The need to review outsourcing laws
Outsourcing is a growing phenomenon. Studies estimate markets in the hundreds of billions of dollars. For 2014-15 Gartner estimated a worldwide IT and technical services market at USD288 billion. The business process and IT breakdowns below show the scale of the market across the world.
European BPO and IT service market 2013 ($Bn by country)
Asia Pacific market
Rest of Asia/Pacific
Australia & NZ
Source: State of the Outsourcing Industry 2013: HfS Research
Source: State of the Outsourcing Industry 2013: HfS Research
Outsourcing is a long-established people solution in industries like hospitality and leisure, supply chain management, cleaning, catering, security and facilities management.
From 2009 and the global financial crisis it has become increasingly important in “white collar” transactional financial functions, HR, IT and the broader financial services industry.
Benefits of outsourcing
Driver Workforce Implications
Cost reduction Reduced pay and benefits, displacing existing workers Cost flexibility Including through work scheduling, mobility and
permanent workforce reduction/temporary use
Accessing better skills Sometimes via displacement of existing workers,
access to concentrated labour pools and methods which service other unrelated clients
Predictable, standardised (international) processes
Capital concentration and rebalancing of regulatory or business risk
Quality and contract management, exerting pressure on supplier profit
(especially in financial services) skills concentration, technology and systems dependency, potential misalignment with underlying business, strong procedures for oversight and monitoring of risk
and data management behaviours, measurement according to brand alignment
The pace of change which affects outsourcing is accelerated by three phenomena:
X technology – the complexity, location and nature of services that can be outsourced are all radically expanded
X internationalisation – increased political and regulatory consistency, improved workforce education, decreased resistance to (and sometimes desire for) mobility, cloud and mobile technology.
X economic and political factors – budget pressure in public sector healthcare, social services: strengthened procedures for financial services risk management such as MIFID and oversight regimes, anti-bribery laws, EU data protection laws.
International regulatory issues are at the heart of these drivers. The migration of work to South America, Central and Eastern Europe and India shows the extent of cultural and legal sophistication that businesses need when they implement changes. The technological and political contexts magnify these complexities. Current legal systems for regulating and managing change are under pressure. This pressure is likely to expose cracks in the regulatory environment meaning:
- legal regimes will need to be overhauled; and
- work organisation and contractual arrangements need thoughtful design and international awareness to deliver the agility the business wants.
In the US and outside the EU there are many contexts where outsourcing or a transfer of functions can be implemented with no right (or obligation) for a worker to follow the job. For cost driven outsourcings, this can be a blessing. For knowledge and skills functions, it can be a curse, and carry a need for sophisticated legal strategies to influence retention, such as non-compete and secondment constructs.
The European model of worker protection which is contained in the EU Business Transfer Directive – mandatory law for 28 countries – contains a mixture of features which enable change through outsourcing, but can also slow and inhibit it. At Taylor Wessing, we think these are ripe for review. Whether the European authorities have the appetite to do that in an environment of votes on potential “exits” will be seen over the period 2016-2019.
EU Business Transfer directive: key features
We all know that employment contracts are personal, and a job is not a property right, right? In the EU, not so. The Directive contains three key protections:
X the employment relationship transfers to a new business owner whether that is desired commercially or not
X employees are protected from dismissal
X employees/representatives must be informed and consulted about a business transfer.
Strange as it may now sound, the operating context of the original Directive included the creation of a more competitive European market, capable of taking on the
USA and eastern economic powerhouses. Ensuring social cohesion when work is reorganised is a clear aim of the Directive, and an ameliorating feature to help make change smoother.
How do these three features map on to the table “Benefits of outsourcing” above? Imperfectly. Employers needs to step with care over the mismatches between their aims and those of the Directive, and the variations in of the Directive’s implementation within EU countries.
Faultlines – when do employee protections apply?
It was easier to work with the national rules when work organisation was simpler, and there was more growth in the economy. Seismic shocks to the system – such as UK’s 1980s recession and policies of public sector cost-cutting beginning under the Thatcher governments and continuing through the 1990s – challenged society’s understanding of the scope of the Directive. The “light touch” manner in which the Directive was applied meant that the outsourcing community took years to work
through disputes with unions about the extent to which their models were within the rules. Even in the 1990s these disputes could result in mass dismissals, strikes and annual applications to the Court of Justice of the European Union.
Employment Tribunal cases now seem relatively steady partly owing to a collective desire to achieve certainty in the UK. This has resulted in legislation going beyond the requirements of the Directive (introducing a “service provision change” expansion of its scope) with the result that the UK now has broader protections for employees than in many other EU countries. Employment disputes generally are declining, and outsourcing disputes match that trend, because the law is so favourable to employees.
