News Coverage

Cross-Border Mergers Create Mountain of HR Compliance Details

Society for Human Resource Management (SHRM)

By Susan Osborn, Director, Advisory Services at Radius.

The recently announced Burger King-Tim Hortons merger is a prominent example of two important business phenomena: corporate inversions and U.S.-Canada mergers. Corporate inversions—in which U.S. companies merge with overseas entities in order to re-register abroad and take advantage of lower tax rates—may not be long for this world. Though inversions had been enjoying a revival in recent years, the U.S. Treasury Department moved in September 2014 to slash the benefits. U.S.-Canada mergers, on the other hand, are not going anywhere and in fact are on the rise.

Canada and the U.S. enjoy a high degree of economic integration, and integrating business across their border just makes sense for many companies. For any operation heading toward a merger, acquisition or divestment, executives tend to maintain a laser-like focus on the deal itself. However, especially when deals occur across multiple jurisdictions, there is a mountain of operational and compliance details to plan for, particularly in human resources.

HR Compliance Implications

For U.S. companies acquiring Canadian employees, the most common HR problems we see arise when U.S. executives assume they can implement American employment practices seamlessly in Canada. When U.S. corporations acquire employees in the U.K. or France, they usually know they will be encountering a whole new set of labor laws. But there is something about Canada’s proximity and the ease of that border crossing (at least in the past) that makes U.S. executives assume that operating in Canada is just like entering another U.S. state.

Perhaps the most significant mistake a company can make is assuming that “at will” employment exists in Canada. It most certainly does not. In the event a corporation is inheriting Canadian employees, whether through a share transfer or an asset acquisition that includes a workforce in place, management is inheriting the employees’ severance and notice rights. This can create major employment liabilities down the road in the event there are any layoffs or the situation simply does not work out for any portion of the “acquired” Canadian workforce.

The time to complete the due diligence to understand those liabilities is before the negotiation phase of an acquisition, as the inherent liabilities may not be appropriately disclosed on a balance sheet. HR may have to interview employees to better address management’s future workforce plans and what sort of liabilities those plans could create. Someone will be charged with the need to quantify that liability to be able to best negotiate over it.

HR and/or management should also review the acquired company’s original employment contracts. It may prove shortsighted to assume that contracts drawn up by a Canadian entity are compliant under local law. Each province in Canada has its own employment standards under its Ministry of Labour. If a contract is not compliant with provincial law, any disputes will be decided by the courts under common law (or under civil law in Quebec). In that situation, the courts generally grant employees a month of notice period (severance) for each year of service, versus one week per year of service (after the second year) up to a maximum of eight weeks.

Be mindful in the event there is no vacation accrual on the balance sheet, as there is no “use it or lose it” concept in Canada. All accrued vacation must be paid out, so typically there will be a vacation liability on the books. There may also be province-specific laws such as overtime pay for full-time employees and labor union issues related to specific industries. These concerns should be on a company’s HR checklist during the due diligence process, as they could affect the negotiations for any deal.

As with any U.S. acquisition of a foreign entity, management must ensure that paid-time-off policies for foreign employees comply with local laws. The U.S. does not mandate paid time off, but Canadian workers are guaranteed 10 annual vacation days plus nine (on average) mandatory holidays (which is still one of the lowest requirements among developed countries), so be diligent to not get caught short-changing any employees you inherit.

Be Proactive

There is a lot to keep track of, and it is best to be proactive. To complete the task, it is recommended that companies heading toward a merger or acquisition create an HR audit team charged with mapping out the compliance needs of the new entity. That team will act as gatekeeper of what has already been negotiated and what will need to be implemented after the deal. This is a complex process that most companies need help completing.

As a final note, remember that in managing so many compliance details, it is easy to lose sight of the question of workforce compatibility, something that even the most thorough audit cannot detect. The culture clash between the management of German automaker Daimler AG and U.S. competitor Chrysler was unanticipated by senior executives and famously contributed to the failure of DaimlerChrysler. Workplace differences across cultures remain real in 2014.

That said, the payoffs can be enormous for successfully planned and executed international deals. We should know. Radius emerged from a 2014 merger between the U.S. firm High Street Partners and the U.K.-headquartered Nair & Co.