Global payroll considerations for mergers and acquisitions

Mergers and acquisitions are the backbone of international expansion. But while they offer enormous potential for business growth, they also come with numerous challenges, including new complexities in payroll management.

Managing payroll during M&A represents a challenge and an opportunity at the same time. Merging existing payroll systems requires careful planning and consideration to prevent operational hitches that might risk losing key employees. However, it’s also a great opportunity to make significant system and process improvements that add real value to the strategic potential of global payroll.

In this article, we will look at the different challenges and opportunities that come with merging payroll systems during M&A and will highlight the different technical, operational, and legal considerations businesses must take into account to guarantee a smooth transition.

Mergers and acquisitions create both challenges and opportunities for global payroll. On the one hand, M&A activities represent a perfect opportunity to unify and integrate existing payroll systems, say good-bye to legacy set-ups that do more harm than good, and increase operational efficiency across the entire global payroll operation.

On the other hand, merging different payroll systems can be incredibly challenging and difficult. This is due to the fact that two or more different payrolls and systems need to be brought together while adhering to different local regulations and respecting different payroll cycles and processes that have been used as a standard in the newly acquired entity for many years. Let’s look at both sides in more detail.

But what is it that makes managing payroll during mergers and acquisitions so incredibly challenging? There are many different factors that need to be taken into account when it comes to the complexities of merging different payroll systems and ensuring smooth operations after an M&A transaction. They include:

• Dealing with differences in payroll systems, processes, infrastructures, policies, and compensation structures,

• Adhering to country-specific laws,

• Navigating the difficulties of integrating legacy payroll systems,

• Harmonizing employee compensation and benefits,

• Managing compliance across borders,

• Managing different payment methods and pay frequencies, 

• And more.

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Instead of focusing only on the challenges ahead, businesses should look at M&A as an opportunity to kick-start their global payroll transformation. Here are some inspirational ideas for using M&A activity as an opportunity to improve global payroll systems and processes.

• Assessing payroll processes in order to identify potential for improvement

• Investing in a global payroll solution to streamline future mergers and acquisitions

• Enhancing payroll processes across the board by adding new alternative payment methods, such as digital wallets, payroll cards, and Earned Wage Access (EWA)

• Implementing workforce policy changes that were long overdue

• Developing a global compensation strategy to resolve current and future compensation issues resulting from M&A

• Consolidating payroll processes and systems to reduce global payroll costs

In order to safely navigate the challenges and really leverage the transformative potential of M&A for global payroll, businesses need to consider various different aspects, ranging from operational considerations to technical considerations.

Let’s start with the operational considerations that businesses must take into account when managing payroll during mergers and acquisitions. From an operational point of view, businesses have to carry out the following tasks and checks.

• Deciding on a system: Since keeping two systems often isn’t an option, businesses need to identify the payroll systems and tools they want to keep after the merger is completed. Depending on who will be using the systems, it might also be necessary to schedule training sessions for employees who are not familiar with the tools yet.

• Checking system capacity: This involves ensuring that the systems are able to process payroll for a growing number of employees which will be the case if payroll operations will be managed jointly on one system after the M&A transaction is finalized.

• Choosing a new system if needed: If the assessment of the current tools and processes indicates that transitioning all new employees to an already existing system would cause problems, businesses should look into finding a new solution that will cater to their changed needs.

• Sorting out payment liabilities for the transition: There might be a pay period that overlaps between the former owning entity and the new owning entity. If this is the case, it’s crucial to put a detailed agreement in place that clearly establishes the payment liabilities. This agreement is called a Transition Services Agreement (TSA).

• Aligning pay periods and pay dates: Running payroll according to different pay schedules is neither time nor cost efficient. In order to effectively manage payroll during and after M&As, the payroll schedules of the different entities should be aligned so that payroll for all employees can be processed in one go.

Operational considerations are by far not the only thing businesses need to take account of when managing payroll during M&A. Additionally, there are many different tax and legal aspects to consider. Here is an overview of some of the key aspects.

