President Obama’s current programs are very likely to limit growth of small businesses to mid-sized businesses and will promote automation, “right-sizing,” outsourcing and offshoring in 2014. We examine some of the key themes in his tenure as President since 2009, particularly those in his State of the Union Address on February 12, 2013. Outsourcing and offshoring might be increased as a result of his policies on healthcare, energy taxation, energy infrastructure investment, higher local U.S. wages and even new regulations on cybersecurity.
Burdening Both Small and Larger Businesses): Bye-Bye, Back Office Employees; Hello, New Small Service Providers. The Patient Protection and Affordable Care Act of 2010 is pushing small business owners to cut back on full-time employee staffing. The law is over 1,000 pages long. Among its key provisions is a mandate for individuals to get medical insurance (or pay a tax of $2,000). Another key mandate requires U.S. employers with over 50 full-time employees to pay for coverage for their employees, effective January 1, 2014. (Incidentally, as of March 1, 2013, U.S. employers must now disclose to their employees in writing whether the employer has obtained medical insurance for the employee.)
Under these conditions, outsourcing will grow because the back office (finance, accounting, human resources administration) does not generate revenue and thus cannot be leveraged for purposes of valuation. We predict a boomlet of new small service providers offering such services, with the real work being done in foreign countries under the supervision of U.S. founders. For a well-designed new service provider, startup costs are modest and return on investment can be recovered within six to twelve months by leveraging a scalable offshore service delivery center.
Even if such outsourcing is not so robust, small business owners will seek to enter into new “independent contractor” agreements with current back office employees to kick them off the payroll and keep the business size at below 50 FTE’s.
Favoring Foreign Manufacturers and Service Providers: New Tax on U.S. Energy Consumption, No Tax on Products of Foreign Energy Consumption. President Obama wants a carbon tax on energy consumption. A draft law failed in 2010. Now, if Congress does not act, he will administratively issue regulations to “reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.”
If such a carbon tax is enacted, it will apply only to U.S. producers of energy and other greenhouse gas (GHG) emissions. The tax would not apply to foreign energy producers or foreign GHG emissions. The tax would not be applied to the importation of finished products from countries that have not such tax. So such a tax would increase the cost of U.S.-made products (and energy consuming services such as office workers) and also promote the importation of foreign-made goods and foreign services that are not so taxed.
Promoting Foreign Jobs along with American Jobs: Upgraded U.S. Energy Production Infrastructure. President Obama approves the hiring of U.S. workers by foreign companies in the U.S. “The CEO of Siemens America — a company that brought hundreds of new jobs to North Carolina — said that if we upgrade our infrastructure, they’ll bring even more jobs. And that’s the attitude of a lot of companies all around the world. And I know you want these job-creating projects in your district.” It’s not clear where the R&D work or manufacturing will take place for energy projects, but the U.S. does have some obligations under WTO agreements to treat certain foreign manufacturers equally.
Comparative Advantage for Automation: Higher Minimum Wages, Maybe More Automation. “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.” By increasing the cost of labor, this could promote capital investment in machines and software that could replace labor.
Cybersecurity: Sharing of Private Data with U.S. Government. In his speech, President Obama viewed cybersecurity of critical infrastructures as essential to national security. “And that’s why, earlier today, I signed a new executive order that will strengthen our cyber defenses by increasing information sharing, and developing standards to protect our national security, our jobs, and our privacy.”
His Feb. 12, 2013 Executive Order to Improve National Cybersecurity will establish a “voluntary information sharing program” that will “provide classified cyber threat and technical information from the Government to eligible critical infrastructure companies or commercial service providers that offer security services to critical infrastructure.” Under this Executive Order, the term critical infrastructure means “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.”
The regulations implementing this “voluntary” program have not been drafted. A draft law on the same subject failed in 2012 because “voluntary” sharing did not come with insulation from liability to third-party stakeholders such as customers, individuals, patients, suppliers and others.
We can speculate whether the eventual regulations will promote offshoring of data centers or more virtualization of data services. It could have the opposite effect, of forcing full supply-chain cybersecurity across national borders. It could result in more segregation of data collected overseas and hiving off of such data so that it is not processed in the U.S. in order to avoid potential liability from complying with the new regulations.
OUTSOURCING LAW & BUSINESS JOURNAL™ : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com.
Insights by Bierce & Kenerson, P.C. Editor. www.biercekenerson.com.
