TSA Pre-Signing Review
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TSA vs employee leasing is a distinction that matters whenever a carve-out cannot move all its people on Day One. A Transition Services Agreement provides services delivered by the seller; an employee leasing arrangement provides the workers themselves, who stay on the seller’s payroll while working for the buyer. Both bridge a gap, and both belong in a deliberate TSA exit strategy that gets the carved out business staffed and operating without surprises.
A Transition Services Agreement provides services to the carved out business: payroll processing, IT operations, finance support, and the other functions the NewCo cannot yet run on its own. Under a TSA the seller delivers an output, a completed payroll run, a functioning email system, a closed set of books, using its own people and systems. The buyer is buying the result, not the workers who produce it.
The people delivering TSA services remain the seller's employees, embedded in the seller's organization, doing the work as part of the seller's ongoing operation. The buyer does not direct them, manage them, or carry them on its books. The TSA is a service contract, and the seller's staffing of it is the seller's concern as long as the service levels are met.
This is the right structure when the buyer needs the function but not the specific individuals. The NewCo needs payroll to run; it does not necessarily need the seller's payroll clerks to become its employees. The TSA delivers the capability temporarily while the buyer builds or buys its own, then the service is exited and the seller's people stay with the seller.
An employee leasing arrangement is different: it provides the people, not a packaged service. Certain workers who belong to the carved out business, or whose roles the NewCo needs, remain legally employed by the seller for a period while working day to day for the buyer. The buyer directs their work, but the seller stays the employer of record, handling their payroll, benefits, and employment obligations.
Leasing is used when employees cannot transfer to the NewCo on Day One. The reasons are usually practical: works council or co-determination processes in some jurisdictions, immigration and visa timing, benefit plan transitions, or local employment law that requires notice and consultation before a transfer. Until those processes complete, the people keep working but stay on the seller's books.
The defining trait of leasing is that the buyer gets specific individuals, not an abstract service output. The NewCo's own engineers, salespeople, or operators may be leased back from the seller until their employment can be formally moved. The arrangement keeps the business staffed with the exact people it depends on while the legal transfer catches up to the operational reality.
The choice between a TSA service line and an employee leasing arrangement follows from what the buyer is missing. If the NewCo lacks a function it intends to rebuild or replace, a TSA service line is the fit: the seller runs the function temporarily and the buyer migrates off. If the NewCo lacks the legal ability to employ specific people it already relies on, leasing is the fit: the seller holds the employment while the transfer completes.
Often both are used at once. The seller might run payroll for the NewCo under a TSA service line while also leasing back a group of employees whose transfer is delayed by local consultation requirements. The two arrangements solve different problems, a missing function versus a delayed employment transfer, and a complex carve-out frequently needs both running in parallel.
Getting the classification right matters because the obligations differ. A TSA service line carries service levels, pricing, and an exit defined by migration. A leasing arrangement carries employment law exposure, cost reimbursement for the leased workers, and an exit defined by when the transfer can legally complete. Treating a staffing problem as a service problem, or the reverse, leads to gaps in coverage or in compliance.
Employee leasing carries risks a service line does not. The most significant is co-employment exposure: when the buyer directs leased workers while the seller remains the employer of record, both parties can face shared employment liabilities depending on the jurisdiction. The arrangement needs careful drafting on who bears what, from wage and hour obligations to benefits to termination risk.
Cost is another watch point. A leasing arrangement should reimburse the seller for the genuine cost of the leased employees, their compensation, benefits, and employer taxes, without becoming a channel for margin the way a marked up service line can. Buyers should confirm that leasing charges reflect actual employment cost and that the arrangement ends promptly when the transfer completes.
Duration is the third. Leasing is meant to be a short bridge to a formal transfer, not an indefinite staffing model. The longer it runs, the greater the co-employment exposure and the more entangled the two organizations stay. Buyers should tie the leasing term to the legal transfer timeline and treat any extension as a flag, not a routine renewal.
Before signing, a buyer should map not only which functions the NewCo cannot yet run but which people it cannot yet legally employ. The first list drives the TSA service catalog; the second drives any employee leasing arrangement. Both belong in the transition plan, and both are far easier to structure while the deal is live than to retrofit after close.
For the leasing side specifically, the buyer should understand the local employment processes that govern transfers in each jurisdiction, allocate co-employment risk clearly, confirm that charges reflect true cost, and tie the term to the transfer timeline. These provisions protect the buyer from inheriting employment liabilities it did not price and from a leasing arrangement that quietly becomes permanent.
Handled together, the TSA and any leasing arrangement keep the carved out business both functioning and staffed through the transition, then unwind on schedule as functions migrate and employees transfer. The buyer that plans services and people separately, but in parallel, avoids the two most common Day One staffing failures: a function with no one to run it, and a person with no one to employ them.
A TSA provides services delivered by the seller's people and systems, where the buyer buys an output. Employee leasing provides the workers themselves, who stay on the seller's payroll while working for the buyer. One fills a missing function; the other fills a delayed employment transfer.
Because some transfers cannot complete by Day One. Works council consultation, immigration and visa timing, benefit plan transitions, and local employment law can delay a formal transfer. Leasing keeps the people working for the buyer while staying on the seller's books until the transfer can legally happen.
Often it uses both at once. The seller might run payroll under a TSA service line while leasing back employees whose transfer is delayed. The two arrangements solve different problems, a missing function versus a delayed employment transfer, and complex carve-outs frequently need both in parallel.
Co-employment exposure. When the buyer directs leased workers while the seller remains the employer of record, both parties can share employment liabilities depending on the jurisdiction. Buyers should allocate that risk clearly, confirm charges reflect true cost, and tie the term to the transfer timeline.
The temporary bridge versus the durable contract. A core buyer distinction.
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