Peter: Today we are speaking with Brian Kennedy of R.A. Cohen Consulting, one of North America’s premier M&A Advisory companies focused exclusively on the staffing sector. Brian has been with RACC for almost 4 years as an M&A Advisor and Management Consultant. Prior to that, he spent 32 years in the Canadian and US staffing industry as an Owner/Operator and Employee of various staffing businesses. And Brian was the one who started me off in this business. So he’s the one you want to blame.
This will be the first of a three-part series discussing what trends are being observed by RACC in the North American IT Staffing marketplace.
Brian, what are the primary differences between the current IT staffing landscape in Canada vs. the U.S.?
Brian: Well, employers and IT staffing companies in both countries struggle to find enough of the right professionals to fill their IT positions with traditional full-time employees. But the nature of the IT marketplace (ever-changing technologies and the nature of the work often being project-centric vs. general and ongoing) has created very robust opportunities in both countries for IT professionals to work as “Contractors”.
Many IT professionals in Canada and the US work through staffing agencies as “Contractors” to get onto larger projects and have fewer gaps between assignments. Anecdotally, we observe a higher utilization of IT temporary/contract Workers as a percentage of the IT workforce in the US than in Canada, either because of the lack of qualified Workers for traditional, full-time roles, or the Employers’ desire to engage a workforce that is more flexible, skill-ready and easier/cheaper to disengage or terminate when the work is done.
Peter: So how does that compare to Canada?
Brian: In Canada, utilizing flexible, temporary IT Workers on a contract basis is becoming more popular and now accounts for a much larger percentage of the Canadian IT workforce than it did five or ten years ago, though adoption still lags behind the US.
Peter: And aren’t there some very important differences in the definition and utilization of “Independent Contractors” in each country, and isn’t it important for both individuals and Employers to be aware of them?
Brian: Absolutely. In Canada, at least currently, you can operate your contract consulting practice as an Incorporated entity, Sole Proprietor, Partnership or you can sign-on as a traditional T4 Employee of the staffing company that finds and deploys you to each assignment. In Canada, a very large percentage of IT Contractors operate as Employees of their own Incorporated companies, with a smaller percentage operating as Sole Proprietors, Partnerships or actual T4 employees of the staffing firm they work through.
In the US, you can run your contract consulting practice in three different ways: as a Corp-to-Corp, which is the same as a Canadian Incorporated, a 1099, which is similar to a Sole Proprietor, or a traditional W2 Employee, which is a T4 Equivalent and where you are an Employee of the staffing company that finds and deploys you to each assignment. By contrast, a very small percentage of US IT Contractors operate as “Corp-to-Corp”. The vast majority of US-based IT Contractors currently work as W2 Employees (full-time, fully-benefitted, T4 equivalents) of the staffing companies they find project work through.
Peter: So what does this all mean? What is the impact on the consultant doing the contracting?
Brian: What this means is that T4 and W2 employees are entitled to employee benefits usually including employment, or unemployment, insurance, retirement/pension/old age security, healthcare or extended health coverage, holiday/vacation pay, possibly overtime pay or time-off in lieu of and possibly educational/training benefits. But nothing comes for free; the individual employee’s income taxes will likely be higher and will be withheld on each paycheck, and the Worker will likely have to pay their portion towards EI/UI and retirement benefits. These obligations, as well as severance or working notice requirements in certain jurisdictions, cause the Employer’s costs to be higher, so the base rate of compensation paid to the T4/W2 Worker may be lower than the gross base rate paid to a Contractor.
Peter: And for Corp-to-Corp or Incorporated Contractors?
Brian: As a Corp-to-Corp or Incorporated Contractor, your taxes will likely be lower and will be payable quarterly or annually, but you will not have the safety net of employment/unemployment insurance, termination benefits or any type of company-sponsored/administered retirement plan. It is also doubtful any Employer is going to pay for, or contribute to, your ongoing education, training, or certification. If you want health or other family benefits you will have to purchase them yourself from a provider such as www.coverme.com. You will also have to dedicate time and money (often more than people expect) to setting up and maintaining your Corporation and you may be required to source and carry professional business/liability/E&O/fidelity insurance.
Peter: Any final thoughts you’d like to add?
Brian: Yes, I feel I would feel remiss if I didn’t add a warning, or at least a heads-up. The American Internal Revenue Service and the Canada Revenue Agency lose billions of dollars yearly in income taxes when employees start their own businesses, and therefore both are very interested in and working diligently to determine if these “C2C and Inc. contracts” depict bona fide business-to-business relationships, or are simply Employer/Employee relationships with some tax-avoidance window dressing. Meeting the criteria of being truly independent vs. an Employee, is a dynamic challenge when you’re dealing with a tax authority. Corp-to-Corp and Incorporated Contractors need to stay constantly aware of current legislation, because like most things, it will inevitably change.
Peter: Thanks Brian!
Brian: You’re most welcome.
In our next installment, we will ask Brian “What opportunities exist for Canadian Contractors working in the US or in Canada but working for US companies/clients?”