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Sourcing International Assignments: Mitigating the Risks of a Consultant-Laden Workplace

CompassGUIDES - Dec 2005

By Lynda Costello, International Workforce Planning & Executive Search Consultant with Calgary-based Estrega International Inc.

Multi-national corporations in start-up mode for overseas operations often adopt short-term horizons when initially staffing up. When the commerciality of an international business venture is unknown, these companies hesitate to commit to a permanent workforce. As a result, international assignments are often initially sourced with consultants.

Unfortunately, corporations tend to overlook the risks associated with a workforce almost entirely comprised of consultants. Misconceptions and lack of communication can lead to lawsuits over taxation and severance issues, and there exists a risk that the Canada Revenue Agency (CRA) will deem the consultants on assignment to actually be full-time employees.

It is possible, however, to mitigate these risks, until the viability of the international business is better known.

What is a Consultant?

The CRA is very clear in its definition of “consultant”. Per the Legal Ease Alberta Edition “Employees and Independent Contractors” handbook, a consultant:

  • Has no fixed hours of work;
  • Is free to provide their services to other businesses;
  • Is not required to report to the supervisor;
  • Has his/her own tools and equipment; and
  • Maintains his/her office at a premise other than the other party’s business premises.

A consultant is quite different from an employee who must conform to designated office hours, reporting structures and procedural guidelines, and be solely committed to employment at the corporation.

Reasons for Sourcing Assignments with Consultants

As long as a signed consulting agreement or contract is in place, with only 14 or 30 days termination notice required for consultants, this type of workforce is easily disposable, should a decision suddenly be made to terminate operations overseas. Compared to the prospect of severance packages and outplacement services, which would normally be required for termination of a permanent staff member, consultants are highly favoured in an uncertain business climate from an economic standpoint.

When one considers the additional real costs associated with full-time employees, consultant fees are also a breath of fresh air:

Not only are consultants immediately more economical, the overhead cost of administering the various benefit and payroll programs of fulltime employees is avoided.

Risks of a Consultant-Heavy Workforce

While consultants are a quick and economic initial source of staffing, companies are often not aware of the associated risks, including the failure to withhold and remit payroll tax to the host country. It is a commonly held misconception that this is not necessary for consultants. Host country tax offices are increasingly trying to capture a portion of the income earned by foreign consultants on their turf. Penalties are often levied on the consultants or their associated consulting companies for failure to comply, and problems arise where no identification or delineation of these tax responsibilities has been made between the start-up company and the consultant.

Employers should ensure that for every consultant, a proper consulting agreement is in place to clearly lay out which party’s responsibility it will be to take care of foreign tax compliance. Consulting agreements, where existent, are often inadequate. CompassTAX recommends that companies append a Taxation and Accounting Protocol to consulting agreements.

When most of the workers in an office are consultants, it is very easy to slip into the trap of having consultants fill positions, which in other companies would normally be designated as employee jobs, and treating them like full-time employees. There is also the risk that this could surface during a CRA tax audit.

It is natural that companies would want to ensure that their overseas office staff is supervised, controlled to common work hours and using standard equipment, however any deviation from the earlier consultant definition could result in an order by the CRA to begin paying the assignment workforce as full-time employees. The CRA regularly tests the compliance of international consultant roles to its definition of the term, as cited earlier, and often determines that consultants in these situations are actually crossing the boundary into the realm of full-time employee, primarily by virtue of their commitment to the company. Penalties can be levied by the CRA for failure to withhold, remit and report on tax for these “full-time employees” who were originally hired as consultants.

It is also imperative that consultants obtain an adequate amount of insurance, such as medical, travel and disability (including job related accidents) to cover the risks associated with the assignment locale. If consultants’ own insurance is not sufficient to cover claims, companies could conceivably find themselves in a position of being responsible for third party general liability.

The widespread employment of consultants for overseas work can also potentially result in lawsuits over misconceptions regarding foreign tax and Overseas Employment Tax Credit (OETC). In their haste to initiate start-up, corporations often neglect to fully inform their employees of the requirements for the OETC, and it is common for consultants to mistakenly assume that they will automatically receive this tax credit, when in fact it is necessary that the OETC requirements be laid out and planned for well in advance. The CRA has definitive rules which specify OETC eligibility, and self-employed independent consultants do not normally meet these eligibility criteria.

There may initially be advantages to having a disposable workforce on international start-up business ventures, but there also comes a point where this is no longer true. Consultants, who typically enjoy moving from one project to another, may not be committed to the company over the long term, and the knowledge base will inevitably disappear. Once the business is no longer considered exploratory, it is no longer desirable to have a temporary workforce.

Preferred Approach

Assessments of workforce composition should begin within the first 6 months of an international start-up, as the company approaches its decision to go commercial. This timing can mitigate a number of risks such as CRA audits, severance lawsuits, and consultant complaints about not getting the OETC or other benefits. During this initial period, consultants should be placed only in project-related roles during the construction and start-up phases, and replaced by permanent employees once the company determines the viability of transitioning to a commercial or operational phase.

Companies should actively attend to the ongoing “health” of their overseas workforce by planning for the optimal assignment type, term, and staffing source. Consultants are often considered an optimal fit for the initial staffing of overseas assignments because they do not require training and can be immediately productive. However, in the rush to staff these positions, consultants are often recruited without proper screening and are therefore not always suitable for long term employment overseas.

Through timely planning, companies can recruit permanent talent which is more likely to be retained than consultants, thus allowing for the protection of an investment in the workforce, and the avoidance of administrative costs associated with staff turnovers.

Summary

Start-up companies often consist of small groups of technical and financial people who are taking personal financial risk on an unproven venture. These groups, as well as larger multi-national corporations, hesitate to make commitments to permanent staffing for their international test operations. The additional overhead of Human Resources, benefits and accompanying administration of permanent employees is not desirable for tentative business conditions.

However, workforce planning and the accompanying overtones of assignment tax planning should begin as soon as possible in the process to ensure the continued financial profitability of the venture, as significant HR-and tax-related savings can be gleaned through early planning intervention.

Lynda Costello of Calgary-based Estrega International Inc. specializes in international and domestic strategic workforce planning for energy companies in startup or expansion phases. She has lived and worked for several years in the Middle East and is seasoned in expatriate and local national human resources practices. She is also an experienced Executive Search Consultant and has been called upon by clients to source candidates for major startups and expansions within Canada and the Middle East.

Lynda can be contacted at (403) 616-8730 or lyncostello@telus.net.

 


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Fax: (403) 263-1826


Web: www.compasstax.ca
Suite 600, 1333 8th Street SW
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Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compassguides.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6