A day seldomly goes by where the effects of the current labour shortage are not heard, referenced or experienced. This shortage is currently glaring in the manufacturing sector, which, according to the Manufacturiers et Exportateurs du Québec organization, suffers from a lack of operators, welders, machinists, assemblers, mechanics and engineers.
According to a BDC study, the manufacturing sector is the second most affected sector by the current labour shortage, tied with the retail and wholesale sector. This unfortunately results in limitations in commercial growth, loss of contracts and deals, payment of monetary penalties due to backlog, and a reduction in overall business production.
For employers, the usual response to this labour shortage is to intensify their efforts to attract available workers by improving working conditions. This approach, however, is subject to its own limitations given the acute competition in the market. In parallel, employers sometimes make efforts to broaden the recruitment pool by asking employees to take later retirement, or to promote immigration initiatives and hire personnel from abroad. Alternatively, certain employers have chosen to automate their processes; this, however, isn't always a viable option as it can be time-consuming and costly.
A solution that companies sometimes overlook or misuse consists in using contractual tools to increase their access to resources. Companies - manufacturing or otherwise - are often familiar with certain contractual models but are not always aware of all the available contractual tools that may aid in minimizing the effects of the labour shortage, and may perhaps even help them distinguish themselves. In fact, there are several contractual models (other than the traditional employment contractual model) that can be used to unlock further resources. Such models offer increased flexibility and provide options to manufacturing companies looking for solutions. However, it is important to first understand these models' specifics in order to achieve the desired objectives.
The Service Contracts: A Flexible Tool
A contract similar, yet distinct in nature from employment contracts is the consulting or service contract. Such type of contract is usually formed between a company and an individual (or a management company owned by that individual). A key difference between a service contract and an employment contract is independence; an employment arrangement entails a relationship of subordination between the employer and employee.
A service or consulting contract offers more flexibility and certain tax benefits to self-employed workers and avoids certain payment obligations for the company generally related to employment (ex. social security). However, it is important to ensure that this contract cannot later be characterized as a «disguised» employment contract. In this case, the individual may be able to benefit from certain legal protections afforded by applicable labour law including those used in the event of wrongful dismissals or workplace accidents. Additionally, it should be noted that a service provider's confidentiality and loyalty obligations are generally of a lesser degree than employees. However, contrary to employees, intellectual property developed by service providers belong, by default, to the service provider (and not to the company!). The consulting or service contract must therefore be well drafted to take these elements into account.
A business that wants to access resources of another, either locally or abroad, can enter into a service contract, which may be called a subcontract or outsourcing contract. There are many variations of such type of arrangement.
One of the main variations is whether the service provider offers access to resources at specified hourly rates or is responsible for delivering a predefined outcome. If the work is to be done at a specified hourly rate, the client company generally remains responsible for managing the resources; this results in the client retaining more control of the processes and knowledge related to the execution of the services. However, the client also retains the risk of execution and is subjected to staff turnover. In the second case, the service provider assumes responsibility for execution and guarantees a result, which has obvious advantages. However, the client must accept a certain loss of control and know-how of certain processes.
In some cases, companies do not have formal agreements and instead issue purchase orders for the services required. However, in the current situation of labour shortages and fragile supply chains, this approach is risky. A subcontractor who is not bound by more formal framework is not obliged to continue to deliver the products and services, even if the relationship was long-standing. This could result in a subcontractor refusing a purchase order. Moreover, nothing prevents the supplier from increasing its prices or changing the nature of its products and services. This is why a company whose activities rely heavily on subcontractors must pay particular attention to implementing solid long-term contracts.
Long-term subcontractor contracts should clearly identify the services, deliverables, schedule (timeline), pricing, delivery and payment terms. If such an agreement is put in place with a foreign company, it is important to identify the laws that will apply in the event of a dispute (governing law), and the court that will adjudicate in the event of a dispute (governing venue). Although the contract may provide that Québec law will apply, there are often certain rules of public order or local standards that will also de facto apply to the relationship. Key issues related to confidentiality, exclusivity and intellectual property will need to be addressed in the contract, which becomes the law of the parties.
The Partnership Contract: Building a Long-Term Relationship
A third contractual option for dealing with labour shortages, which is often more binding and complex, but has great potential, consist in combining property, knowledge or activities with those of another business and to share the profits from the joint activities. This arrangement is known as a partnership.
There are several ways companies may wish to structure a partnership; the most well known consists in forming a joint-stock partnership, known as a "corporation". We also sometimes hear of the formation of consortiums or joint ventures. This can be an interesting option, for example, if a company with an interesting technology or customer base wishes to establish a long-term relationship with another company that has access to qualified resources, either locally or abroad. Needless to say, partnership agreements must be carefully drafted and are subject to significant negotiations.
Acquiring Another Business: A Definitive Avenue
Finally, a business that wishes to have access to the resources of another entity on a more permanent basis may acquire it, either through an asset or share purchase. In this case, a proper due diligence of the assets and liabilities of the target business must be conducted, keeping in mind that the acquiring company is acquiring the employment contracts of the target company "as-is". This means that it is bound by the terms and conditions of such contracts, which implies, among other things, that it will have to respect the seniority of the employees and their existing terms of employment. This solution is currently being adopted by many businesses, which undoubtedly explains, in part, the marked increase in merger and acquisition transactions over the past few years and the increased business consolidation in the manufacturing sector.
In short, there are many available contractual tools that can be customized to each company's business reality and desired objectives. It would be a shame not to take advantage of the huge collaboration potential available, locally and abroad. Of course, as with all opportunities, there are risks to consider; the overall decision on how to navigate a labour shortage requires careful analysis and planning, but once you land on the right, well-crafted solution, the payoff is worth it. As with any crisis, the current labour shortage can be seized as an opportunity for growth and improvement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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