How to protect yourself when negotiating an outsourcing agreement

Many thanks to all of you who completed our outsourcing survey in the last edition of HR law. The results have shown that outsourcing is a hot topic, with three quarters of the organisations having outsourced a function in the last twelve months or are considering doing so. The results demonstrate that outsourcing is not solely brought about by the current economic climate and that many view it as a long term solution, rather than a quick fix. Indeed some reported that it reduced costs to such an extent so as to avoid the need to make redundancies. There is no doubt that outsourcing can be an effective way to increase cost efficiency. Conversely, if you provide the types of functions that organisations traditionally outsource then you may well find that your client base is increasing.
However, the legal implications of outsourcing can be highly complex and there are numerous practical issues to consider and pitfalls to avoid, largely caused by The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“the TUPE Regulations”). The TUPE Regulations may apply where a client engages a contractor to carry out work on its behalf, reassigns such an existing contract to a different contractor or brings the work back “in-house.”  
For the TUPE Regulations to apply, there must be an organised grouping of employees before the change, whose principal purpose is to carry out the services for that client. This does not mean that there must be an entire group or team dedicated to the client, as a single employee could constitute an organised grouping for this purpose. The TUPE Regulations will not apply if the contract is wholly or mainly for the supply of goods for the client’s use or if the intention is that the activities that the contractor will perform will be “in connection with a single specific event or a task of short-term duration.” The application of the TUPE Regulations has a number of effects, including: imposing obligations to inform and consult, transferring employees who are assigned to the function with the work, and re-distributing liabilities associated with those employees.
This arrangement may look attractive to the business, as it cuts staff costs and diverts the liabilities, but the contractor taking on the work will be concerned to reduce the liabilities they take on as far as possible. Where parties end up in the negotiation will depend on their relative bargaining powers.
Both the service provider and the client will want to seek to protect themselves through the contract and will seek to do this through negotiating warranties and indemnities. Key areas of concern are who bears the cost of any failures to inform and consult as required (which gives rise to a possible liability for 13 week’s full pay per employee), for dismissals pre and post transfer, if the service provider decides to change the terms on which the transferring employees are employed (which is strictly limited under TUPE) and for any pre-existing claims the employees may have.
You will use a warranty when you want the other party to confirm that they have done something or that certain information is correct. For example, that the information given about the pay and benefits of transferring employees is correct. If it turns out that it was not then you will have a claim for damages, although will be subject to an obligation to mitigate the loss suffered. 
You will use an indemnity where you want a guaranteed remedy of reimbursement in respect of a particular liability. For example, if the employee has claims which arose before the transfer the client will reimburse the service providers costs of dealing with this claim and any compensation it has to pay. 
Key indemnities and warranties that you will want if you are the service provider are:
Indemnities
  • Indemnities to cover pre-transfer employment liabilities (pay, cost of benefits, claims which have arisen).
  • An indemnity in respect of any failure by the client’s to comply with its information and consultation obligations under TUPE.
  • An indemnity to cover liability for any employees who are not detailed on a list of transferring employees, but who are employed by the client and assigned to the business immediately before the transfer and who will therefore transfer to your organisation automatically.
Warranties
  • A warranty that there are no employees or individuals engaged in the provision of the services other than those detailed in a list/ appendix. However, an indemnity covering the liability of employees not on that list/ appendix is preferable.
  • Warranties in connection with the information the client is required by TUPE to provide about transferring employees, in particular, that it is accurate and up to date and a complete picture of potential liabilities.
  • Warranties that full details of all benefits, bonuses and arrangements with employees to pay any sums to them have been disclosed.
  • A warranty that the client has not been involved in any industrial or trade disputes in a set period (e.g. three years) and that to the best of the client’s knowledge and belief there are no circumstances which may result in any industrial dispute involving any of the employees who will transfer.
Key indemnities that you will want if you are the client are:
Indemnities
  • An indemnity in respect of any failure by the service provider to comply with its obligation to inform you, the client, of any proposed measures that it proposes to take in connection with the transfer i.e. if it will be making any changes to transferring employee’s terms of employment or working conditions in compliance with its obligations to inform.
  • An indemnity to cover liability for any claims for automatically unfair dismissal brought by an employee who resigns and claims constructive dismissal before the transfer arguing that any change in role constitutes a material detriment.
  • An indemnity for post transfer employment liabilities, including dismissals, as some claims remain with you, for example in constructive dismissal cases.
Warranties given
If you are the client you will want to qualify the warranties that you agree to give (examples of which are in the list above) as far as possible by for example including phrases like “as far as it is aware” or “as far as reasonably practicable” or by reducing any commitment relating to “best endeavours” to “reasonable endeavours”.
Exit provisions
Both parties may also want to keep an eye to the future and consider exit provisions. For example, if you are the service provider you may want an indemnity from the client in respect of the next service provider not matching the terms and conditions provided, which may result in a constructive dismissal claim against you, the initial service provider. If you are the client you may want a commitment by the service provider to indemnify a successive service provider (to the same level as the indemnities that you have provided it with) in order not to put off future providers. If this is not agreed, the client may ask for the service provider to indemnify them in respect of any losses incurred by virtue of their providing an identical indemnity to any subsequent service provider.

 

Martha Arnold  is an employment and HR lawyer at Fox Williams LLP. Martha can be contacted on 020 7614 2650 or marnold@foxwilliams.com.

 
 
 
 
 
 
The articles featured on hrlaw.co.uk were correct at the time of publication and should not be relied on or treated as a substitute for legal advice relevant to particular circumstances. Please contact us if you require legal assistance on any employment issues.
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