Spinoff Projects - Who stays and who goes?

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The spinoff of a division, unit or business line from an existing company (“Parent”) into an independent entity (“NewCo”) presents numerous human resources challenges.

 

When a global organization splits off a business division across national jurisdictions with differing legal regimes, the complexities are multiplied. In any case, effective HR management, planning and implementation throughout the process can facilitate a successful spinoff.

 

Here are a few HR-related matters in the context of a spinoff that Stark HR handles for you:

 

 

Allocation of Personnel

 

A fundamental decision in any spinoff is the population of Parent employees who are intended to transfer to NewCo. Making this determination early can facilitate HR planning for the transition and post-restructuring periods.

 

 

“Ring-fencing”

 

Parent and NewCo need to consider a post—spinoff no—hire agreement that prohibits each party from poaching employees assigned to the other for a period of time to reinforce the agreed-upon employee allocation.

This should be done in conjunction with establishing policies barring certain employees from seeking such employment opportunities during the restricted period.

 

 

Internal services

 

It is critical to identify what services may no longer be available to each entity after the reorganization due to the division of the workforce. For example, if the entire internal accounting department stays with Parent, then NewCo will need to replace those services. In addition to personnel gaps, there may be systems that NewCo will need to procure (HRIS, performance management, etc.) to continue business as usual. In this regard, HR management must consider its role as a provider of HR services to the organizations as well as a consumer of internally provided services.

 

Such needs may be filled over the short term under a Transition Services Agreement (“TSA”) where one entity agrees to continue to provide services to the other for a transition period. A comprehensive and detailed TSA can be invaluable when disputes arise, as they often do when individuals struggle to “serve two masters” whose interests may no longer be aligned.

 

 

Employee retention

 

Retention issues can be a major factor in spinoffs. Disruption to the status quo can lead individuals to consider other opportunities, particularly if there is uncertainty surrounding post-spinoff compensation packages, reporting lines, relocation and other potential employment-related changes.

New employer context

In some cases, the employee allocation may have significant effects on the nature of Parent or NewCo. For example, a substantial change in the size or other characteristics of the workforce (e.g., union versus non-union, geographic location) or corporate organization (e.g., public versus private company) can significantly alter the employment context.

 

 

Compensation and Employee Benefits

 

Two main questions for HR in any spinoff are: what effect will the spinoff have on existing compensation and benefits, and how will compensation and benefits be structured post-spinoff.

 

All of these issues need to be explored for each applicable jurisdiction for international spinoffs. In this regard, an employer will be considerably more restricted in its ability to make unilateral changes to employee compensation and benefits, and other terms of employment, in certain non-U.S. jurisdictions.

 

 

Effect on Parent plans

 

Issues relating to Parent’s existing compensation and benefit plans include:

 

  • Are amendments required for Parent’s severance plan (or its contractual severance arrangements) to prevent benefits from being triggered by employment transfers to NewCo?
  • Will such transfers be considered terminations of employment under Parent’s retirement, deferred compensation and other employee benefit plans?
  • What happens to transferring employees’ outstanding awards under any equity-based compensation plans sponsored by Parent—will awards be retained, cashed out, forfeited or substituted with rights under a NewCo plan?
  • Will there be any acceleration of unvested stock-based benefits?
  • If there are incentive stock options outstanding, can their tax-advantaged status be preserved?

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NewCo plans

 

Spun off companies often must establish a slate of new employee benefit plans. Many companies mirror the parent’s benefit plans and programs in a “clone and go” approach, but this may not always be feasible, cost-effective or desirable.

 

It should be noted that implementing new equity incentive plans can be a complex process, particularly for cross-border plans having participants in multiple countries.

 

Determinations will need to be made concerning the preservation of benefits under NewCo’s plans, such as the extent to which NewCo employees will be credited for their service with Parent and whether the applicable NewCo welfare plans will waive preexisting condition and waiting period restrictions or credit out-of-pocket expenses incurred under Parent’s plans in the plan year of the spinoff toward the deductibles and co-payment thresholds under the corresponding NewCo plans.

 

 

Third-Party HR Service Providers

 

NewCo will need to negotiate and put in place new agreements with HR service providers, such as payroll processors, benefit plan administrators, employee leasing and temporary services agencies, and others. Whereas Parent will need to determine if the change in its workforce will affect any of the terms under its service provider agreements.

 

 

Allocation of Employment Liabilities

 

The documents governing the spinoff should explicitly allocate responsibility for all employment-related obligations, whether they arise before, on or after the spinoff. These include liabilities arising from employment-related litigation (e.g., for discrimination or harassment), unfunded benefit plan liabilities such as retiree health and life insurance benefits, disability obligations, deferred compensation, welfare plan and workers’ compensation “runoff claims” (i.e., claims incurred prior to the spinoff date but made afterward), COBRA continuation benefit obligations, and other unfunded obligations to employees accrued through the spinoff date, such as unpaid bonus and commission compensation and vacation time. Such liabilities also include restructuring-related obligations such as retention bonuses.

 

 

Union and Works Council Matters

 

If any of the affected employees (which may include employees staying behind with Parent or transferring employment to NewCo) are covered under a collective agreement with a union, works council or other employee association, Parent will need to fulfill any notification requirements and, if applicable, consultation and/or consent requirements. Parent should commence this process sufficiently in advance so that any required consultation does not disrupt the timing of the spinoff.

 

 

Communications

 

Explaining the employer’s goals to the affected workforce, informing individuals about what is expected from them and what they can expect in return, and generally providing updates as developments arise can bolster morale during a time of uncertainty, reduce attrition rates and improve buy-in. In some cases, there are legal aspects to consider as well. In addition to any union or works council notice, advisory or consultation requirements, such obligations may also arise under European laws implementing the Acquired Rights Directive and similar laws outside the United States when there is a transfer of employment. These requirements should be identified in the early planning stages so that they may be satisfied in a timely manner without affecting the timing of the transaction.

 

 

Onboarding, Governmental Filings, Data Privacy and Other Legal Compliance

 

Legal compliance issues that arise in connection with employment transfers and onboarding vary greatly depending on the applicable jurisdictions. Routine matters may include filing with the appropriate governmental agencies for tax collection and social insurance and handling any visa issues if international employees are affected. In some jurisdictions, structuring employment transfers may require particular documentation to preserve “continuous employment” treatment, which may be necessary to avoid triggering statutory notice and/or severance payment obligations. Data privacy laws regulating the collection and transfer of employee related data are another key compliance area. In the United States, the main issues to be aware of concern “personal health information” protection under HIPAA and the security of certain sensitive data such as Social Security Numbers. The European Union’s Data Protection Act and legislation in other countries (including Australia, Canada, Mexico and Malaysia, among others) set forth comprehensive data privacy schemes. In the context of a spinoff, these laws may require certain measures to be taken to allow for cross-border transfer of such information, such as obtaining employee consent.

 

HR plays a central role in many aspects of spinoffs: workforce planning, employee communications, ensuring NewCo’s payroll and other HR services and employee benefit plans are ready on Day One and avoiding personnel-related disruptions to business operations, among many others. Focusing on legal compliance matters starting from the early planning stages and continuing throughout the transition can help avoid unpleasant surprises and costly delays and contribute to a successful new beginning for both Parent and NewCo going forward.