OUTSTAFFING in IT. How to avoid a 4 mln fine.
Updated: Oct 28, 2019
Outstaffing and outsourcing are now regular things for the IT industry.
These services are not new and very popular. That is why you can find lots of articles on this subject on the Internet explaining when an outsourcing contract should be used and when – an outstaffing one.
Some of these materials are written by lawyers and accountants attempting to teach professional nuances of such relations, however, without practical advice on when these relations are appropriate and how they must be shaped.
Ukraine is among leaders of IT-outsourcing services in the world and thus the difference between outstaffing and outsourcing seems to be known literally to any IT guy. Yet, in fact, the correct notion is usually distorted. The IT community still does not see a big difference between outsourcing and outstaffing.
This leads to a wrong usage of such relations in business and so – to huge penalties. How big the penalties can be? This big: “In result of an inspection carried out by the tax office the tax payer was additionally charged with the tax obligations in the total amount of UAH 4 404 821.88 (including UAH 2 202 410.94 of the principal payment and UAH 2 202 410.94 in fines).” – (extract from a court decision).
There are many other similar cases. For example, you will find 456 search documents simply doing a search in the Single State Register of Court Decisions by the key word “outstaffing”:
Therefore, in this article we will discuss outstaffing:
when it cannot be used?
how should it be properly arranged?
how to avoid of penalties from and court cases against supervisory state authorities?
Someone asserts that outstaffing is not envisaged by the Ukrainian law. But that is not quite true. There are a number of legal acts regulating the provision of outstaffing services, nevertheless:
a) there are not that many of such acts that leaves the freedom of action for those who know the subject matter yet creates a minefield for those who are not aware of outstaffing peculiarities;
b) some legal acts regulating outstaffing have not been enforced yet;
c) this service should be regarded in complex from the point of view of businessman, lawyer, accountant, HR manager, staff, Tax Office, Labor Protection Office.
Taking into account everything outlined above, the usage of outstaffing is more complicated and riskier than simple outsourcing. Moreover, problems may arise both for the outstaffing provider and for his customer.
That is why before getting into outstaffing relations it is very important to carefully contemplate further legal and practical moments that we are going to consider below not only from the legislation point of view but also from the perspective of business practice and real actual court cases:
1) Own personnel. An outstaffing company cannot lease out its personnel it does not have (by the way, an outsourcing company can).
For example, an everyday example from the IT life is when an outstaffing company provides a programmer who is not its employee but who is a private entrepreneur (ala ФОП in the Ukrainian language). By providing a PE (or an employee of another employer) the outstaffing provider is acting simply as a regular intermediary who is looking for an outside programmer. This is by no means the outstaffing. And so, the Tax Office may create very big problems for this by recognising the character of relevant agreements as unreal, of simply saying – the agreements as null and void.
2) Listing in the outstaffing database of the State Employment Office. Usually IT outstaffing providers never heard about this database even though it is compulsory according to the Law of Ukraine On Employment of Citizens and is one of criteria considered by the inspecting authorities and courts deciding on legitimacy of the outstaffing business.
Including into this database is free of charge and is not a difficult process. So better do not ignore this requirement when doing outstaffing.
3) Hired / Fired. Very often outstaffing providers discharge their personnel to give them to their customers who, respectively, hire them. But this “trick” is wrong, unfortunately.
The truth is that such a legal scheme is not the outstaffing. It is a simple change of employers by an employee. That is why applying this scheme will harm both the outstaffing provider and its customer because the first one receives payment from the second on for nothing, and the later deducts these sums from its taxed profit thinking they are its expenses.
To make things worse, this scheme also violates rights of the employee because such a transfer between employers deprives him rights to vacations and other social benefits.
4) Keeping HR records in order. An outstaffing provider should keep a staff list, have employment agreements signed with every its employee, job descriptions and instructions, as well as to submit special reports (No. 1-ПА form) to the Employment Center.
Submission of 1-ПА forms is usually a news for IT outstaffing companies.
By the way, make sure that the customer (the one who leases personnel from the outstaffer) has a certified outstaffing contract in its office as well as the employment agreement with the rented staff and the order (resolution) issued by the outstaffer on transiting the staff in lease to the customer. These copies will save your nerves, money and time during inspections carried out by the Tax or Employment offices.
5) Salary amount of the “leased” staff. No, this is not about the minimum salary amount known for everyone. This is absolutely different. The law obliges an outstaffing provider to pay salaries to its leased-out personnel in amounts not lower than are paid by the recipient of the leased staff.
For example, you, as an outstaffing provider, got an order from Google that pays 10 time higher salaries than you do. In this case you will be obliged to pay your outstaffed personnel salaries not smaller than Google pays. Of course, this is pertinent to official salaries and so the social taxes of 41.5% do apply here as well.
6) Prohibition of Non-compete. This is another news the IT outstaffing providers find out. The Law of Ukraine On Employment of Citizens directly bans any limitations regarding employees to be hired by any other employer.
In particular, you can sign any Non-compete agreement and you can include in it any provisions and clauses, all of them will be null and void and your customer can easily hire your employee without any negative legal consequences. None fines can be imposed if this happens. You cannot also collect any reimbursement for the alleged provided studding.
Actually, there are some legal mechanisms to get compensated in such cases but this will be a topic for another article.
7) Outstaffing permit. This permit is envisaged by some regulation that has not been enforced yet because some other law to be approved. Hence it is impossible to obtain such a permit eve if you wanted it.
8) Proper documentation of relations between the outstaffer and the customer. There should be a signed outstaffing contract, staff needed orders, acceptance and delivery acts, timetable of hours worked by every leased employee, invoices, orders (resolutions) on the staff transit.
It needs to be mentioned that even a professionally tailored outstaffing contract cannot solve all issues. However, it helps to avoid most of them. The first thing that the state authorities will want to check is the outstaffing contract. For this type of relations, a template downloaded from the Internet is a very bad choice.
Here we would like to stress about the common problem of most IT companies – a very weak specification of provided services in contracts, acts and invoices. Usually you can find in there something like “The Contractor provides and the Client accepts services for leasing out personnel.”. That is all. Such general phrase merely shows that some services were rendered but does not point out how the contractor was able to provide this service, how much time did the employee work, how much word did he do and, therefore, it does not allow answering how much salary shall be paid.
9) Economic reasonability. This is what the Tax Office likes to use as an argument for voidance of outstaffing contracts.
For example, a customer has its own programmers who receive minimum salary yet now it outstaffs same programmers from an outstaffing company for a higher price. The Tax Office, in this case, will reasonably question this deal suspecting it in a money cashing attempt.
10) Three more. There are 3 other prohibitions in the law regarding outstaffing business. They are very rare for the IT industry but it is better to keep them in mind just in case.
The law says that it is prohibited to send personnel to another employer who:
- layed off its staff during this year;
- does not meet a number of employees of the main professions worked in technical processes of the main manufacturing;
- needs extra staff for execution of work in hard conditions and for main professions in the technical process of the main manufacturing.
And the last thing:
As we see, outstaffing is not only a cool word and not only a contract with the same title. It is some relations, somehow complicated, have a list of defined requirements breach of which may cause losses and fined for hundred thousands of US dollars.
However, it is not that complicated to be afraid of. Outstaffing is a very useful model of creating teams for IT projects. All you need to do to be protected is simply to get professional help in preparation of outstaffing operations.
Bonus: We share our list of TOP 5 legal problems in the IT sector we discovered.
Contact Legal Ideas law firm for a free preliminary legal audit of your IT business in order to reveal existing legal issues and to find out how to solve them.