OUTSOURCING IN EU? AN OVERVIEW FOR IN-HOUSE COUNSEL ON THE LABOR ISSUES INVOLVED

Transcription

1 OUTSOURCING IN EU? AN OVERVIEW FOR IN-HOUSE COUNSEL ON THE LABOR ISSUES INVOLVED By Mitchell Bell, Labor Law Specialist, Halebury (London) 1. Introduction This article provides in-house counsel with an overview of the process of undertaking an outsourcing, with a particular emphasis on outsourcings involving countries in the European Union (EU). While not a comprehensive review of all of the aspects and issues involved in undertaking an outsourcing, it should provide in-house counsel with a good idea of what to expect from the process. When a company outsources a function jobs move, jobs disappear and jobs are created. For labor lawyers, the focus is on the labor law issues that these people movements raise. Here we look at: how to effect the transfer of employees from the customer to the service provider; other labor law issues that arise in outsourcing deals; key money issues; points to plan and address so that the people part of the process runs smoothly and provisions typically included in the commercial agreement. 2. Transferring employees In many cases, the parties to an outsourcing will be looking to replace customer employees with, typically, lower cost service provider employees. However, it is not unusual for some of the customer's employees to be transferred to the service provider on an interim basis during the transition period or long-term if some services will continue to be performed on site or in a nearby location. If the service provider has agreed to employ all or some of the customer's employees, it will need to consider how such wanted employees can be transferred. In addition, customers and service providers operating in the EU will need to know that employees will often transfer by operation of law, under local legislation implementing the EU Acquired Rights Directive (ARD). In considering how to transfer employees, it helps to distinguish between two groups of countries - non-automatic transfer jurisdictions and automatic transfer jurisdictions. 2.1 Non-automatic transfer jurisdictions Most jurisdictions in the Americas and the Asia Pacific region are so-called non-automatic transfer jurisdictions. The transfer of employees in these countries is usually a straightforward process and involves the customer issuing termination documentation, and the service provider issuing a new employment agreement or offer letter. However, there are issues to consider. For example, it is vital to establish whether there will be an obligation to give notice or make a severance payment, and, if so, whether these can be waived by transferring employees. In the United States, this is usually not a concern, assuming employees are at will employees and the customer has no severance policy, plan, or practice. However, in virtually all other non-automatic transfer jurisdictions the concept of employment at will does not exist, so the termination of employment of a customer employee, even if followed by that employee's immediate hire by the service provider, is likely to give rise to a need to give notice and/ or make a severance payment. For example, 1

2 Russian employees are entitled to up to three months of statutory severance and two months notice. Canadian employees are entitled to statutory or "reasonable" notice of termination (or payment in lieu thereof), which is based on various factors, including the employee s length of service, level of responsibility and age. Termination and re-hire is usually achieved by having employees waive their rights to notice and severance in return for receiving the service provider s offer of employment. In order to obtain the waiver the service provider will usually have to recognise prior service (because severance entitlements generally increase with service), and in practice, employees are unlikely to waive their rights unless the new offers are on the same terms as their current employment, or are at least comparable overall. In some countries, for example Hong Kong, there are rules which require new offers to be made at a specified time (offers have to be made at least seven days before the employee transfer) and/ or subject to conditions (on "no less favourable" terms) in order the avoid triggering an obligation to make a severance payment. 2.2 Automatic transfer jurisdictions Most automatic transfer jurisdictions are found in the EU where the member countries have had to introduce local laws implementing the ARD. The ARD states that employees transfer automatically in the event of the transfer of a business, even if the parties do not want them to transfer, and gives certain protections to those employees who are affected by the transfer. Unfortunately, there is still a great deal of uncertainty around whether an outsourcing transaction, never mind an outsourcing involving offshoring, is a "business transfer" under the ARD. The automatic transfer of employees might appear to be a desirable result if the service provider wants to keep a customer's employees, but, in many outsourcings, the deal is priced on the basis that the work will be offshored to a lower cost country and all or the majority of the customer's in-scope employees will be made redundant. In these circumstances, the automatic transfer principles can create a number of difficult issues. Before looking in more detail at some of those issues, we need to consider in more detail when the ARD will apply and so result in an automatic transfer of employees. When does the ARD apply? There are two key questions: Is the function (in an outsourcing, this will be the services being outsourced) an undertaking? Has that undertaking transferred? (i) Is the function an undertaking? There will be an undertaking where there is an group of people and assets which is organised together in such a way as to allow an economic activity which has a specific objective to be carried out and which is capable of operating independently. 2

