In the first two entries in the series, I first addressed why a buyer would seek a transition service agreement (TSA) and then in the second entry discussed the components of a thorough and effective TSA with supporting schedules and the need for robust governance.
However, in certain M&A deals, it is problematic or impossible to leverage a TSA for certain HR Services. In such transactions an employee lease agreement maybe an option.
In the U.S., the use of a TSA in a share deal can result in multiple employer plans or multiple employer welfare arrangements (MEWA), which can create additional benefit plan compliance risk for the seller. As a result, a seller may refuse to provide a TSA for U.S. benefits. Because of interdependencies between payroll and benefits, this could also mean that neither a payroll nor benefits TSA will be granted in the U.S.
If a seller will provide a U.S. benefits TSA, the duration often is limited and confined to a plan year to minimize risk. If a longer term is needed, a seller may offer a buyer an employee lease agreement, which provides similar features of a TSA.
With employee lease agreements, the employment relationship remains with the seller, but the employee provides services to the buyer. At the end of the employee lease period, employees transfer to the buyer and again are employed by the legal entity that transferred to the buyer as part of the deal.
In the case of a U.S. share deal, a pre-close reorganization must be executed to allow the employees to be moved from the transferring legal entity to a legal entity that will remain with the seller at close. Such agreements allow employees who are expected to transfer to the buyer to continue to participate in the seller’s U.S. benefit plans by remaining its employees and allowing the buyer time to build the HR infrastructure necessary to take on the transferred employees. At that time, the employee lease agreement ends and the employees transfer to the buyer.
In an asset transfer, the legal entity remains with the seller. Payroll and benefits of the employees included in the deal will be linked to that legal entity. Since the employees will transfer to the buyer through an “offer and accept” process that ultimately results in employment by a buyer’s legal entity, it is often not possible to extend payroll and benefits support through a TSA.
In this case, it also may be possible to leverage an employee lease agreement where the employment relationship remains with the seller, but the employee provides services to the buyer. At the end of the employee lease period, the employees transfer to the buyer and again are employed by the legal entity that transferred to the buyer as part of the deal.
If a transaction is an asset deal and employees transfer to the buyer under operation of law (transfer of undertaking – protection of employment, or TUPE) or transfers where an acquired rights directive (ARD) applies, then a TSA for any HR support connected to the employing legal entity, such as payroll and benefits, cannot be provided. This is because the employing legal entity of the transferring employees will be a buyer legal entity, not their former employing legal entity, at deal close.
Unfortunately, in this case there are few straight-forward options that are available due to regulatory constraints.
In all cases noted above, you should consult legal counsel to determine if the options specified are feasible in your deal.
Finally, if transition support is not possible in the form of a TSA or an employee lease agreement, the best course of action is to ensure an early and intense focus on planning and implementation of the HR infrastructure needed to support the transferring employees. This way, they will be able to successfully transition to the buyer at close.
