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Global HR Hot Topic – July 2007: Offshore Outsourcing: An HR Checklist

July 2007
Global HR Hot Topic
Donald C. Dowling, Jr.


Challenge: Outsourcing services to overseas providers raises employment law challenges as tasks done at headquarters shift over to employees of an outside company abroad.


Former vice-chairman of the Federal Reserve Alan Blinder sees international outsourcing as the "third Industrial Revolution...We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering." The New York Times (April 4, 2007). Even if not a "revolution," and however controversial, outsourcing is an increasingly vital strategy, because using expert providers outside a company's core strengths maximizes efficiency.

Outsourcing inevitably raises human resources issues, because outsourcing is fundamentally an HR strategy. To outsource means to reassign a task currently done by in-house employees over to the staff of an outside business. Therefore, outsourcing must account for HR and employment law compliance.


Pointer: When outsourcing tasks overseas, focus on HR and employment law compliance. Use a checklist to catch all the issues.


International outsourcing can mean "offshoring" (i.e., a job now done by company employees in one country moves to overseas outside provider) or "foreign domestic outsourcing" (i.e., a job now done by the company overseas shifts to local domestic supplier in that same foreign country). Either way, international outsourcing opens a Pandora's box of HR and employment law compliance issues. In structuring any international outsourcing arrangement, use a checklist:

  • Inform, consult, negotiate: Trade unions are common outside the US, and parts of Europe and Asia also have "works councils" that represent workers alongside unions. Worker representatives enjoy legal rights to be "informed and consulted" about workplace proposals, including proposals to outsource (like "mandatory subjects of bargaining," under US labor law). Start mandatory consultation/bargaining early in the outsourcing process. Involve local company labor liaisons.
  • Employment contracts: Collective labor agreements often contain outsourcing provisions, and certain clauses in individual employment agreements may be affected by outsourcing. Be sure to comply.
  • Local outsourcing prohibitions: Some countries and US states impose outsourcing-specific laws to protect jobs. Brazil flatly prohibits outsourcing "main" (as opposed to "ancillary") "activities." A Brazil computer software business, for example, might legally outsource payroll, but not the writing of computer code. Brazil is tough here: A São Paulo labor court actually rejected the outsourcing of janitorial services as not "ancillary," reasoning that "corporate structure cannot function without cleaning" (SP 2d Region Labor Court, 27 Aug. 2002). Ensure outsourcing complies.
  • Acquired rights: "Acquired rights" (also known as "transfer of undertakings") rules, especially in Europe, can mandate that employees' vested rights in their jobs transfer over to outsource providers, along with the work. A service provider may therefore need to hire its customers' laid off employees, matching pay and benefits and even respecting union and works council arrangements. Then this same doctrine applies after outsourcing ends — so the outsourcing customer should consider post-termination re-hire provisions in the outsourcing agreement.
  • Lay offs: International outsourcing may mean some of an outsourcing customer's current employees (either at headquarters or overseas) lose their jobs. Create a realistic restructuring or "redundancy" (lay off) plan.
  • "Dual employer" claims: In Latin America and elsewhere, an outsourcing customer can become "secondarily liable" for employee and contractor/consultant claims as a "dual employer." If a service provider fails to meet payroll or violates wage/hour laws, its staff may come after the outsourcing customer. So do due diligence. Consider indemnities, set-asides, hold-harmless provisions and other ways to fund eventual claims.
  • Data protection laws: Outsourcing that involves cross-border transfers of employee data must account for data protection laws.
  • Visas: If leaders of an outsourcing customer will go abroad to oversee a service provider, start early applying for visas/work permits.
  • Personnel control: An outsourcing customer necessarily relinquishes control over how a task gets done and who does it. But what if the service provider fails to train adequately, or assigns insufficient, incompetent, or non-English-speaking staff? Anticipate potential quality control and "talent" problems. Use a risk management model to set measurable standards and service levels. Quantify damages. Consider retaining a right to train, interview and test service provider employees and to have poor performers reassigned.
  • Communications: Offshoring can be controversial, so it requires both a public relations and an internal employee communications strategy. Proactively explain potentially controversial offshoring decisions. Talk to stakeholders, including affected employees.
  • Social responsibility: In the 90's, sneaker and clothes makers that outsourced production to the third world drew fierce criticism for partnering with "sweatshops." They responded by appending codes of conduct to outsourcing contracts, and actively monitoring. Offshoring services can raise the same social responsibility issues, so impose on service providers an appropriate code of labor standards. Address:
    • Translation
    • Distribution of the code of conduct to outsourced employees
    • Monitoring
    • Compliance
    • Penalties for violations
    • Future code revisions
         

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