Global HR Hot Topic—February 2014: International Outsourcing and Offshoring: An Employment Law Checklist

by White & Case LLP

Belgium's Roger Blanpain, perhaps the world's preeminent professor of international employment law, once declared that "we live in an information society, driven by knowledge in action.…[Services] can be provided via the information highways from anywhere, even from the other side of the globe…. We are in a New World. It immediately becomes clear why developments in the globalized, non-material market economies are totally transcending the nation-state and its political authorities." (The World of Work in the 21st Century: Challenges and Opportunities, paper presented at Oxford, October 2008) Pulling Blanpain's observation down to the multinational human resources level, today's hightech and globalized workplace spawns two vital trends in cross-border HR: International telecommuting and international outsourcing. In one sense, international telecommuting is the microscopic half of this issue—an employer in one country arranges for one of its own employees to work from a home overseas. (See our Global HR Hot Topic of Nov. 2013) Meanwhile, the macroscopic half of this same issue is international outsourcing—an employer in one country contracts for products made or services rendered by employees of an unaffiliated employer business in some other country.

To Alan Blinder, former vice-chairman of the Federal Reserve, international outsourcing amounts to the "third Industrial Revolution"—"we have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering." (New York Times, April 4, 2007) Even if not a "revolution," cross -border outsourcing is an increasingly vital if sometimes controversial business strategy. Undeniably, tapping expert providers to handle tasks that fall outside an organization's core strengths maximizes efficiency. That said, outsourcing jobs internationally can be devisive: "there has been plenty of bad press over outsourcing and offshoring and the effect [these] practices have on employees and communities." (Mary Pratt, "Is Your Outsourcer an IT Sweatshop?" Computer Work Management, April 21, 2008) Further, international outsourcing can be legally complex and heavily regulated, particularly as to employment issues. In one extreme case, a Brazilian company got fined US$1.5 million for illegally outsourcing work that, under Brazilian law, should have gotten done by the company's own employees. (Brazil TRT, 15th region, decision of Apr. 2, 2013, case no. 0002007-98-2011.5.15.0013 RO)

To "outsource" means to reassign a task formerly (or logically) done by in-house employees, transferring it over to an independent contractor or the staff of an outside business that specializes in that particular task. Outsourcing reaches both production and services:

  • Outsourcing production means buying big orders of components or even finished goods from specialty fabricators, often made to the principal/customer's specifications. For example, an automobile manufacturer outsources production of tires to tire companies and production of radios to audio equipment makers. Meanwhile, clothing, sneaker and computer device retailers often outsource production of their entire product lines to specialized manufacturing factory companies, often in the developing world. For example, employees of The Gap, Nike and Apple do not make most (or any) Gap jeans, Nike sneakers or Apple iPads—outsourcers' employees do.
  • Outsourcing services means engaging an outside vendor or provider (contractor or company) to handle business services like janitorial work, mailroom, equipment repair, payroll, call centers, information technology, technical support, whistleblower hotline or any of a myriad of other "business processes". Outsourcing of services is sometimes well-integrated with the principal's day-to-day operations; some outsourcing of services means an independent contractor comes in and works at the principal/ customer's own site, like an outsourced plumber or adjunct professor teaching courses on a university campus. Other outsourcing of services gets done by a separate business vendor's employees coming onto the customer/principal's site— think of outsourcing of mailroom services and janitorial services. But at the other extreme, outsourcing services can be physically remote from a principal's core operations, such as offshore business process outsourcing (BPO) of technology, payroll, call centers, or whistleblower hotlines. 

Remote outsourcing can either be local/domestic or international. The more legally complex outsourcing arrangements tend to be the international ones. There are two types of international outsourcing: offshoring—a job now done by company employees in one country moves to an outside provider overseas, and foreign domestic outsourcing—a job now done by the company at an overseas location away from headquarters shifts to a supplier in that same foreign country. These days, big outsourcing arrangements can involve many countries at the same time, with the customer/principal outsourcing a task to a multinational vendor across a pool of jurisdictions.