Vol. 12, No. 5, June 2012
1. ObamaCare Survives Judicial Death Threat: Impact Of Supreme Court Decision On Offshoring And Outsourcing.
1. ObamaCare Survives Judicial Death Threat: Impact Of Supreme Court Decision On Offshoring And Outsourcing. The U.S. Supreme Court’s historic 5-4 decision approved the constitutionality of the entire Patient Protection and Affordable Care Act, P.L. 111-148 (March 23, 2010) [“ObamaCare”]. Nat’l Fed. of Indep. Businesses v. Sebelius, 567 U.S. ____ (June 28, 2012). How will this law impact the global services industry? Will it favor offshoring? Will it create new outsourcing business models? What opportunities arise for new forms of outsourcing services and, indeed, for global entrepreneurship? Click here for our view on the impact, followed by a brief legal summary for those who study constitutional law in the United States.
Healthcare outsourcing, (n). (1) management of patient care by non-medical service providers; (2) a form of nuclear medicine, for embedding low-radiation, low-cost information technology into medical treatment and for extracting exponential monetary value; (3) IT implant into a diseased organization.
Electronic Medical Record, (n). (1) patient’s medical chart, including the most personal of personal information, etiology, diagnosis and prognosis; (2) metadata for Big Data analytics; (3) litigation fodder for claims of security breach, malpractice, transborder data mismanagement, and cloudy computing.
September 10-12, 2012, IQPC presents its 13th Annual eDiscovery West Coast Summit, San Francisco, California. Across all industries corporations are experiencing exponential growth in the ESI volumes that must be collected, reviewed, and in some cases, produced in litigation. Requesting, preserving, collecting, processing, and reviewing social media content presents new challenges for organizations of all sizes in litigation and day-to-day records management. IQPC has paid particular attention to these dynamics in crafting this year’s program. You will benefit from an unparalleled mix of thought leaders and industry movers who will shape the future of E-Discovery for years to come. This is a must attend event to keep your organization up to speed on the developments and new horizons in this critical field. For more information on speakers and sessions, click here, download the brochure here or email email@example.com to have it sent straight to your inbox.
FEEDBACK: This newsletter addresses legal issues in sourcing IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at firstname.lastname@example.org. The information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: email@example.com. Edited by Bierce & Kenerson, P.C. Copyright (c) 2012, Outsourcing Law Global, LLC. All rights reserved. Editor-in-Chief: William Bierce of Bierce & Kenerson, P.C., located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080.
ObamaCare Survives Judicial Death Threat: Impact Of Supreme Court Decision On Offshoring And Outsourcing
The U.S. Supreme Court’s historic 5-4 decision approved the constitutionality of the entire Patient Protection and Affordable Care Act, P.L. 111-148 (March 23, 2010) [“ObamaCare”]. Nat’l Fed. of Indep. Businesses v. Sebelius, 567 U.S. ____ (June 28, 2012).
How will this law impact the global services industry? Will it favor offshoring? Will it create new outsourcing business models? What opportunities arise for new forms of outsourcing services and, indeed, for global entrepreneurship? Here’s our view on the impact, followed by a brief legal summary for those who study constitutional law in the United States.
Impact of the ObamaCare Decision upon Outsourcing and Offshoring. The most important aspect of this law is its complexity (over 900 pages, with new regulations to follow). For the outsourcing industry, the decision is highly positive for process managers seeking to develop service offerings in the administration of healthcare insurance, healthcare funding and corporate human resources.
- In general, new consulting advisory services will develop tech-enabled decision analsyis and recommendations. They will identify how to enable small businesses to choose whether, and how, to provide insurance plans for employees. For large busineses, they will help direct how to manage internally, or externally, a huge healthcare bureaucracy for the employer.
- For small businesses, new consulting advisory services (and related process automation and outsourced services) may develop to stay below the threshold of a “large” employer to avoid ObamaCare’s mandatory coverage requirements for “large” employers.
- For insurers and health plans, the pressures for cost containment, regulatory compliance and operational efficiencies will offer opportunities for both consulting and outsourcing, and even offshored teleservices by U.S. qualified medical professionals.
U.S. Health Insurance Model. Unlike other countries, the U.S. has not nationalized healthcare. Instead, since 1965, it has provided nationalized healthcare to seniors (aged 65 and over) under Medicare. Historically, it has also provided Medicaid to younger, but more needy persons in limited categories.
New Class Warfare; New U.S. Business Models . The ObamaCare legislation creates a “class warfare” between “small” businesses and “large” businesses. ACA exempts “small employers” from the duty to carry health insurance for their employees. “Large employers” (with more than 200 full-time employees who perform at least 2,080 hours of service per year subject to vacations and statutory exceptions) must automatically enroll all new full-time employees in one of the plans offered and continue the enrolment of current empoloyees in a health benefits plan offered through the employer.
We offer some predictions on the future of employment in the United States.
- Business Models. New business models will arise, based on outsourcing, virtualization and avoidance of the 200-employee limit.
