Nicole Sahin

Don’t Screw Up Your Exit: Choosing the Wrong Employer of Record Could Have Unexpected Consequences

by Nicole Sahin
July 2020
Reading Time: 6 minutes

When you’re choosing a global Employer of Record, you’re outsourcing your global HR, legal, and finance infrastructure. If your employment contracts are a mess, your Employer of Record hasn’t managed data properly, or the intellectual property protection clauses with the employees don’t assign ownership of their work back to you, the impact of choosing the wrong Employer of Record could be disastrous when it matters most – at your exit.

International Employment Contracts – Protecting your Greatest Asset or Creating Unexpected Liabilities?

As the global Employer of Record (EOR) industry becomes known, some companies might consider outsourcing the hiring of their team members around the globe through third parties. This enables companies to hire talent around the globe via already established local businesses. You identify the talent, and they put your talent on their locally compliant payroll.  Seems simple, right? It is, and yet, all the work that goes into having made it simple behind the scenes is where quality really matters.

The point of choosing a global EOR is to outsource your global HR, legal and tax infrastructure. Making sure you choose a global partner that is built with compliance in mind is critical not only to your growth, but when it matters the most – at your exit. Choosing the wrong EOR could mean that your company is littered with legal minefields and liabilities that you never contemplated.

 

Employer of Record Models

There are two global Employer of Record models. One is a fully-built, in-house model whereby a highly qualified legal, HR and tax team build global infrastructure to meet world-class standards. This model takes on the liability for ensuring things are handled properly and legally in each country, as well as to meet the world-class standards that any high-growth and professionally-backed company needs when it matters – upon exit. Besides having the legal and tax team to prove they’ve built a solid infrastructure you can trust, they should also have the backing of significant investors – people you can trust have vetted something as important as quality of an outsourced international legal infrastructure.

There’s also the consolidator model. This is the model where an umbrella company selects third-party mom and pop shops in each country on behalf of its clients, and acts as an intermediary between the client and the local in-country partner.   This is known as the aggregator or consolidator Employer of Record model. It means the aggregator company serves as an umbrella organization, and sub-contracts out employment of the client’s team members to providers in various countries, which are typically mom & pop shops who have the local presence the aggregator Employer of Record didn’t take the time to set up themselves.

 

Unexpected Consequences of the Aggregator Model

There are many challenges with using an aggregator EOR to hire your international team, but one of the biggest issues comes to light at one of the most critical times for your company: when it’s time to exit.

Guess what? Your contracts with your international team, which generate a significant amount of the revenue and IP that contributed to your success, are either viewed as a huge asset or a major liability that detracts from the exit valuation and impacts your ability to close the deal. And it all hinges on how well the employment contracts were constructed.

If you use an aggregator Employer of Record, employment contracts go through at least three parties before it gets to your company. It starts with your personnel, then moves to the third party, then to the consolidator company, then to your company. However, any ineffective transfer of ownership or other legal breakdowns in these contracts put that valued asset – your IP – at risk.

In addition, if there was an issue where you had to enforce IP ownership, how will you do so?  In your contract with the aggregator EOR, they might put the burden on you to hold the in-country third party responsible. The aggregator might also be headquartered in a foreign country, or have no real assets, which makes it hard to hold the aggregator EOR accountable even if contractually it seemed they were. Seeking to work through the enforceability and actually enforce those contracts and subcontracts at the time of an exit could delay or even derail your deal.

You need to make sure you’ve chosen a partner that had the fortitude, team, and awareness to set things up correctly from the outset – a team you can trust. Setting things up correctly means not only following local laws in-country, but also following international money-laundering regulations, data compliance standards, and world-class legal and HR best practices in your headquarters’ country. While the mom and pop shops in each country may have positive intentions, they were not built to meet world-class legal, tax, and HR requirements, and they weren’t designed for cross-border transactions. That is the aggregator model’s downfall.

 

What Can You Do?

To start, you can choose a global Employer of Record that has been built from the ground up, and has the team and infrastructure to prove they’ve done it the right way. Take it from someone who has had to navigate their company through due diligence and the valuation process.

Globalization Partners recently completed a round with leading private equity firms, garnering a company valuation of well-over a half-billion dollars. The diligence process alone was a multimillion-dollar effort conducted by the “big four” accounting and prestigious law firms, evaluating every detail of our legal and tax infrastructure to ensure our commitment to our clients in 187 countries was secure, and that our investors weren’t buying into unexpected liabilities.