UK’s declining employment tribunal claims
2010-11 2011-12 2012-13 2013-14 2014-15
Total claim Unfair dismissal Claims for the application of
Directive insight on collective information
Source: UK employment tribunal statistics 2010-2015
“Aftershock” claims are most frequently heard now in activities such as
transport and infrastructure, healthcare and hospitality and leisure, social provision and IT based functions. Intriguingly, these include core areas of state activity, or the human content jobs that do not appear readily capable of being automated. They are on the fault line of future litigation.
“Aftershock” claims are most frequently heard now in activities such as transport and infrastructure, healthcare and hospitality and leisure, social provision and IT based functions. Intriguingly, these include core areas of state activity, or the human content jobs that do not appear readily capable of being automated. They are on the fault line of future litigation.
France, as often, has taken a different path. In a series of decisions involving the Perrier brand, and others notably involving hospital cleaning and catering, a line has been drawn requiring there to be an autonomous identifiable activity which is continued after the transaction, for the French rules to apply.
Regarding the definition of this autonomous identifiable activity, French case law considers that a combination of workers and tangible or intangible assets is necessary to qualify as a transfer of activity. Such a position is more demanding
than the one adopted by the European Court, which considers that in some sectors, where the transferred activity is essentially performed by manpower, the cumulative presence of these two elements is not necessary.
Outsourcing under French law therefore requires not only a transfer of the workers themselves but also of related assets (such as clientele, software and leasing contracts). International companies operating in France can therefore organise knowingly the elements to be transferred or to fall within or outside its scope.
Such an activity must above all be performed in a continued way after the transfer. The continuation of an identity is a key aspect, meaning that change in the way
that work is organised (or in the context or place in which it is conducted) is likely
to take the outsourcing outside the scope of the rules. This means that often the “transferor” (as they would be in other jurisdictions) will be left with retained
employees, requiring a full restructuring dismissal process unless other work within the scope of their contracts can be found. Unsurprisingly, the outsourcing market is smaller in France than other EU countries, notably the UK and Germany.
Different strokes for different folk: variable protection
When employees are protected by the national rules implementing the Directive, there are still key differences. As the table below shows, it would be possible to make substantial costs savings by discontinuing pension arrangements in the UK, but less so in the Netherlands. Disputes about choice of employer are resolved differently and consultation about the transaction is handled differently, with greater or lesser formality or delay required by national collective processes.
Business Transfer Directive: differing implementation
objecting to transfer
France, Netherlands: no right to object – refusal may
Fragmentation and mobility: the next big things
What is an employer? Obviously, someone who employs an “employee”. But that core concept is not defined in the Directive. It is for EU Member States to say who is an employee, and what is an employment contract. This means a world of differences. In the UK, the rules now mean that employees of sub-contractors could be treated as those of the main transferor, and therefore come within the protected class. Sub-contractors might be required to lose key staff when the
“master employer” changes its lead outsourced provider. “Master employers” might be required to guarantee the unmet obligations of insubstantial contractors – undermining many of the aims of outsourcing.
In France, the implications of fragmentation could have an interesting effect – an increase in the number of employment relationships, rather than their loss or concentration. If part of a business is transferred, an employee who is clearly
attached to that part may be able to transfer with it while remaining (part-time) employed in the rest of her activities with the transferor. UK courts would probably not apply this multiplication, and could instead leave the employee with one old reduced role, or even no role on the basis that her activities have been fragmented.
The courts are struggling to apply conventional concepts of “employment” to outsourced services as outsourcings become more sophisticated and seek to break down management processes. The courts are reluctant to break down employment, or employee rights, in the same way. These cases may have particular application to asset management and public sector outsourcings in future years, both areas which as identified above are likely to increase due
to fiscal, economic and regulatory pressures.
There are possibilities for the enforcement of shared responsibility seen in the Dutch case known as Albron which involved a Heineken outsourcing. Here the Court of Justice of the EU used the language of there being an “contractual” employer and also an “economic” employer, the two being different. It used these constructs to suggest that a transfer of staff from a service company was required. This case is not limited to intra-group transfers, or the use of service companies. It is ripe for use in applying the Directive where there are group companies with separate economic or management functions. Similarly, the UK has an emerging stream of cases which explore the relevance of a common intention of outsourcing clients (or groups of them) and their contractors.
The courts are struggling to apply conventional concepts of “employment” to outsourced services as outsourcings become more sophisticated and seek to break down management processes. The courts are reluctant to break down employment, or employee rights, in the same way. These cases may have particular application
to asset management and public sector outsourcings in future years, both areas which as identified above are likely to increase due to fiscal, economic and regulatory pressures.
The courts use the concept of “intention” to reunify the relationship which may otherwise be fragmented by outsourcing, so that a coherent liability can be left with an employer. Contracts and investment structures will need careful design, and disclosable negotiations will need tactful conduct, if modern evolutions of outsourcing can confidently withstand this tendency.