- Accelerated Offshoring and Outsourcing. The costs, complexity, bureaucratic burdens and overhead, and proliferation of employment litigation associated with mandatory healthcare rules will inspire entrepreneurs to outsource and offshore everything possible. ObamaCare will accelerate the offshoring of both low-level functions (such as non-voice customer relationship management, credit card claims processing, mortgage origination and administration, and other routine business functions) and high-level functions (such as R&D, market research, accounting and tax administration, cash management, etc.).
- “Small is Beautiful.” A wave of new incorporations and new LLC’s will be the new norm for establishing rapid-growth organizations.
- Networked Virtual Organizations. “Small employers” will stay under 200 FTE’s in the U.S., but will partner with other small employers in the U.S. and with outsourcing service providers wherever possible.
- Compliance, but with Cutbacks. Large global corporations will devote more costs and management time to compliance with new regulations. Entrepreneurial leaders at large organizations will consider leaving to form new “small employer” organizations based on a virtualized, global, partnered (outsourced, offshored and allianced) business model.
New HITO: Healthcare IT Outsourcing (New Software Platforms and Service Solutions). Like the Employee Retirement Income Security Act of 1974 (“ERISA”), the Affordable Care Act creates complex new rules governing human resource administration. Like ERISA, ACA delegates extensive authority to bureaucracies to review mandatory disclosure reports by employers in order to ensure employers are not discriminating in favor of highly compensated individuals and includes enforcement mechanisms. The ACA imposes both civil and criminal penalties for non-compliance.
In addition, ACA already has adopted healthcare IT mandates including subsidies for electronic medical records (EMR). Secretary of Health and Human Services (“HHS”) has adopted regulations for developing interoperable and secure standards and protocols that facilitate enrollment of individuals in Federal and State health and human services programs. Sec. 3021(a). “Third party service providers” are identified as having a legislatively approved role to facilitate enrollment in covered insurance plans.
New Security and Compliance Requirements. The outsourcing industry was born out of “boring,” repetitive “standard” business processes. ACA creates a “perfect storm” for outsourcing of many new “boring” processes in human resources administration.
IT-Enabled Healthcare. ACA also delegates authority for administrative regulations under HHS to develop standards and protocols for electronic enrollment in Federal and State healthcare programs. Sec. 3021(b).
(1) Electronic matching against existing Federal and State data, including vital records, employment history, enrollment systems, tax records, and other data determined appropriate by the Secretary to serve as evidence of eligibility and in lieu of paper-based documentation.
(2) Simplification and submission of electronic documentation, digitization of documents, and systems verification of eligibility.
(3) Reuse of stored eligibility information (including documentation) to assist with retention of eligible individuals.
(4) Capability for individuals to apply, recertify and manage their eligibility information online, including at home, at points of service, and other community-based locations.
(5) Ability to expand the enrollment system to integrate new programs, rules, and functionalities, to operate at increased volume, and to apply streamlined verification and eligibility processes to other Federal and State programs, as appropriate.
(6) Notification of eligibility, recertification, and other needed communication regarding eligibility, which may include communication via email and cellular phones.
(7) Other functionalities necessary to provide eligibles with streamlined enrollment process.
New Training Mandates. Since the law is new, it requires obligatory trainings. The corporate education markets will expand.
More Litigation under New Civil Rights and Whistleblower Protections. ACA is good for e-discovery and Legal Practice Outsourcing. It creates new entitlements and protected classes of employees. This will result in new costly litigations. The plaintiff’s class action lawyers will reap big rewards for mistakes or disputes that need to be settled just to avoid distractions, uncertainty and costs.
First, it creates new civil rights, which can be enforced by plaintiff’s contingency-fee lawyers using class actions. Employees may not be excluded from participation in, be denied the benefits of, or be subjected to discrimination under, any health program or activity, any part of which is receiving Federal financial assistance, including credits, subsidies, or contracts of insurance, or under any program or activity that is administered by an Executive Agency or any entity established under ACA. Sec. 1557, extending civil rights under title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d et seq.), title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.), the Age Discrimination Act of 1975 (42 U.S.C. 6101 et seq.), or section 504 of the Act of 1973 (29 U.S.C. 794).
Second, in addition to substantive healthcare civil rights, the ACA adds a “whistleblower” protection for employees who report to their employer, the federal government or a State Attorney General, any violation of, or act or omission that the employee reasonably believes to be a violation of, the ACA. Similar protection is granted for an employee’s right to object to, or refuse to participate in, any activity, policy, practice or assigned task that is or is reasonably believed to be such a violation. ACA, Sec. 1558.
The Legal Decision on Constitutionality.
