Trendspotting: aligning corporate structures with HR needs (why larger companies are considering splitting up into smaller legal entities)

Avoiding an overly complex organization is a constant challenge for most executives. Complexity may lead to low efficiency, lack of transparency, reduced responsiveness and the multiplication of internal processes.  A new trend, however, seems to defy this classic approach. Companies are deliberately splitting up into smaller legal entities in order to increase (rather than reduce) their agility and efficiency.

Whether in the context of an internal (re)organisation or in the framework of a corporate acquisition or TUPE scenario, splitting up a business in different legal entities undoubtedly comes at a certain managerial and administrative added cost. Certain companies, however, now consider that these costs and efforts are, in some circumstances, outweighed by an immediate substantial reduction in costs as well as an immediate increase in agility, efficiency and flexibly.

The driver in this process is the optimisation of human resources and the application of the most appropriate regulatory framework. Contrary to certain other legal provisions in the employment realm, the regulatory framework at business sector level (“Commission Paritaire/Paritair Comité” or “CP/PC”) is not applicable to an entire business (referred to as technical business unit (unité technique d'exploitation/technische bedrijfseenheid), but is determined at the level of each individual legal entity.  While companies are not allowed to freely choose adherence to a business sector committee – this is determined by the main activity of the legal entity – companies are free to choose which business activity to allocate to which legal entity, or, in other words, whether to combine business activities into one legal entity or to have separate stand-alone businesses, who can then be horizontally or vertically integrated through normal commercial processes.

Why would companies go through all the trouble?  Because in some cases, the regulatory framework at business sector level (CP/PC) may give them the edge over competitors in terms of cost of employment (some business sector committees are more costly in terms of compensation and benefits than others) or in terms of flexibility and appropriateness of the sector standards (the regulatory framework, working conditions and required flexibility are usually optimized for the employees active in the core business of the company).   

Where in the past, companies tried to split up their businesses merely to make some savings, the new trend is to use the most appropriate sector rules in order to increase flexibility and agility. In some businesses, being able to introduce flexibility schemes or to work nights or Sundays can make the difference between success and failure. Applying the most specific and appropriate regulatory framework to some specific business activities can make a huge difference.  

Also for employees, applying the most specific and appropriate sector rules can be beneficial, hereby creating a win-win situation. When the setup is sincere – and not merely an attempt to reduce the rights of the current employees – trade unions can be interested to constructively participate in this process, although this is likely to depend on the specific scenario and the impact it will have on their members and representation.

Needless to say that this trend of splitting up into smaller legal entities is only worth looking into if your companies has different business activities (whether horizontally or vertically integrated) that could benefit from a differentiated work organisation, flexibility or remuneration approach. In order to make this assessment, an identification of the different business activities as well as an extensiveknowhow of the different sector regulatory frameworks (including flexibility schemes, working time regimes, pension and benefit schemes, etc.) will be required.

Several companies are currently considering taking this big leap.  Should you?

Bert Theeuwes
Partner – Monard Law