Can I, must I, move?
Europe still has borders. And offshoring is a measure that needs business to design its own solutions when employees bring claims about international mobility.
Just as there is no European passport, there is no single diagnostic tool or single dispute resolution process to help business deal with claims from competing workforces when offshoring occurs.
As younger generations show the appetite to move, and migration patterns mean that communities may find it easier to move across borders, more cases about offshoring can be expected. Countries where there have been reported cases include Germany (to Ireland), France (to Brazil) and the UK (to Israel). One in particular – Holis – illustrates the need for a renewal of current regulations. The key points are:
X most country laws contain a presumption against extra-territoriality (that is, they only apply to events within that country). But the Directive and UK law only need the business to be based in the UK before the transfer for the rules to apply. A UK origin means courts can “export” the employment protections of national laws, in a similar way to that which they can use to “export” requirements to comply with bribery laws, data protection rules and so on. This expansion of national influence can apply not just to expatriates or posted workers (see “Lost in transit” in this report) but also to conventional workers;
X the Courts assume that enforcement of rights is a problem which is easily overcome: “In these days of multinational corporations and economic interdependency I would regard the issue of enforcement as less difficult than it used to be” said the Judge in Holis. Courts like employees to have a remedy, and expect employers to work out the consequences of competing systems, even where legislation does not exist; and
X Courts, like trade unions, like employers, look at what their colleagues overseas do. The UK court analysed the German case of Englischer Dienst, and saw a similar treatment. It went against the analysis applied in a French case where the economic, cultural, social and other changes entailed by a move of business from France to Brazil meant that there was no retention of identity and so no right or requirement to transfer. This sounds a little like saying that being “non-French” could mean the destination of transfer takes it outside the rules. Of course, in France this can result in a perceived form of employee protection – their “work” stays in France, and if there is not a role, they have French severance rights. Perhaps the result would be different for a transfer with in the EU, but so far we see an inconsistent solution to a problem applying within EU states.
The current state of the EU Directive renders Europe vulnerable to changes
that its structures are inconsistent, over-complex and too uncertain for
the evolving needs of an international outsourcing marketplace.
“Relaxation of immigration policy will result in a moderate increase in outsourcing, driven primarily
The current state of national law renders the UK vulnerable to business views that its regime is unusually protectionist, and is in some ways more likely to be a problem platform from which to manage international outsourcings.
The current state of the EU Directive renders Europe vulnerable to changes that its structures are inconsistent, over-complex and too uncertain for the evolving needs of an international outsourcing marketplace.
The UK could fix this one way – by amending some of its protections or contemplating a Brexit from the EU. The EU could fix things through greater convergence and a review of legislation.
Future proofing: what employers can do
In 2008, the European Commission decided it did not need to reform EU laws to clarify cross-border transfers. In 2015 in the wake of the debate on EU data protection laws, US safe harbour and increasing anxiety over conflict between trading blocs, it may find increasing pressure to reform that view.
Business needs to be ready to deal with opposing pressures. Those include the possibility of labour market protectionism, fears of migration, and the accidental impact of laws on data privacy and liberty. What if it became unlawful to outsource or offshore certain activities? Or the processes central to outsourcing, involving big data, mobile technology and so on, were regulated to death?
Perceived impact of laws on outsourcing
by the Asia Pacific region with 45% of participants indicating they are likely to increase use of outsourcing versus 28% across all geographies combined. This sentiment is lead primarily by responses from India, Pakistan, South Korea, and Japan. Less
Increased data privacy regulation
Increased anti-corruption regulation
(e.g. UK Bribery Act, BSA/AML, FCPA)
Relaxed restrictions on hiring and termination of new employees (e.g. ARD/TUPE)
Relaxed export control (e.g. ITAR)
than 5% of organizations are likely to decrease outsourcing as a result of a relaxation in immigration policy.”
Likely to decrease use of
outsourcing (% of respondents)
Relaxed immigration policy
In the U.S., impact of health care reform (e.g. PPACA)
Likely to increase use of outsourcing
(% of respondents)
Source: Deloitte’s 2014 Global Outsourcing and Insourcing Survey 2014 and beyond, December 2014
Outsourcing contract future proofing: key features
a close enough connection to maximise the likelihood of choice being upheld. Consider courts or arbitrators (confidentiality, cost, speed). Allow for non-derogable local law e.g. posted worker rules, minimum wage, etc.
In 2016-17 there are important discussions about managed exit from international communities, while there are competing tendencies to seek and encourage inward investment from foreign sovereign states and multinationals. There is great opportunity for business to inform the political debate, and to influence social dialogue through industry forums. And, back in the day job, there is time to review and refresh the legal and business tools for managing outsourcings.