Judicial Restraint. A minority of four justices would have invalidated the entire law. Writing for the majority, Chief Justice Roberts chose to uphold the law as a “tax” (even though it is not said to be a tax) and pushed the debate back into the political arena of the November 2012 Presidential elections: “It is not our job [as a Supreme Court] to protect the people from the consequences of their political choices” of legislation enacted by an elected Congress.
Two Key Issues. The judicial decision focused on narrow constitutional principles of limited federal legislative powers as enumerated under the federal Constitution. It addressed two technicalities: the “individual mandate” to either get health insurance coverage or pay a federal health tax, and the expansion of scope of Medicaid in such a manner that the States would have to subsidize a new class of individuals in order to continue to enjoy federal funding for a 50 year old Medicaid program with limited costs and scope.
Individual Mandate: the “Shared Responsibility Payment.” On the “individual mandate,” the decision confirmed that Congress may impose a penalty (called a “shared responsibility payment” but treated judicially as a tax) on individuals who choose not to obtain insurance coverage, even though the tax is on doing nothing. Justice Roberts, the swing vote, noted that the individual health care tax is not confiscatory or punitive, and imposes no other restraint than the payment of the tax. The decision represents an expansion of federal legislative power to tax individuals for doing nothing by relying upon the Taxing Clause of the Constitution and not the sweeping Commerce Clause
Medicaid Expansion. The Court struck down the “Medicaid expansion” that would, if enacted, have coercively and unconstitutionally forced the States to raise taxes to cover 10% of new insurance programs covering virtually an entire subclass of individuals earning family income at 133% or less of the federal “poverty level,” far more than the pre-existing Medicaid scope and costs. So the law was upheld, but it will have a shortfall in revenue where States choose not to “opt in” to provide such new medical coverage for that class of individuals. Hence, a State may elect to continue the existing Medicaid program (which covers the most needy: pregnant women, children, needy families, the blind, the elderly and the disabled.
In considering talent management strategies, employers inevitably consider the relative costs of hiring employees and complying with labor law. Such considerations include the regulatory regime governing minimum wages, unionization and, now, health care compliance. For example, in the 1980’s, Japanese automakers chose to set up manufacturing plants in non-union “right to work” states in the South, rather than in states where unions are strong. Enacted in July 2010, U.S. healthcare reform (“ObamaCare” or the “Patient Protection and Affordable Care Act”) will force employers large and small to consider sending jobs offshore. ObamaCare also promotes medical tourism for cosmetic surgery.
Reforms. The Patient Protection and Affordable Care Act, H.R. 3590, 111th Cong., 2nd Sess., restructured the tax and regulatory conditions governing healthcare for all Americans. The act requires all Americans to be covered under healthcare insurance under standard underwriting conditions. These core conditions prevent insurance companies from creating different pricing models based on actual health of the individual. They consist of nine core principles, the first eight of which conflict with the ninth.
1. a prohibition of preexisting condition exclusions or other discrimination based on health status.
2. “fair” health insurance premiums through extensive legislative and regulatory controls of the underwriting process.
3 guaranteed availability of coverage for all, so that insurers cannot deny issuance of insurance.
4. guaranteed renewability of coverage.
5. prohibiting discrimination against individual participants and beneficiaries based on health status.
6. non-discrimination in health care.
7. comprehensive health insurance coverage, so that coverage provides substantial benefits.
8. a prohibition on excessive waiting periods.
9. freedom to opt-out of the Federal health employment law.
Mandatory Health Insurance for All Americans. Beginning in 2014, all U.S. individuals will be required to be covered by health insurance, or they will have to pay a tax penalty. In general, the new law mandates healthcare coverage, either individually (through an Exchange or other permitted, regulated insurance program) or through an employer’s program. Individuals who are employed must pay for their own coverage if the employer does not. As a result, individuals will gravitate to employers who offer employer sponsored health plans. Section 5000A(a) of the Act requires that each “applicable individual” shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month. Failure to be insured will result in a tax liability (called a “penalty” but payable under the tax code) of up to 300% of $750 (plus cost of living adjustments) per year. Section 5000A(c). Spouses are jointly and severally liable, as are taxpayers responsible for their dependents under Section 5000A(b).
Illusory Freedom of Business to Opt Out. The Act expressly permits everyone to opt out, but it does not appear to override the universal mandate for “applicable individuals” to be covered by conforming healthcare insurance. Section 1555 states the “opt-out” principle in terms of opting out of a health insurance program created under ObamaCare.
No individual, company, business, nonprofit entity, or health insurance issuer offering group or individual health insurance coverage shall be required to participate in any Federal health insurance program created under this Act (or any amendments made by this Act), or in any Federal health insurance program expanded by this Act (or any such amendments), and there shall be no penalty or fine imposed upon any such issuer for choosing not to participate in such programs.