Our lawyer from Mintz Levin was quoted in a press release stating that we sailed through due diligence – no small feat for a company with operations covering 95 percent of the countries where our customers hire. Beyond that, our model has been tested with multiple customer companies exiting, including Magento Commerce, which exited using Globalization Partners in 25 countries at a $1.7B valuation.

Using an Employer of Record that was built from the ground up by a world-class legal, tax and HR team not only helps you manage your company while you’re building it, but it is critical at the time when you exit, when every detail of your international contracts will be evaluated.

Importantly, Globalization Partners engages a large team of in-house lawyers spanning every continent except Antarctica, and we’ve built our company to meet the standards of a world-class team, with Ogletree, Littler and other top firms as our in-country legal experts when needed. We’ve built our infrastructure to meet world-class standards that our customers can depend on.

 

Ask the Right Questions Before Outsourcing Your Global Legal, HR and Finance Infrastructure

A company positioned for a strong exit is one built on a secure, stable legal infrastructure. When it comes to your company’s infrastructure, on a global scale, how can you ensure the highest valuation possible?

It comes down to asking the right questions, and choosing the right partners, especially when engaging an Employer of Record to hire your international team.

When evaluating an Employer of Record, here’s what you should focus on:

  • Who is contractually responsible for ensuring the employment contracts via which your team members will be engaged follow best practice? Who are the EOR’s internal and external lawyers, and where are they located?
  • In practical terms – can you legally hold your Employer of Record accountable, or do they pass off the responsibility of protecting your company’s risk and liability related to employees to their third-party providers? How would you hold those third-party providers accountable if you find out things go wrong at the time of your exit?
  • Who will you talk to and how will the communication go if you get a late-night phone call from an employee who was injured at work in another country, is in the hospital and needs help? Is the employee covered under insurance? How will you get ahold of the team?
  • Does the Employer of Record have an internal international tax, legal team, or data privacy specialist? Ask to see LinkedIn profiles for all of these professionals.
  • Does your Employer of Record follow all GDPR laws in relation to employment data? (If not, be wary of fines, equal to about four percent of your gross revenue. Plus, investors may penalize you.) How can they make sure their in-country partners are also compliant with data privacy?
  • If things go wrong, do you have access to an in-country, in-house HR and legal team? How will you communicate with them, and is the Employer of Record staffed properly? Is everything in email, or are they working through a data-secure helpdesk? What are their service level agreements for response times?
  • Does the company have sufficient capitalization, and have they been vetted by world-class investors?

 

Make Your Exit as Strong as Your Infrastructure

Globalization Partners is the only global Employer of Record that was built by a team of world-class employment lawyers, with operations covering 95 percent of the market. We’ve set up our legal infrastructure with some of the best experts in the world – Littler and Ogletree – and had our tax structure vetted by EY and Deloitte. In each country, we’ve drafted tight employment contracts that are locally compliant and meet the most stringent best practices, protecting your IP, and also following best-practice for cross-border business. Everything is automated, compliant, and at your team’s fingertips.

Better yet, we’ve paved the way to make full compliance less complex. The best practices for going global are at your fingertips. Whether it’s your HR manager, your General Counsel, or an onboarding manager, if they use our employment contract generator’s pre-selected drop-down categories, you can rest assured our software has already been built for local compliance and international best practice – no additional review necessary.

Headquartered in the U.S., Ireland, and Singapore, we cover every market, making global compliance possible, and setting your company up for international success.

Globalization Partners:  Hire the World

For more information on expanding globally, download our eBook 10 International Expansion Mistakes to Avoid here:

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Nicole Sahin

Nicole Sahin

CEO, Globalization Partners

CEO Nicole Sahin’s mission is to make it easy for any company to expand into any country as easily as they hire team members in the United States. Her current focus is building the world’s most competent and trustworthy Global PEO to meet the standards of the company’s Fortune 500 clients. She led Globalization Partners to a ranking of No. 33 on the 2017 Inc. 500 list of fastest-growing private companies in America, No. 6 on the 2016 Inc. 500 list, has been named Entrepreneur of the Year in New England, and has won numerous awards for breaking the traditional corporate mold by building a nationally-recognized company culture.

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