Increasing globalisation, rapidly evolving technology, new virtualised ways of working, are all commercial trends that are changing the IT landscape. Outsourcing may be seen by some as a way of relinquishing the shackles of responsibility. However, companies that are “insourcing” can be blissfully unaware of the pitfalls and ongoing employee liabilities that they must absorb.

Outsourcing is the act of one organisation (Client) contracting with an external supplier (Supplier) to provide services that might otherwise be performed by in-house employees.

IT based services are regularly outsourced by large companies. Indeed in a recent survey KPMG interviewed 230 businesses, with a total IT budget of £30bn. Of these companies 76% of organisations said that they will maintain the same level of outsourcing or increase it over the next year.

Technology seems to be increasingly driving UK businesses and outsourcing is central to this. Suppliers of IT services must react to new demands from customers such as multi-sourced contracts and new delivery options.

Many companies see the obvious advantages of outsourcing, including developing internal staff, risk sharing and reducing overheads. However, they fail to see the potential problems if they have not identified their legal obligations. These can come in the form of their obligations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Employers are obliged, under TUPE, to inform and consult staff about the proposed transfer, either by writing to and talking to the employees concerned, or to a staff or union representative. The penalty for failing to inform and consult is potentially severe. It is a maximum of 13 weeks’ pay, per affected individual.

TUPE does not just impose obligations on the Client. Under TUPE, the Supplier has to respect employment terms of employees such as salary, hours, overtime allowances, redundancy packages, holiday entitlements, union recognition and so on. Any changes because of the transfer are void and if they are for a reason connected to the transfer then subject to a special defence they are also void.

A client engaging a contractor to do work on its behalf, reassigning such a contract or bringing the work “in-house” (a Service Provision Change).This can, therefore, encompass an initial (or first generation) outsourcing, a subsequent (or second generation) outsourcing or an in-sourcing. However, the supply of goods and “one-off buying-in of services” are excluded.

TUPE applies to outsourcing by virtue of a Service Provision Change. In order to identify whether there is a service provision change, and therefore whether the outsourcing will attract TUPE, there must be an “organised grouping of employees” situated in Great Britain before the outsourcing, that has as its “principal purpose” the carrying out of the relevant services on behalf of its client.

In order to constitute an “organised grouping of employees” it is not enough that employees carry out the majority of their work for a particular client. Rather, employees must be organised by reference to the requirements of the client’s team. Therefore there may not be an identifiable grouping of employees if, for example, the contractor uses different employees each day or week to provide the service or the employees provide services to a number of clients, for example in a shared service environment or if the employee is assigned to, for example, the night shift but spends 100% of his time working for the client.

If TUPE does apply to an outsourcing, Suppliers will need to consider a number of employee related issues. The same issues will arise at the end of an outsourcing when there is a change of supplier or the activity is brought in-house back to the client.

The employment of those assigned to the Supplier automatically transfers to the Supplier on their existing terms.

Any dismissal that occurs by reason of a TUPE transfer will automatically be unfair and the employee will be able to bring a claim of unfair dismissal against the Supplier.

Throughout the contract both the Supplier and the client will want to seek to protect themselves and will seek to do this through negotiating warranties and indemnities.

Both parties may also want to keep an eye to the future and consider exit provisions. For example, the Supplier may want an indemnity from the Client in respect of the next supplier not matching the terms and conditions provided. The Client may want a commitment by the Supplier to indemnify a successive supplier in order not to put off future suppliers. If this is not agreed, the Client may ask for the Supplier to indemnify them in respect of any losses incurred by virtue of their providing an identical indemnity to any subsequent supplier.

Source:Thames Valley Business Magazine November 2012