This option is illusory and contradictory with the penalty provisions.
- Individuals Subject to Penalty Tax. Under Section 5000A, individuals who are not covered must pay a penalty tax.
- Large Employers Subject to Penalty Taxes. Under Section 1513 (enacting Section 4980H of the Internal Revenue Code), large employers (with over 200 employees) who fail to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) must pay similar penalty taxes. Under Section 1514 (enacting Section 6056 of the Internal Revenue Code), large employers must file tax returns demonstrating compliance with the healthcare coverage (and penalty) rules. Similarly, under Section 9001 (enacting Section 4980I of the Internal Revenue Code), ObamaCare imposes a 40% tax on “high value” employer-sponsored health coverage, to dissuade entrepreneurs from benefiting senior managers to the disadvantage of lower income employees.
Actual Freedom to Opt Out: Applying Territorial Limitations of Universal Healthcare. ObamaCare creates a new territorial limitation on the universal mandate of minimum-standard healthcare coverage. Like minimum wage laws and the Fair Labor Standards Act (which ObamaCare amends), the new ObamaCare legislation does not apply to services rendered outside the U.S.A. The universal healthcare insurance mandate of ObamaCare cannot not apply outside the United States. For purposes of mandatory coverage, the Act covers all “applicable individuals.” But the definition excludes
- religious conscience exemption,
- incarcerated individuals,
- health-sharing ministries, for individuals sharing “a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs”; and
- individuals who, for the month in question, are not a citizen or national of the United States or an alien lawfully present in the United States. On any given month, the mandatory health insurance coverage does not apply to U.S. citizens residing abroad (under Section 911(d) of the Internal Revenue Code) or in U.S. territories and possessions
Peripatetic Employees: Social Security and Retirement Benefits. The United States has entered into certain treaties with other countries for the reciprocal recognition of entitlement to social security benefits for nationals of one country who work in another. The normal work period for entitlement is five years. For the U.S.-India convention, the wait is 10 years, long after the expiration of the 6-year maximum for an H1-B visa.
Discrimination against Knowledge Workers (“Discrimination based on Salary”). ObamaCare does not allow employers to discriminate in favor of a group of persons based on based on the total hourly or annual salary of the employee or otherwise establish eligibility rules that have the effect of discriminating in favor of higher wage employees under Section 2716. Of course, discrimination against highly-compensated employees is permitted, allowing plan sponsors to impose “contribution requirements for enrollment in the plan or coverage that provide for the payment by employees with lower hourly or annual compensation of a lower dollar or percentage contribution than the payment required of similarly situated employees with a higher hourly or annual compensation.” In effect, nothing prevents an employer for charging more to highly paid employees for the same health coverage. Id.
Medical Tourism for Cosmetic Surgery. Section 9017 of the Act establishes a new 5% excise tax on cosmetic surgery, which is defined as any medical procedure that is “not necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.” The tax is imposed on the patient, but the surgeon must pay it if he or she fails to collect and pay the tax at the time of the surgery. The tax applies retroactively to all procedures performed on or after January 1, 2010. While a 5% tax might not make a difference for wealthy persons, it certainly will promote medical tourism to India, Brazil and other foreign high-tech medical destinations.
Trade Regulation Supports Offshoring. The current international trade regulatory regime does not stand in the way of enterprises moving jobs around to obtain skills anywhere. Nothing in the WTO agreements requires foreign countries to match similar labor entitlements. Nothing in the WTO agreements allows the U.S. to impose an import tariff on the work product of foreign labor, since that would discriminate on the basis of country of origin. In the field of trade in goods, the WTO (and before it, GATT) applies long-standing solutions of countervailing duties to offset foreign governmental export subsidies and anti-dumping duties to prevent predatory foreign pricing. Such solutions simply do not function in a service-based global economy. In short, the WTO regime supports offshoring.
Impact of ObamaCare on Globalization and Offshore Outsourcing.
- Wider Gap, More Labor Arbitrage. By increasing the costs and regulatory burdens on employers hiring individuals lawfully in the United States, the Patient Protection and Affordable Care Act widens the gap between U.S. labor costs and foreign labor costs. Quite literally, it is built upon a tax on business and a tax on individuals. Accordingly, it is predictable that ObamaCare will accelerate offshoring and globalization of talent pools of enterprises large and small.
- Expansion of the Global Small Business. While small businesses with fewer than 25 employees may be able to obtain U.S. federal subsidies for offering healthcare insurance, they lose such subsidies if they grow, and even if they qualify the subsidies are limited to promotion of healthcare for low-wage workers. Hence, even small businesses have an incentive to develop multinational talent pools. As part of this evolution, savvy entrepreneurs (and their Venture Capital investors) will constantly seek methods for hiring talent globally, whether by outsourcing or offshoring, or both.
