Companies often create operating divisions across different subsidiaries, frequently across different jurisdictions in order to bring employees working on a particular project, or in a particular area, together from different parts of the group. However employers contemplating setting up such arrangements should be mindful of the legal and practical issues that arise.

Commercial advantages

The advantages of such arrangements for businesses are clear.

  • Employees working in a particular area identify themselves as part of a team with employees in other parts of the group, often located abroad.
  • Reporting lines may be altered so that employees report to the most appropriate person for their work, even if that person is technically employed by a different subsidiary, and in a different country.
  • Communication between employees at the different subsidiaries is improved: –
    • IT systems may be standardised to allow easy transmission of information;
    • weekly team meetings by conference call may be set up to facilitate exchange of ideas;
    • salary/bonus arrangements may be standardised so that all employees are incentivised in the same way.
  • Duplication of work by different group companies should therefore be prevented.
  • A brand name for the operating division will often be created: –
    • this will assist in employees’ sense of identity within a particular division;
  • this allows the company to present a brand image, stretching across different jurisdictions, to customers. This should create a high profile for the brand, attracting not only customers, but also high quality employees.

However before employers embark on setting up this type of arrangement, they should think through the practical and legal consequences.

Potential Issues

Be wary of power struggles between different subsidiaries, particularly subsidiaries based in different countries. For example, in the case of a new operating division created uniting employees in a UK subsidiary to employees in a US subsidiary:-

  • If it is decided that the employees are to report to managers in the US, the UK employees may feel that the US are dictating matters and conducting them on their own terms. This will be heightened if US employees are selected going forward for top management positions. Discrimination claims (race discrimination on the basis of nationality) may result. US managers may personally be named as respondents in these claims.
  • Conflicts may arise as to the working methods/environments of the different jurisdictions. US managers will probably not be aware of UK employment law rights, or of the UK working culture. UK employees, working in the UK, will of course retain all their UK employment law rights. Tribunal claims from employees may arise as a result.
  • In the event of a claim the UK company will be liable for the acts of the US managers. The employees’ employer would (subject to the comments below, and in the absence of a separate legal entity for the division being created), remain the UK company.
  • If one subsidiary effectively takes management control over the employees of the other subsidiary, has there been a TUPE transfer? Do employees remain employees of the subsidiary they are in, or will they become employees of the new entity? How will this affect their employment rights?
  • Have the UK directors derogated their fiduciary duties to the US? They have certainly derogated day-to-day control of the employees to the US. If they see that the US managers are about to flout UK employment laws, do they have a duty to prevent this?
  • Is the new operating division/brand a legal entity? How is it being presented to external bodies? In the absence of any formal legal process, it may well not be a legal entity. In this case how will it enter into contracts with third parties? For example what entity enters into contracts with recruitment agencies? On the other hand will a legal entity have been created unwittingly – e.g. a partnership? In this case the parties will be subject to all the legal implications of being a partnership.
  • In the absence of any legal entity being created what happens regarding the sharing of outputs/costs/profits. This will be important in terms of accounting and tax issues across the group.
  • Which company will hold the intellectual property rights in an invention created by employees from both jurisdictions?
  • What if regulatory requirements of each jurisdiction are quite different. The requirements of both will need to be complied with. The companies will need to ensure tax compliance and compliance with any listing requirements.

Steps to take when setting up an operating division

In light of the issues above: –

  • consider what legal form you would like the operating entity to take – i.e. a joint venture, a partnership, or a new corporate body;
  • take legal advice on the pros and cons of each vehicle. Legal advice will need to include advice in a variety of areas to ensure the most efficient structure is created – e.g. corporate advice, tax advice, employment law advice, intellectual property advice;
  • in order to obtain clarity and certainty going forward, document the new structure together with the arrangements regarding the sharing of outputs, profits, costs etc. Again legal advice, particularly tax advice, will be required. A variety of issues will determine how matters are dealt with – e.g. in a research company, the holding of intellectual property rights in the most favourable jurisdiction, will most likely be a crucial factor;
  • educate managers/employees so that they understand the structure, and contract properly with third parties;
  • ensure a fair allocation of costs income etc, so as not to over incentivise some employees as opposed to others;
  • if managers in one jurisdiction are having responsibility for employees in another jurisdiction, ensure managers receive proper training on the employment law obligations and working culture of the jurisdiction in which the employees are placed.
  • ensure the managers/directors of the subsidiary “losing” day-to-day control over the employees understand their own duties and understand the extent to which they should get involved in issues when they see that, for example, local employment laws are about to be flouted.

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