR hiring can help solve talent management issues for many companies as they approach a cross-border carve-out deal, especially when it comes to bridging the gap of orphaned employees.

An EOR is a third-party organization that acts as the official employer for a company’s employees in a foreign country. This means that the EOR is responsible for all employee-related matters including payroll, benefits, taxes and compliance.

By working with an EOR, the acquiring company can ensure its orphaned employees are properly taken care of and all legal, financial and HR requirements are met. The EOR can also provide additional support and resources to help these employees feel connected to the acquiring company and to succeed in their new role.

In addition to addressing the challenges of orphaned employees, EOR hiring can also offer many other benefits for companies engaged in cross-border carve-out deals. For example, an EOR can help expedite the onboarding process for new employees, reduce administrative burdens, streamline payroll, solve language barriers and minimize the risks of non-compliance with local laws and regulations.

In a world where global business expansion is becoming increasingly common, partnering with an EOR can provide companies with a competitive edge – allowing them to navigate the complexities of cross-border HR with ease and confidence.

Check out our guidebook “Managing and Engaging Talent through Mergers, Acquisitions and Divestitures” or contact us to learn more about managing talent throughout the M&A lifecycle.