- Rise of the Global Sweat-Equity Business. The “new normal” under U.S. labor law opens the door for a “global sweat-equity business,” where all (or most) workers are co-owners. ESOPs (employee stock ownership plans) are complicated and limited to U.S. law. Other partnership-type legal paradigms can achieve a “global sweat-equity business” for rapidly growing entrepreneurial ventures. Many smaller businesses (with between 25 and 100 employees) can pursue global markets using global talent and global sources of investment and innovation. With a suitable legal structure, global “sweat equity” enterprises can tap into global talent and yet provide a single layer of income taxation and incentive compensation (in the form of equity interests and/or profit sharing) to employees globally. The details of such business models involve taxation, employment law, intellectual property, corporate and relationship governance, securities law for owner-employees, risk management and other disciplines. Beyond simple outsourcing, the global sweat-equity business model offers the one-to-one relationships globally that were promised by the Internet revolution.
- William B. Bierce, Esq., Bierce & Kenerson, P.C. – Outsourcing Lawyer
- Larry Scinto, PA Consulting, Managing Consultant
- Neil McEwen, PA Consulting, Managing Consultant
- How do I put together an effective contingent workforce strategy to optimize my investment in contingent labor?
- How do I ensure that my business customers are engaged in the case for change and buy-in to common technology, process, policy and governance?
- How do I govern multiple providers and ensure effective performance and value for my investment?
- What technologies should I be using to track provider/contingent worker utilization and performance?
- How do I ensure that legal/regulatory/compliance risks are recognized and managed in all geographies where I operate?
- How do I ensure that there is effective governance across the entirety of my contingent workforce?
- How do I manage risk and compliance issues that arise through the implementation of a contingent workforce?
- Organizing an effective records program by tapping into existing resources
- Developing a litigation preparedness plan
- Determining judges’ priorities when eDiscovery conflicts arise
- Aligning the interests of IT, inhouse and outside counsel
- Handling eDiscovery via social media sites and other new sources of ESI
- Controlling the cost of review while maintaining defensibility
- Saving money by employing Early Case Assessment tools and new technologies
- Speakers from Top Companies:Aramark, Arbys/Wendy’s, AstraZeneca, Chevron, Coca-Cola, Conagra Foods, General Motors, Kellogg, Kraft, Microsoft, Monster, NASA, Northrop Grumman, Oakley, Perdue Farms, Schering Plough, Warner Brothers and more
- G8: Global Sourcing Think Tank Eliminating the White Noise: The first ever neutral platform to help shape a common industry agenda in the US
- Under the C-Suite Spotlight with Rene Carayol, An Exclusive Onstage CXO Interview: Board-room revelations regarding shared service & sourcing model strategy
- New, Strong, Business Outcome-Focused Content: 8 content-intense tracks, from Planning & Launching and BPO Evolution to IACCM’s Contracting to Collaboration
- Enhanced Annual Features: Quick Wins Energizers, Speed Networking, Blue Sky Innovation Room for Mature SSO’s, and more.
P.S. See the Bierce & Kenerson, P.C. webinar, December 9, 2010, on the “Global Sweat-Equity Business.”
OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events. Insights by Bierce & Kenerson, P.C. www.biercekenerson.com
Vol. 9, No. 11 (November, 2009) Last Opportunity to Register - Webinar on Sourcing of Global Talent
Managing Knowledge, Compliance and Legal Risks in Sourcing of Global Talent
Thursday November 17, 2009, 11 A.M. – 12 Noon, Eastern Daylight Time U.S.
Agenda. This webinar will discuss the human capital management for the contingent workforce in our current economic climate. The speakers will address issues in designing a contingent workforce strategy, managing this contingent workforce, effective governance and the managing risks and legal issues that arise with the implementation of such a workforce. In this webinar, some of the questions that will be discussed are:
This webinar is by invitation only. To register, please click here. _________________________________________________________________________
1. “ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries).
1. “ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries). If enacted, President Obama’s healthcare reform would probably hurt domestic employment and accelerate automation, outsourcing and offshoring. It would change the economic incentives for keeping service industries in America. And it would hurt foreign-owned businesses whose ultimate parent company is based in a tax haven or other country that has no U.S. income tax treaty. On November 6, 2009, by a paper-thin margin of 220 votes to 215, the U.S. House of Representatives passed the “ Affordable Health Care for America Act,”H.R. 3962, the 1,990-page health care reform law that has been frequently called “ObamaCare.” If substantially adopted by the Senate and passed into law, the bill would impose significant new burdens on employers and self-employed persons. For the complete article, please click here.
Healthcare reform, n. (1) a plan to make healthcare “affordable” in America by making employment less affordable.
