One of the first questions our Private Equity clients and their Portfolio Executive team ask us during the final negotiations around Day 0 (sign) is how do we ensure we will pay our people after Day 1 (close)? Due to legal and regulatory issues, the new owners are typically required to pay the acquired entity’s people in the first payroll period after close.
If you follow these 10 steps, you will pay your employees on-time, make a great first impression and start the journey to a seamless separation from the Parent Company.
- Obtain proposals and select your technology and payroll BPO (business process outsourcing) provider prior to signing so that contracts can be executed immediately after the deal is signed. If there are international locations, there will often be multiple contracts and platforms involved to support multi-currency and regulatory requirements.
- Organize the right team and establish the “functional mirror” concept. Assign a HR/payroll functional lead from both the New Company (“NewCo”) and the Parent Company. Get these two people identified and have them review expectations to make the project successful, such as issue escalation and resolution, meeting cadence, data requests, etc.
- Agree upon the pay schedule, frequency, and first pay date – it sounds like a no brainer, but the new owners must determine if they will continue the Parent Company’s pay schedule or make a change. This decision needs to be made quickly and communicated to the organization properly.
- Once the partner is selected, obtain their HR data import template then provide this template to the Parent Company so that it can be populated with the extracted employee census data and delivered on Day 1. Timely delivery of this information by the Parent Company is key to the payroll system critical path
- Determine if there will be a benefits enrollment period post-close or if the benefits will just be mapped directly from the old plans to the new plans. This decision will impact the employee’s benefits plans and how much effort will be required to get the employee deductions into the payroll system.
- Engage your payroll BPO provider or an external auditing firm to file for all tax registrations (SIT and SUI account numbers with state and local jurisdictions). Ensure the treasury functional team completes drawdown and other agreements with the payroll provider to ensure the bank accounts are setup and approved for funding of the accounts (e.g. reverse wires).
- Decide on the payroll discovery and configuration topics with the Parent Company and agreed upon these with the new company quickly: earnings and deductions codes (e.g. commissions, car allowances, overtime, etc.), department structure, GL coding, special taxables (e.g. 401k policy), garnishments and liens, accrual policy and many more.
- If there are hourly employees, dependencies need to be discussed with the time and attendance work stream to determine how clocked hours will be loaded into the new payroll system. This will be dependent on the time clock input methods (clocks, phone, web portal), the volume of employees, and how quickly the time and attendance solution can be implemented- for instance, a temporary interface or manual import may need to be developed.
- Understand the methods of pay distribution – agree upon how employees will be paid (likely direct deposit) and take into account any special requirements, such as payroll debit cards or live checks that may need to be transitioned. Implement the online pay stub portal so employees can validate their pay online without requiring check stubs to be distributed to sites.
- Depending on the Parent provided HR shared services and TSA schedule, the HR operating model of the new company will likely be changing to support new operational processes to execute the first payroll run. Establish a RACI matrix, deliver adequate training, and have clearly defined roles to support the coordination of the payroll preview and approvals.
As you can see, there are many functional teams (HR, Treasury, Accounting, IT) and constituents involved to help make the first pay date a success. This effort should to be driven by a central Program/Separation Management Office (PMO/SMO) to ensure that issues are resolved and this first major milestone is delivered on-time.