Outsourcing

Employment Aspects

by Tom Ince

What employment issues arise on an outsourcing?

The employment aspects of an outsourcing transaction are often critical, not only due to the expensive liabilities that may be inherited, but also because of the impact they can have on the success (or failure) of the transaction. This note outlines the main employment issues to consider in an outsourcing deal. If these points are dealt with appropriately, it should help to set the right framework for a successful transaction.

Is there an automatic transfer of employees to the service provider?

In the UK, it is likely that any employees who are wholly or mainly assigned to the outsourced services will transfer from the customer to the service provider under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ('TUPE'). TUPE will also apply to other types of service provision changes as defined by the regulations.

In the case of other member states of the European Union, local law advice is required in each jurisdiction to determine whether, on the facts of the case, there will be an automatic transfer of employees under the relevant local implementation of the Acquired Rights Directive ('ARD').

In jurisdictions where there is no automatic transfer of employees, the customer and the service provider will need to consider how the employees will be dealt with. For example, will the service provider be required to offer employment to the customer's employees and if so, will this be on no less favourable terms than they currently enjoy?

If there is an automatic transfer of employees, who will transfer?

In the UK, any employees who are wholly or mainly assigned to the activities to be transferred from the customer to the service provider would transfer under TUPE. However, it is often difficult to assess which employees are wholly or mainly assigned. Employees may be assigned to various different parts of the business.

The parties will also need to consider whether there are any other types of person engaged in the carrying out of the services that are not employees and may therefore not automatically transfer to the service provider. For example, are there any contractors engaged in the business? The parties will need to consider how to deal with any such persons.

What will transfer to the service provider?

Where there is an automatic transfer under TUPE:

• generally all rights and liabilities in connection with the transferring employee's employment contract will transfer to the service provider;
• the service provider will have to employ the transferring employees on their existing terms and conditions of employment, except in relation to occupational pension schemes (although there are certain obligations in respect of occupational pension schemes that will transfer or be required of a transferee); and
• the employees' continuity of employment will be preserved.

Where the service provider cannot exactly replicate a benefit enjoyed by the transferring employees, the service provider will have to provide a benefit of substantial equivalence.

What other impact does TUPE have?

If TUPE applies:

• any dismissals in connection with the transfer will be automatically unfair, unless they are for an economic, technical or organisational reason entailing a change to the workforce (an 'ETO reason');
• the service provider cannot change terms and conditions of employment of the transferring employees unless the change is for an ETO reason for doing so; and
• appropriate collective information and consultation will need to be undertaken.

What does the service provider need to consider in relation to the start of the contract?

The service provider will need to:

• ensure that complete and accurate due diligence information concerning the employees who will transfer has been provided so that it understands (and can price for) the employee and pension's liabilities that it will inherit;
• ensure that it protects itself against both known and unknown liabilities that it will inherit;
• consider how and where it intends to utilise any employees that transfer to it (including considering the risk and cost of any relocations and redundancies);
• ensure that appropriate information is provided to the customer about any measures (for example, changes to terms and conditions where possible) it envisages taking in relation to the transferring employees;
• obtain an indemnity from the customer for any pre-transfer liabilities;
• obtain protection from any unexpected employees transferring or claiming to transfer;
• consider what happens if the customer reduces or increases the services required and whether this has any redundancy or further transfer implications;
• consider and obtain protection from any expensive pension related benefits that may transfer; and
• obtain an indemnity for any failure by the customer to inform and consult as required by TUPE.

What does the service provider need to consider in relation to the termination of the contract?

The service provider will need to:

• consider what happens to the staff engaged in the provision of the services at the end of the contract; will there be an automatic transfer to the customer or the new service provider?
• consider who pays any redundancy costs if employees do not transfer to the customer or new service provider; and
• obtain appropriate exit indemnities from the customer.

What does the customer need to consider in relation to the start of the contract?

The customer needs to:

• comply with its TUPE information and consultation requirements;
• ensure employee liability information is provided to the service provider;
• consider how to deal with obtaining information and appropriate indemnities from any incumbent service provider;
• consider what control it requires over the service provider's employees during the life of the contract; for example, control over key personnel and removal of staff from the provision of the services; and
• obtain appropriate indemnities from the service provider.

What does the customer need to consider in relation to the termination of the contract?

The customer needs to:

• consider what should happen at the end of the contract; will the customer renew the contract, engage a different service provider or bring the service back in house?
• ensure it obtains appropriate employee and pension's information in relation to the service provider's employees;
• obtain appropriate indemnities from the service provider; and
• place restrictions on the service provider, for example upon cherry-picking the best employees out of scope to transfer or changing their terms and conditions of employment.

The employment issues are increasingly becoming a key part of any transaction and with careful planning and contract documentation both the customer and the service provider can ensure that their interests are protected but also reach a mutually acceptable commercial deal.

This note is for general information only and is not intended to provide legal advice. This note does not cover all the employment and pensions issues that may arise on an outsourcing transaction. Legal advice in each relevant jurisdiction should always be obtained.

For more information, you can contact Tom Ince

©2011 Tom Ince.

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