Why HR can benefit from a transition services agreement during global M&A

May 17, 2022

transition services agreement

During mergers and acquisitions (M&A), smooth transitions are key to maintaining positive employer-employee relationships, uninterrupted operations and financial success.

Two merging entities often use a transition services agreement (TSA) to plan, execute and monitor internal operations like HR, payroll and other critical functions. This type of agreement is especially important for global companies merging workforces from different countries because of the complexity of employment regulations that must be followed.

What are transition service agreements (TSAs)?

Transition services agreements (TSAs) are contracts that stipulate which services a sold entity will continue to provide to the purchasing entity while the companies merge. A TSA also provides a detailed plan for the entire process, including transition timelines.

TSAs are particularly useful for core business functions like HR and payroll. The buying and selling entities are likely to have different processes in place for managing:

  • Payroll
  • Benefits administration
  • Hiring, onboarding and termination
  • Internal conflict resolution

How a TSA can benefit your HR department

Although a transition service agreement can be advantageous for financial and operational functions, it can also benefit HR departments, who will interface directly with employees from both entities to ensure retention and compliance with labor laws.

HR-related TSAs can secure the following:

  • Employee peace of mind. When M&A news crosses the desks of employees from a purchased company, it can often cause unrest about job security or internal processes like pay schedules, wages and benefits. Providing an official set of transition guidelines to employees can reduce stress, decrease pre-emptive resignations and communicate HR stability.
  • Compliant transitions. A strong, effective TSA should account for any compliance changes each entity must address related to labor laws, benefits administration, employee legal protections and more. This is especially relevant during international M&A.
  • Appropriate timelines. Entities merging under a TSA can complete crucial steps in the transition process according to a pre-established schedule.
  • Contractual compensation. TSAs outline how each entity will compensate the other for HR transitional work, creating policies for rates, overtime considerations and payment methods.

Considerations for creating a TSA for HR processes

During the M&A process, which HR elements should you consider while crafting a TSA? Let’s explore some considerations for the effective, mutually beneficial TSA.

Contract timelines

The timeline for an HR transition should be as detailed as possible. To set achievable goals, ask make sure you take into account:

  • How long it takes to process payroll each period
  • How onboarding affects payroll processing
  • How much time per month is spent on compliance activities, benefits administration, internal conflict resolution and drafting additions or changes to the HR policies

Once you have a clear picture of how long each HR process takes, increase or decrease that timescale for the purchasing company and purchased company, respectively.

You should also stipulate deadlines for individual tasks, zooming in as much as possible to include:

  • Transferring and collecting new employee information
  • Sharing all relevant compliance information between entities
  • Distributing HR policies
  • Modifying and publishing updated hiring and termination policies
  • Transitioning benefits providers
  • Issuing relocation or reassignment requests

HR service integrations

An effective TSA should outline how the companies plan to integrate third-party HR service providers and create a timeline for this benchmark.

For instance, if one company uses a managed payroll provider or employs international workers through an employer of record provider, how will these partnerships be affected during the transition?

In addition, don’t forget to create a plan for benefits-related transitions. How will the two entities move forward with administering health insurance, retirement account contributions and paid time off—HR will have to orient employees to the new services and any additional benefits employees will receive as part of the merger.

Performance standards

Both entities should craft a set of performance standards by which to measure the success of the HR departments’ transition activities. Consider the following metrics:

  • Adherence to expected deadlines
  • Employee retention
  • Relocation requests and reassignments completed
  • Compliance benchmarks achieved
  • Completed third-party service provider onboarding (when applicable)

The TSA should stipulate how these metrics will be recorded, who will monitor them and how deviations from expected benchmarks will be addressed.

Both entities should also set and agree to goals for each standard. For instance, both entities should do everything in their power to prevent employee resignations—perhaps both HR departments agree that they won’t exceed 10 resignations.

Creating performance metrics benefits both parties—both HR departments are contractually obligated to work together to reach agreed-upon goals, deadlines and standards.

Data protection and security

Just like every other arm of a business, confidentiality and data protection are critical to HR. Merging companies might encounter a variety of data security circumstances and craft new policies that protect employees’ confidential information.

Both entities should speak candidly about their procedures to create an optimal policy to protect private employee data, like:

  • Government-assigned identifiers
  • Banking, insurance and retirement account information
  • Private information that may be stored in emergency medical files
  • Pay and benefits rates
  • Usernames and passwords for employer-provided computers and software

Payments

In many cases, the purchasing company will compensate the purchased entity for their time spent managing TSA-related tasks. Since HR processes commonly make up a large portion of TSA action items, HR should work closely with finance to determine appropriate contract amounts, payment due dates and overage policies.

Any HR-related TSA should outline the following payment considerations:

  • Any applicable taxes for services rendered, and which entity will pay them
  • Overtime considerations, compensation methods and rates
  • Inclusion or exclusion of TSA services from the M&A sale price
  • Incentives for reaching or exceeding benchmarks

A pre-established payment structure will streamline the transition process and hold both parties accountable to complete their transitional task loads.

Paving the way for a seamless transition

TSAs can be complex to negotiate and establish, but they’re often integral to the success of a merger or acquisition. When it comes to the HR components of M&A, a global workforce partner can help ensure that all bases are covered:

  • Comply with requirements in markets where they have little knowledge
  • Integrate new systems with limited runway
  • Support a new workforce and train them on new processes

Contact us today to gain expert guidance and support for critical HR activities during M&A.

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