International outsourcing inevitably raises vital human resources and employment law issues, because cross-border outsourcing is fundamentally an international HR strategy (getting work done overseas by employees on someone else's payroll).

Principals that outsource production or services need to be sure their outsourcing complies with employment laws. Obviously international outsourcing requires compliance with employment laws internationally. Indeed, international outsourcing sometimes opens a Pandora's box of HR and employment law compliance issues for the customer/principal doing the outsourcing. So when embarking on international outsourcing, in addition to attending to all the outsourcing transactional issues, account for this checklist of cross-border employment law challenges:

  • Employment contracts
    Collective labor agreements often contain outsourcing provisions, and even individual employment agreements sometimes have clauses that can affect an employer proposal to outsource. Be sure to check for these provisions, and to comply with them.
  • Consultations and negotiations
    Trade unions are common outside the US and, in addition, parts of Europe and Asia also have "works councils" and other employee representatives that operate right alongside unions. Worker representatives often enjoy a legal right to be "informed" and "consulted" about management proposals that would materially change terms and conditions of employment—and of course a proposal to outsource work is a quintessential subject of bargaining, because outsourcing takes work away from the principal's workplace. Indeed, outsourcing can be a bête noir to worker representatives.

    Even where worker reps do not have enough power to stop an employer from outsourcing, they might have the leverage to impose conditions on outsourcing, such as demanding outplacement services for displaced staff or reining in the scope of work outsourced. Failing to bargain or consult can give worker reps a wedge to get an outsourcing arrangement nullified. So start any mandatory consultation/bargaining early enough in the outsourcing process. Involve local company labor liaisons on the front lines (the management representatives who talk to the worker groups).

    This said, though, in practice principals are often reluctant to disclose outsourcing arrangements to their employees until the arrangements become more or less final. Therefore, many outsourcing agreements get signed without minimum revenue commitments or "go-live" dates, subject to employee consultation that starts immediately after signing. 
  • Co-/dual-/joint-employer exposure
    In Spain, Latin America and many places beyond, an outsourcing customer/principal can easily become secondarily liable for employment claims, including contractor/consultant classification claims, as a co-/dual-/joint-employer. For example, an employee of a vendor might have a viable claim against not only his boss, the vendor, but also against his boss's customer (the principal) for, say, overtime or severance pay, on the theory that the vendor's customer was the employee's beneficial or de facto co-/dual-/joint-employer. This co-/dual-/jointemployer scenario is most likely to arise where the vendor is an independent contractor or small business dedicated to just one customer/principal, and might be less likely where the vendor is a viable free-standing business with its own site and large pool of customers. But these claims do sometimes arise even in that context.

    The threat of co-/dual-/joint-employer liability can be acute in jurisdictions like Costa Rica and Mexico. Mexican labor law articles 12 to 15 hold a customer/principal jointly liable for employment claims of staff hired through an "intermediary." Indeed, the Mexico Labor Reform Law effective December 2012 requires a customer/principal to conduct "permanent compliance supervision" to ensure its outsourcers/ services providers comply with employment, health/safety and other workplace laws. Especially in a captive (one-customer) relationship, if a vendor fails to meet payroll or violates wage/ hour laws, its staff may have an easy claim against the boss's customer, the principal. So do due diligence