Independent contractor, n. (1) a staffing company, outsourcing service provider or personal service company working on projects under a defined scope, subject to change control procedures and never under the direction or control of the enterprise customer except by contract revision; (2) a free spirit, within the freedom of the statement of work.
December 6-8, 2009, IQPC and SSON’s 4th European Shared Services Exchange, The Hague, Netherlands. Following the success of our Shared Services Exchanges in North America we are now launching the new format for Europe, bringing together senior level conference topics in a highly productive and interactive meeting platform. The 4th European Shared Services Exchange is an invitation-only gathering for VP and C-Level senior Shared Services executives from successful European organizations. With a distinguished speaking faculty from Dell, Lafarge and Microsoft amongst others, the seats at the 2009 Exchange are limited and filling up quickly. We have limited complimentary invitations available for qualified delegates for a limited time. Please give us your reference when inquiring. There are solution provider opportunities also available for companies who want to be represented. You can request your invitation at firstname.lastname@example.org or call us at 1866-296-4580. Visit the website for more information.
December 7-9, 2009, Legal IQ and IQPC’s 8th Annual E-Discovery Conference in New York, New York. Legal IQ and IQPC present the 8th eDiscovery event this December in New York City. Bringing industry leaders together to explore current risks, opportunities and challenges facing eDiscovery, this event will offer best practices and possible solutions to the ever remaining question: How can we lower our costs? This event goes beyond the traditional basics by examining the critical, high level, and strategic issues. Some of the topics to be addressed by the expert speaker faculty will be:
For more information and to register for this event, please click here.
January, 24-26, 2010, IQPC Business Process Outsourcing and Shared Services Exchange 2010, West Coast, USA. This is an invitation-only gathering for VP and C-Level senior Shared Services and Outsourcing executives made up of highly crafted, executive level conference sessions, interactive “Brain Weave” discussions, engaging networking opportunities and strategic one-on-one advisory meetings between solution providers and delegates. With a distinguished speaking faculty from McGraw-Hill, Ingram Micro and Pfizer, amongst others, the seats at the 2010 Exchange are limited and filling up quickly. We have limited complimentary invitations available for qualified delegates for a limited time. Please give us your reference ‘Outsourcing Law’ when inquiring. There are solution provider opportunities also available for companies who want to be represented. You can request your invitation at email@example.com, call at 1866-296-4580 or visit their website.
February 22-24, 2010 ,SSON and IQPC 8th Procure-to-Pay Summit, Miami, Florida. Join Procurement, Accounts Payable and Sourcing professionals at the 8th Procure-to-Pay Summit to discuss new initiatives for procurement as IQPC and SSON continues with its Procure-to-Pay series in 2010. More information will be available shortly. In the interim, check out what happened at the 7th P2P Summit this past summer.
March 22-26, 2010, SSON presents the 14th Annual North American Shared Services & Outsourcing Week, Orlando, FL. Here’s a sneak peek of new and enhanced features, which include:
Please contact Kim Vigilia directly at 1-212-885-2753 or at firstname.lastname@example.org with your special code IUS_OSL_#1 to get a 20% discount off the all-access pass. You can also visit the website at www.sharedservicesweek.com.
“ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries)
If enacted, President Obama’s healthcare reform would probably hurt domestic employment and accelerate automation, outsourcing and offshoring. It would change the economic incentives for keeping service industries in America. And it would hurt foreign-owned businesses whose ultimate parent company is based in a tax haven or other country that has no U.S. income tax treaty.
On November 6, 2009, by a paper-thin margin of 220 votes to 215, the U.S. House of Representatives passed the “Affordable Health Care for America Act,” H.R. 3962, the 1,990-page health care reform law that has been frequently called “ObamaCare.” If substantially adopted by the Senate and passed into law, the bill would impose significant new burdens on employers and self-employed persons.
Automate, Outsource, Offshore. As a result of the new mandatory taxes and/or health costs, American employers would be encouraged to automate processes, outsource many business functions to external service providers for more automation, and offshore many business functions. At a time when the U.S. unemployment rate is over 10%, this health care bill could permanently kill re-hiring in many service jobs that have been lost. It would encourage further globalization of American enterprises to establish foreign shared-service captives.
Taxing American Employers Encourages Export of U.S. Jobs. This version of ObamaCare would require every American citizen and lawful permanent resident (but not illegal immigrants) to enroll in a “qualified plan.” §§ 202 and 224. Every plan must be identical in coverages, except only for differences in co-payments and deductibles. § 303. If your employer fails to pay 72.5% of the cost of the “qualified plan” for individual plans (or a 65% share for your family coverage), your employer must pay an 8% payroll tax. § 412(b)(1). If you are the employer, your cost of hiring a U.S. employee would increase by at least 8% of the employee compensation. This would not affect independent contractors and consultants.
