Consultants vs Employees for Cost Cutting

By: Noel C Ducusin

During the early part of the pandemic, many companies experienced reduced demand with the unfortunate result that these companies had to downsize/right size and let go of their employees.

 Even so, most companies could not just close shop as to do so would be a complete waste of large amounts of capital already committed and sunk into the business.

 How can the company do this when almost all of the employees are gone?

 One of the best ways is to use temporary consultants.

This will be the first in a series of articles on cost reduction/cost management.

 Before we proceed, please note that it is not necessary to use a fresh batch of people to service your consultants. It is perfectly acceptable to use former employees who are willing to take the role.

 The use of consultants over employees has several advantages and we will discuss the main ones below.

Minimum Wage Does not Apply to Consultants

 This is a very important distinction when it comes to cost reduction.

 Basically, you can agree with your consultant as to any price or rate. This is because consultants are not employees and the rule on minimum wage applies only to employees.

 With consultants, you are dealing with independent contractors and just like any contract, the terms and conditions will depend on the agreement of the parties.

Allowances Given Do Not Become Part of Their Regular Compensation

 One of the popular ways to lower labor costs is by offering allowances instead of increases in base salary.

The problem with this method is that over the course of time, these allowances can be considered "company practice" after which the allowances may no longer be removed under the rule on non-diminution of employee benefits.

 Again, consultants are independent contractors and not employees.

Thus, allowances can be removed at any time as long as causes for removal are indicated in the contract. For example, it can be agreed that the allowances will only be for a fixed period or that the allowances are discretionary on the part of the company based on certain metrics.

Needless to state, there is a lot of flexibility when it comes to allowances for consultants and these allowances will never become part of their regular compensation.

Consultants Can Be Engaged for a Fixed Period

Employees, after they finish their respective probationary periods (which is typically six months), become regular employees in perpetuity and may be removed only on very limited grounds, i.e. due to "justifying circumstances", e.g. poor performance, absenteeism, et cetera, or, "authorized circumstances", e.g. retrenchment to prevent losses and redundancy.

This means that your option to use employees to match customer demand levels is practically non-existent as employees can only be removed at the tail end as a last resort.

There is a big difference when it comes to consultants because they can be hired for a fixed term. The consultant can be engaged when the demand is high and then disengaged when the demand is low. Similarly, different rates can be negotiated for high demand months and for low demand months. Again, the company and the consultant are free to agree on whatever terms and conditions are acceptable to them.

Less Administrative Burden for the Human Resources Department

Again, consultants are not employees and are independent contractors. This means that they are responsible for their own government-mandated contributions, i.e. social security, health, and housing. There is no need on the part of the company to withhold these benefits and then remit them to the appropriate government agencies.

 Similarly, since consultants are not employees, withholding of taxes is also much more simplified since the consultants are treated as contractors and the more straightforward withholding tax system for contractors or vendors applies.

Labor Tribunals Have No Jurisdiction

 Employee termination claims or claims regarding wages and working conditions may be filed by employees in special labor tribunals, i.e. the National Labor Relations Commission.

This labor tribunal is an administrative body but functions like a court. Since it is an administrative body, its processes are extremely streamlined and informal.

For example, complaints can be initiated simply by filling up a one-page form. There is no need for witnesses to testify and all arguments and presentation of evidence are done in writing. The employee can even represent himself without the need of hiring expensive counsel. Finally, the evidence required is only substantial evidence and not the degree of evidence required in civil courts.

The rationale for the existence of this specialized labor tribunal is that the employee should have a speedy way by which to obtain redress for their grievances hence their informal and less restrictive procedures.

Consultants cannot ask for relief from this specialized labor tribunal. Again, consultants are not employees and therefore must go through the regular court process which is not only expensive but very time-consuming because their relationship with the company is governed by the civil law on contracts.

Needless to state, the litigation process is not usually something resorted to by consultants for the same reason that it is also avoided by the company.  

The above are the main advantages of using consultants for cost management purposes.

Of course, no method comes without its disadvantages and this will be discussed in a separate article.

Finally, please be aware that when it comes to consultants, it would be advisable put a conflict of interest clause in the agreement as a conflict of interest rules are not built in unlike in employee relations.

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About the Author

Atty. Noel C. Ducusin is the senior and founding partner of the N. Ducusin & Partners Law Offices - a law firm based in Metropolitan Manila, Republic of the Philippines that specializes in Corporate Advisory, Cross Border Regulatory Matters, Mergers & Acquisitions, and Commercial Litigation.

Atty. Ducusin is also the President & Sole Director of DoingBusinessPH OPC - a company dedicated to empowering foreign investors to do business in the Philippines through online executive education programs, digital books, seminars, as well as online and offline events.

His mission for this Community is to help foreign investors, business owners, and managers by breaking down complex legal concepts or dense technical material into straightforward actionable legal information for better business decisions.

This is not the place for academic writing and legalese will not be tolerated here. The simpler and the more practical the better.

“Everything should be made as simple as possible, but no simpler.” – Albert Einstein