    While the customer/principal cannot shift this legal risk, it might shift the financial risk. Consider negotiating into an international outsourcing contract indemnities, set-asides or a hold-harmless provision to fund possible employment claims brought by vendor employees. And where the vendor is a local subsidiary of a bigger conglomerate, consider backing up the indemnities with parent company guarantees, bonds or letters of credit. 
  • Local outsourcing employment law restrictions
    There is a widespread perception that customer/principals treat their staff better, and pay more, than outsourcing vendors do. And there is a widespread perception that offshoring in a given country loses more outbound jobs than it gains inbound jobs. So outsourcing can be politically unpopular. Some legislatures have even taken affirmative steps to rein it in. Some jurisdictions impose outsourcing-restrictive laws designed to protect jobs at the customer/principal and to curb vendors’ perceived abuses of employee rights. Be sure to comply with these sometimesdraconian rules. For example:
    • Argentina flatly prohibits outsourcing of a business's "core functions," at least in theory. (Labor Contract Law No. 20,744 secs. 29 bis, 30; Law 24,023; decree 1694/2006) Therefore, for example, an Argentine computer software business might legally outsource its payroll but not the writing of its computer code. But Argentina’s anti-outsourcing doctrine is mostly directed at co-/dual-/joint-employer liability; outsourcing even of "core functions" may be tolerated where the customer/principal actively oversees the vendor’s compliance with local labor/employment laws—as a practical matter, there may be little risk of exposure where the vendor rewards its staff with the same pay, terms and conditions of employment as employees of the customer/ principal. That said, though, employees of a vendor often do earn less than equivalent staff at a customer/principal. In those situations, there could be a viable legal challenge.
    • In Australia, the Fair Work Act 2009 imposes on a customer/ principal an affirmative obligation to explore "redeployment opportunities" for staff displaced by outsourcing.
    • Brazil flatly prohibits outsourcing a business's "main," as opposed to "ancillary," "activities." (Law No. 6,019/74 of labor code and Superior Labor Court Precedent No. 331) Brazil is particularly tough in enforcing this law—as already mentioned, one Brazilian case actually assessed a US$1.5 million fine for illegal outsourcing. And Brazil can be strict on the concept of "main" versus "ancillary"
      "activities": A São Paulo labor court once actually rejected the outsourcing of janitorial services as not "ancillary," reasoning that “corporate structure cannot function without cleaning.” (São Paulo 2d Region Labor Court, 27 Aug. 2002)
    • Chile's so-called "sub-contracting law" (Labor Code articles 183A-E) requires that a written contract document an outsourcing arrangement, but does not offer substantive protections for affected employees.
    • Colombia prohibits outsourcing core services and allows outsourcing vendors to provide only discrete services—not to provide seconded personnel.
    • India's economy benefits from inbound "offshore" outsourcing, so Indian employment laws do not interfere with inbound offshoring. But India regulates domestic outsourcing: Where a local customer/principal employs 20 or more blue collar “workmen” at its headquarters site, local law imposes a set of restrictions on outsourcing.
    • Mexico, Panama and Peru prohibit outsourcing core business activities, similar to Brazil and Colombia (e.g., Mexico Federal Labor Law arts. 15-A to 15-1)
    • Turkey prohibits most "sub-contracting" of work done on a customer/principal's site when the sub-contracted work advances the "main" business activity of the customer and is not ancillary to the business. But Turkey distinguishes "outsourcing" that happens off a customer/principal’s site. Off-site outsourcing is far less regulated than on-site sub-contracting. (Turkish Subcontracting Regulations, Gazette 27010 9/08; Labor Law #4857, art. 2)
    • Vietnam passed a law in 2013 that caps outsourcing at 12 months, with no renewals, and that prohibits all outsourcing except outsourcing for: temporary increases in work; replacing employees out on leave; and outsourcing that replaces drivers, sales assistants, document editors and 14 other specific job categories. (Decree # SS/ND-CP of 7/15/13)
  • Acquired rights
    "Acquired rights" (also known as "transfer of undertakings" or "TUPE") rules, especially in Europe and Australia, can require that employees of a customer/principal retain their vested rights in their jobs in an outsourcing arrangement. This means that by operation of law, a customer/principal employee's job rights actually transfer over to the vendor along with the outsourced work. And so when a domestic outsourcing happens (in countries with acquired rights laws broad enough to reach outsourcing), affected employees automatically get jobs with the same pay and benefits, only now working for the vendor. (See our Global HR Hot Topic of Dec 2013) Then, after the domestic outsourcing ends, this same acquired rights doctrine springs back up and applies yet again, requiring the customer/ principal to rehire the staff now working for the vendor. To temper the effect of these laws, in acquired rights jurisdictions a customer/principal should always consider including postcontract- termination re-hire provisions in its outsourcing agreements. Account for the scenario of the employee who refuses the transfer, and also for the scenario of the vendor that designates its poorest performers as its employees subject to the transfer.