• Payroll tax reporting: Depending on when the M&A transaction takes place, the end of the tax year might be approaching, which means that it’s time to submit payroll year-end reports and more. During mergers and acquisitions, it’s crucial to keep track of all statutory deadlines, ensure that all the relevant data is transferred from the old owning entity to the new one, and adhere to country-specific payroll reporting requirements. A detailed year-end payroll checklist can help with this.

• Country-specific employment obligations: Acquiring an entity in a new target market as part of global expansion means taking over employment contracts with employees who are subject to different employment laws and are entitled to different statutory benefits than employees under entities in different geographies. Businesses need to make sure they are familiar with the rules and regulations that apply in the new target market.

• Local compensation requirements and existing pay structures: One payroll-related aspect that can be especially tricky to manage during mergers and acquisitions is compensation. For one thing, local compensation rules must be respected. For another thing, existing agreements and compensation standards should be continued to prevent employee turnover.

• Inherited mistakes: There is no payroll without errors, and payroll errors can take many different forms. The problem with mergers and acquisitions is that the new owning entity might “inherit” existing mistakes, such as employee misclassification, from the old owning entity, which can be difficult to resolve.

Merging payroll systems after an M&A transaction also involves several technical considerations regarding the feasibility of the integration and the necessary adjustments regarding system configurations and more. Here are some of the most important technical aspects to take into account:

• Ensuring correct and efficient payroll data migration,

• Checking the feasibility of seamless system integration (especially with regard to custom-built solutions and legacy systems),

• Preparing for payroll integration with other HR tools and systems like ERP (enterprise resource planning),

• Striving to reach for a high level of payroll automation, and

• Securing data transfers between systems to prevent data leaks in global payroll.

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Payroll and the employee experience are closely intertwined. Since global payroll affects employee morale in several regards, businesses should also think about their employees when managing payroll through M&A activities.

Research conducted by EY reveals that 47% of key employees leave after a major transaction. In order to prevent mergers and acquisitions from causing employee attrition and increasing turnover, organizations should keep the following best practices in mind:

• Ensuring that the service history and extra benefits earned by individual employees are retained,

• Respecting commitments and agreements that were made prior to the M&A transaction,

• Communicating clearly with employees and keeping them informed about what’s happening and what’s going happen next,

• Addressing differences in employee pay scales in a timely manner and finding a solution that’s fair for everyone,

• Introducing employee self-service functions if the new set-ups allows for it, and

• Openly addressing employee fears and concerns.

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On top of the different technical, legal, operational, and employee-focused considerations, businesses should consider several different success factors, including:

• Proper planning: Organizations need a workable plan before they start merging payroll systems, along with a detailed set of guidelines for navigating the transition and post-merger phase.

• M&A-experienced payroll team: Building a first-class global payroll team is important for any organization. Businesses that are actively expanding their international operations and going through a high number of M&A transactions should make sure to hire qualified payroll staff with a strong background in managing payroll during mergers and acquisitions.

• Global payroll business case: Mergers and acquisitions are the perfect opportunity to improve global payroll operations. A global payroll solution can help with this. Payroll teams should have a solid business case for global payroll in place to convince the leadership team that it is a sound investment.

• Methodical approach: Nothing should be left to chance when it comes to payroll. Therefore, businesses should approach M&As methodically, using a detailed checklist for payroll management during mergers and acquisitions.

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A global payroll solution can help businesses safely navigate the challenges of managing payroll during M&A by reducing compliance risks. Using a centralized solution for multi-country payroll management also simplifies payment processes, reduces compliance risks, and provides the necessary integration capabilities to efficiently merge different payroll systems.

Lano offers businesses a unified solution for their global payroll. Our advanced global payroll consolidation platform is built to allow for easy integration of new systems and payroll vendors and provides the necessary data migration technologies to ensure seamless data transfers between systems. Businesses that struggle to manage payroll for their newly acquired entity can further choose a local payroll vendor from our global network of vetted payroll partners. Book a demo with one of our global payroll experts to learn more.