UK and International MSP - key legal and commercial issuesFrances Lewis – 27 June 2012

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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

Duty to accept offered

assignments/ contracts

Subject to orders regarding location,

time, subject

Formal criteria : • deduction of wage tax,

social security, personal files• continued payment when

sick, during holidays • registered business /

Company

Integra-tion into business

Repor-ting duty

Integra-tion into

shift plan

Entrepreneurial presence at the

market

Common treatment of contractors and employees

with similar duties criteria

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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

Agency

Staffing Company

Agency Worker

Customer Company

Leasing Contract

Employment Contract

performs employer‘s rights to give directions

works for/at customer

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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

Frances LewisConsultantEPI - RecruitmentT +44 (0) 20 7105 7032frances.lewis@osborneclarke.com

Kerry Viner SolicitorEPI - RecruitmentT +44 (0) 20 7105 7274kerry.viner@osborneclarke.com

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Kevin BarrowPartnerEPI - RecruitmentT +44 (0) 20 7105 7030M +44 (0) 7711 604971kevin.barrow@osborneclarke.com

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Recruitment team

Andrew SaulPartnerCorporate T +44 (0) 20 71057372andrew.saul@osborneclarke.com

Richard Brown PartnerAdvisory T +44 (0) 20 71057544richard.brown@osborneclarke.com

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Deepa ParekhSolicitorEPI -RecruitmentT +44 (0) 20 7105 7182deepa.parekh@osborneclarke.com

Summary

Global staffing programmes are often hard to get right

But expertise and best practice is developing