Part-time employees would be affected too. For part-time employees, the employer contributions are required in proportion of the average weekly hours of employment to the minimum weekly hours specified by the health insurance Commissioner for an employee to be a full-time employee. § 412(b)(3).
Small Business. Small businesses (with payrolls from $500,000 to $750,000 including owner salaries) would pay a lower tax in 2% increments for payrolls of $585,000 or more. § 413. If the small business has affiliates doing different businesses, they are aggregated for determining whether they get “small business” treatment. While small business might not consider offshore outsourcing, the House ObamaCare bill would encourage small business to automate and use independent contractors, staffing companies and outsourcing service providers domestically.
Taxation of High-Income Americans. The House ObamaCare bill would impose an additional 5.4% personal income tax on citizens and resident aliens earning $1.0 million per year (for married persons filing jointly), or $500,000 for individuals filing singly. This could be enough to encourage some high-earners to re-consider their personal tax planning and expatriation or non-residency for high-income years.
Hardships to Be Studied. The ObamaCare bill acknowledges that employer responsibility requirements may pose significant hardships. Yet it failed to take into consideration any special provisions for any employers by industry, profit margin, length of time in business, size or economic conditions (such as the rate of increase in business costs, the availability of short-term credit lines, and ability to restructure debt). Instead, the bill contemplates a future study of such hardships. § 416. The “hardships” listed do not include the impact of the ObamaCare system on the use of automation, outsourcing or offshoring.
Classification of Workers as Employees or Independent Contractors. The ObamaCare bill contemplates new regulations (in addition to existing tax and labor regulations) for “recordkeeping requirements for employers to account for both employees of the employer and individuals whom the employer has not treated as employees of the employer but with whom the employer, in the course of its trade or business, has engaged for the performance of labor or services” to “ensure that employees who are not properly treated as such may be identified and properly treated.” § 423(a). Existing regulations of the Department of Labor, the Internal Revenue Service and other agencies already address this issue. It will become a pivotal issue and encourage unemployed persons to set up new personal service companies or to work through staffing companies in lieu of permanent employment.
Individuals Taxed if Not Adequately Insured. For individuals who fail to purchase (or be covered by their employer’s purchase of) “acceptable” health insurance, the House bill would impose a federal income tax equal to 2.5 percent of a slice of income as especially defined in section 6012(a)(1)). § 501. Exemptions would apply to non-resident aliens, non-resident U.S. citizens, residents of U.S. possessions and religious conscientious objectors.
Collateral Targets: Foreign Business with U.S. Subsidiaries. Foreigner-controlled businesses would help pay for ObamaCare unless the controlling parent is in a treaty with a U.S. income tax treaty. The ObamaCare health “reform” would thus significantly increase the cost of doing business for foreign businesses that are not based in a country that has an income tax treaty with the United States. Amending U.S. federal income tax law (and bundling a tax provision unrelated to healthcare), the ObamaCare bill would require the U.S. subsidiaries of foreign-controlled companies to apply the normal 30% withholding tax on all deductible income paid unless an income tax treaty applies to the foreign-controlled parent company. “In the case of any deductible related-party payment, any withholding tax … with respect to such payment may not be reduced under any treaty of the United States if such payment were made directly to the foreign parent corporation.” Payments subject to withholding consist of passive income such as dividends, interest, rents and royalties. § 561, adding a new §894(d) to the Internal Revenue Code of 1986. The bill would apply to U.S. subsidiaries that are part of a “foreign controlled group of entities” that have a common parent that is a foreign corporation.
The U.S. currently has income tax treaties with 67 countries, including Russia, India, China and the Philippines. For the entire list, see http://www.irs.gov/businesses/international/article/0,,id=96739,00.html.
Foreign-controlled companies established in low-tax jurisdictions are targeted, including Aruba, Barbados, Bermuda, the British Virgin Islands, the Channel Islands (Jersey and Guernsey), Hong Kong and Panama. Formerly U.S.-based companies that moved their situs of incorporation from the United States to tax havens, such as Accenture did, will be directly affected.
However, the draft healthcare legislation would also have an impact on foreign businesses established in other industrial and commercial countries that provide significant levels of business process and IT services to U.S. enterprise customers. These countries include Brazil, Columbia, Costa Rico, Malaysia, Mauritius, South Korea and Taiwan. Companies in such countries that provide call center services, customer care and other remote offshore services would find that the cost of doing business in the United States is increased.
Conclusions. ObamaCare will cost American employers and American taxpayers. These costs will give a new comparative cost advantage to foreign service providers, assuming their ultimate parent company is based in a country with a U.S. income tax treaty.