SI Review: June 2012

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Setting Up Shop, Globally

How to set up international MSP services and be compliant

By Kevin Barrow

International hiring by many U.S.-based companies is growing. Many hirers are mimicking internationally their hiring practices in the U.S. and are, among other things, engaging an increasing proportion of overseas workers on a contingent basis.

In response to this trend, recruitment and staffing services are becoming increasingly global. Major hiring organizations based in the U.S. are looking for suppliers that can service them not just in Miami and Las Vegas but Munich and Liverpool. In addition to needing to be compliant with local labor laws and regulations at each location, these hiring companies need to have greater insight into their global operations. The fact is that many global companies have no idea how many contingent workers and independent contractors they are engaging country by country, let alone how much they are being paid and whether tax and labor law risks are being covered.

This is no doubt why 35 percent of U.S. hirers with international operations told Staffing Industry Analysts that they plan to implement global contingent worker programs this year. As a result, many staffing and managed service provider companies not currently established outside the U.S. are showing interest in buying overseas staffing businesses and MSP/recruitment process outsourcing (RPO) businesses.

But this is not a simple task. Even if U.S. staffing and MSP providers do identify a good quality target, it may take time to integrate, and build standard service levels suitable for key U.S. clients. So how can these companies best satisfy their clients’ wishes relating to a compliant international MSP program? How can they quickly set up something profitable without undue complications?

In our experience, there are five key considerations.

1. Big bang, or one at a time?

Usually, best practice involves going live first in the country that has the best combination of:

(a) contingent worker-friendly culture with good availability of local expertise,
(b) benevolent legal environment, and
(c) decent contingent worker numbers.

There is little point building a program structure to suit a country with diverse regulations, low numbers of contingent workers and little available local know-how.

During contract negotiations, nail down general commercial and contract terms relating to your “first base” countries. While many of these general terms and conditions will be applicable to all countries, you’ll then want the contract structure to allow for local country agreements to set out specific local terms agreed on country-specific issues country by country. The general terms will stipulate what can and cannot be agreed by local representatives by way of variation of the general terms, and your general framework agreement should contain a template Local Country Agreement.

Many hirers and MSPs find that based on this, it is usually sensible to start European programs in the U.K., the Netherlands and Germany. The further south you go in Europe the harder it tends to get. France often presents challenges. It may also be wise to have different staging dates for different categories of staff: there may be local regulatory or tax or labor law issues making it easier for you to supply skilled workers in the U.K. or Germany than unskilled workers, for example.

If your return as an MSP provider is reliant on good volumes in France, Spain or Italy, you will need to ensure that your commercial terms reflect the fact that it may take you longer to achieve successful go-live there than it would in the U.K. or the Netherlands.

2. Local regulation

The world can seem a complicated place when it comes to working out what local regulatory requirements apply to global staffing and MSP programs. And in many countries the supply of contingent workers is subject to detailed regulation with serious penalties.

Of course it is essential to work out what the local regulatory requirements are, not least in order to avoid criminal offenses and reassure clients that you are compliant. However, I believe it’s possible to get too hung up generally about local regulatory issues.

Obviously there are countries with tricky regimes that you will need to cope with, such as:

(a) Many countries have licensing regimes (e.g., Germany’s AUG license, or France’s temporary agency registration and substantial license fee, or Hong Kong’s licensing regime for perm recruitment, or the quasi monopoly in certain Middle Eastern jurisdictions).
(b) Rules in Southern European countries and Japan, etc. about the types of work contingent workers can perform and/or how long they can be on site and/or the contents of their contract terms.
(c) Belgium and parts of Latin America have confusing requirements relating to employee leasing.
(d) European data protection and privacy laws that stipulate how staffing companies can deal with candidate data and do background checks.

The key when implementing a global program is to make sure you know where you need to have a local presence and where the program can be run remotely, work out the time and cost of getting into good regulatory shape and reflecting those costs and timelines in your commercial terms so you are not required to go live before you are ready and so that a contribution to associated regulatory costs is recovered through your commercial terms in that country.

3. Local labor law

Compliance with local labor laws often sounds scarier than it is. Of course, some countries have substantial statutory protections for employees, but often these protections do not apply to contingent workers, and many countries with the greatest employee protection measures (such as Spain and Italy) are generally reviewing them as part of the conditions for their financial bailouts by the IMF.

Also, many countries have provisions entitling contingent workers to be paid the same as comparable traditional employees and minimum holiday pay and pension contributions (as in Europe with the Agency Workers Directive and the Working Time Directive). You will certainly need to factor these costs and related administrative burden when setting up your European MSP and staffing arrangements, with a possibility of class actions where mistakes are made.

However, there is no great precedent in Europe of class actions by workers. Few countries outside the U.S. have this practice so in the event of a mistake on your part, the compensatory awards will usually be minimal.

4. Tax really matters

Tax is the arena where international staffing and MSP companies often run into problems. Many countries in Europe have chain law rules that mean the MSP will be held liable for failures by contingent workers and independent contractors to pay the correct tax and social security contributions. These rules can be complex, with some countries like Switzerland having different rules in different regions. Withholding taxes requires early attention as well.

Be sure to seek out local advice and if you use local payroll management companies or professional employer organizations (often called “umbrella companies” in Europe), be sure to monitor them carefully — many are not as compliant as they claim, and (to be fair) in many countries the tax requirements are not clear. As a result, it is not always possible to be confident about what “compliant” means. Generally, the regimes in the Netherlands and the U.K. are considered the easiest to understand, but even there tax claims for many million dollars have been noticed.

5. Commercial terms & contract models

Buyers face serious risk if they fail to get a grip of contingent workforce issues. They don’t yet feel they have many suppliers to choose from when setting up global deals. This is because global deals cost money to get right. Most times, programs will not achieve full compliance unless the buyer is prepared to acknowledge this.

Therefore, be sure the client pays you a reasonable amount to sort out the problem, or agrees that you initially operate on an agency basis (i.e. not as a contractual intermediary from which most serious legal and tax risks arise for the MSP providers). We’ve also found that most major staffing and MSP providers have ceased to offer to solve international compliance and risk for free. Perhaps one way of sweetening the cost pill is to agree to take on the role of MSP in return for the (easier) appointment as RPO provider.

Kevin Barrow is a partner at international law firm Osborne Clarke. He can be reached at kevin.barrow@osborneclarke.com.

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