    All this said, though, some jurisdictions outside Europe impose more limited acquired rights laws (aimed at asset-sale business transfers) that do not necessarily reach outsourcings. Be sure to check.

    The effect of acquired rights rules on offshoring remains murky. What happens when a customer/principal's employee in acquired rights jurisdiction A loses his job because his tasks get outsourced to a team at a vendor operating in country B? Country A's acquired rights rules may be unclear in this context.
  • Reductions-in-force
    Where acquired rights rules do not reach an international outsourcing arrangement, some of a customer/principal's current employees may be in danger of losing their jobs when their tasks get outsourced. Craft a realistic restructuring/ redundancy, lay-off or "social" plan that complies with both local law and with lay-off provisions in individual and collective employment agreements.(See our Global HR Hot Topic of June 2013)
  • Data protection laws
    When an outsourcing arrangement implicates cross-border transfers of employee (or customer or other) personal data, be sure to comply with the data protection laws of the jurisdiction where the personal information is sourced. Data law compliance can be a real challenge where customer/principal personal data originates in jurisdictions like the EU, Hong Kong, Israel or Mexico that impose tough omnibus data laws, and where the outsourcing work will then get done in jurisdictions with looser data laws—say, Africa, Arab countries, India or the United States. This issue is vital, for example, in offshore payroll outsourcing and cross-border outsourcing of whistleblower hotlines.
  • Personnel control
    By definition, an outsourcing customer/principal relinquishes control over who does its tasks and how the responsible worker does the work. This can mean quality problems related to vendor employee performance. What if a services vendor fails to train its staff adequately, or assigns insufficient, incompetent or non-English-speaking personnel? For example, outsourcing a call center to handle customer service puts the vendor's employees out front as the customer/principal's "face to the public." What if service problems emerge? How can the customer/principal correct specific vendor employees who consistently do a bad job?

    Anticipate potential quality and "talent" problems connected to individual employee performance. Use a risk management model or "service-level paradigm" to set measurable standards and service levels. Quantify damages. Consider retaining a right to train, interview and test vendor employees. Consider retaining a right to force the vendor to reassign specific poor performers to some other customer.
  • Social responsibility
    Since the 1990s, clothing and products retailers and now computer devices/tech brands that outsource production to the developing world have drawn fierce criticism for partnering with so-called "sweatshops." The Bangladesh Rana Plaza factory collapse of 2013 spotlighted the enormity of this problem. Outsourcer/principals respond by appending supplier codes of conduct to their outsourcing contracts and actively monitoring vendor compliance. (See our Global HR Hot Topic of March 2012)

    Offshoring services can raise the very same social responsibility issues. In 2008, Computer World Management ran an article asking "Is Your Outsourcer an IT Sweatshop?" According to that article, Ron Kifer, Chief Information Officer of Applied Materials, Inc. in Santa Clara, California insists that his company's "IT outsourcing apply the same ideals" as his California headquarters, "giving back to community, supporting the economies in which we live and work, and green initiatives."

    When offshoring either production or services, particularly to developing countries, consider imposing on the vendor a code of labor standards or supplier code of conduct that addresses:
    • Basic labor standards and employment law compliance
    • Distribution of the code to vendor employees, and translation
    • Code compliance monitoring conducted by the customer/ principal or its agents
    • Penalties for code violations
    • Right to revise/amend the code
  • Visas
    Particularly in big outsourcing arrangements, managers from an outsourcing customer/principal often need to travel to the vendor site to oversee a new outsourcing relationship. Start early applying for visas/work permits in the host country and arranging expatriate assignments.
  • Communications
    A decision to outsource work can be controversial. And a decision to offshore work can be divisive. Outsourcing decisions require a proactive communication strategy—not only external public relations, but also internal employee communications. Proactively explain potentially controversial outsourcing and offshoring decisions to all the stakeholders, including all the affected principal's employees. Get in front of the issue before bad press or workforce blowback.

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