3 The ARD is not directly binding in the EU countries but has been implemented into local law by each country. As a result the test for whether a function is an undertaking (and as we will come on to see, the test for whether the undertaking has transferred) has not been applied consistently across Europe. What is clear is that there needs to be more than just a collection of assets transferred. In many countries, the focus is on whether the function has a sufficient degree of autonomy. (ii) Has that undertaking transferred? The following factors are relevant in determining whether the undertaking has transferred: type of undertaking or business (ie is it asset reliant or labour intensive) whether or not its tangible assets, such as buildings and movable property are transferred the value of its intangible assets, such as goodwill, at the time of the transfer whether or not the majority of employees are taken over by the new employer how similar are the activities carried on after the transfer to those carried on before the transfer the period, if any, for which those activities are suspended. Will the ARD apply to an outsourcing? In the process of implementation, some countries have broadly interpreted the ARD to include outsourcing transactions, whereas other countries narrowly define the scope of the ARD. The country with the broadest application of the ARD is the United Kingdom, which in 2006 extended its local implementing legislation (TUPE) to expressly apply to service provision changes. By contrast, in France the law has been held to apply in the case of an outsourcing of a computer assistance hotline to a service provider, but not to other outsourcing transactions. In countries where there is any doubt whether the ARD applies if services are outsourced, but still a desire that the ARD should apply, ideally the parties would be able to identify some assets which can be transferred, and make clear in the contract that these are transferring. (c) Will the ARD apply to an offshoring? The position is just as uncertain where the outsourcing involves offshoring the services to jurisdictions outside the EU. In Germany, the courts have held that the ARD did apply to the transfer of part of a news publishing business which transferred from Germany to Ireland - provided the relevant test for a transfer was satisfied, the change in location did not prevent the legislation applying. That court did however state that it considered there could not be a relevant transfer to a state outside the EU. In France it has been held that the relocation of a function from France to Brazil did not constitute a transfer of an undertaking because it had transferred to a different "environment". The Court said that the undertaking had not retained its identity. This approach would suggest that, under French law, many overseas transfers would not, on their individual facts, constitute a transfer of an undertaking because it would often lead to a change of "environment" as there are likely to be differences in the legal, social and economic context and in the language of the new country. 3

4 The most liberal interpretation again comes in the UK, where there is caselaw which supports the position that TUPE can apply to overseas transfers from the UK to a country within, or even outside, the EU. In offshorings, it is often going to be safer to assume that the ARD does not apply because most of the various factors outlined above will usually not be fulfilled. That said, in practice, the more prudent approach may be to proceed as if the ARD does apply, at least to the extent services are going to be carried out in the same country or in a nearby country, unless the law in a particular EU country is quite clearly to the contrary. Taking a more aggressive approach that may end up being wrong may cause substantial liability for failure to comply with local law implementing the ARD. In any multi country outsourcing, it is therefore very important at the planning stage to obtain advice from local counsel on the likelihood of local ARD legislation applying. 2.3 What are the consequences if the ARD does apply? If the ARD is triggered by an outsourcing, the customer and service provider need to be aware of the following consequences: (c) (d) Employees engaged in the transferring services transfer automatically to the service provider. Employees are entitled to be employed on the same terms and conditions of employment that they enjoyed while they were employed by the customer. Terminations because of the transfer of the services will be invalid or automatically unfair. Notification and/ or consultation obligations with employees and/ or employee representative groups such as works councils and unions will need to be complied with. 2.4 Automatic transfer of employment Under the ARD the employment of all of the employees assigned to the business/ services immediately before the transfer automatically transfers. No formal offers of employment are necessary and there is no termination of employment by the customer. There is no simple test for whether employees are assigned to the services. It is a question of fact. For example, if an employee is engaged on a shared services basis, it is relevant how much of his work creates value for the services in-scope and how much of his work creates value for out of scope services. Although a simple percentage of time spent working on the services being transferred is not the only relevant issue, in the absence of one clear simple test, it is the default position often adopted, so someone engaged 51% or more of their time on the services is considered to be in-scope. The automatic transfer of employees clearly presents issues for companies involved in an outsourcing, in particular where the parties want the customer employees to be replaced by lower cost service provider employees in other words it makes it impossible in theory for the parties to reduce headcount to gain economies of scale or engage in any type of cherry picking to ensure only the best employees move over to the service provider. What practical options are there? 4

5 Although it is not possible to avoid the impact of the ARD, it is possible to contract around the consequences of employees transferring automatically. It is often going to be in the customer's best interest to have all of the in-scope employees transfer to the service provider and have the service provider terminate any unwanted employees. When the ARD applies, terminations before the transfer are not generally recommended - they are likely to be void or unlawful, and increase the severance costs and/ or lead to employees seeking reinstatement. Pre-transfer terminations may expose the customer to greater liabilities and costs than if the unwanted employees had transferred to the service provider and been terminated post-transfer. That said, it is not unusual for the service provider to say it does not want to deal with the cost and effort of bringing employees on board only to make them redundant in the future and from an employee relations point of view, it is often considered to be undesirable to transfer employees only to make them redundant immediately after the transfer. There is no general rule as to who conducts the dismissals, although in order to win work many of the larger outsourcing companies are having to accept that if they are going to win work in mainland Europe, they will have to agree to take on in-scope employees at least in the short term. What is important is that the agreement clearly sets out who is liable for the potential claims. Even if the termination of unwanted employees is not prohibited, or is carried out post-transfer by the service provider when it is in theory permissible, local laws in the EU are likely to require the company carrying out the dismissals to follow detailed procedures before terminating the employees. These vary on a country by country basis and can take several weeks and sometimes several months to complete. The proposed terminations cannot be carried out before the required procedures are completed. It is therefore critical to ensure that a complete understanding of the different requirements in each country is obtained during the planning process and sufficient time factored into the timetable to allow necessary steps to be completed. Identifying the transferring employees and dealing with the situations where either the identified employees do not transfer or unwanted employees transfer The automatic transfer of employees can mean that either too many employees or too few employees actually transfer. What practical steps can be taken to address these issues? Identifying the transferring employees It is important to determine whether specific employees will transfer, and/ or how many employees transfer, and/ or what jobs they do. In some cases, it may be possible to identify in advance the employees who will transfer to the service provider. The form taken differs between deals, and the agreement may adopt one of the following three options. (i) (ii) (iii) Identify the number (and sometimes jobs) of the employees who will transfer Attach a schedule of specific employees who will transfer to the service provider Simply provide that all employees assigned to the services for the purpose of the ARD will transfer The first option can be a practical solution where the wanted employees are part of a pool of employees (e.g. part of a call centre) where employees have similar skill levels. It is also favourable to the customer 5

6 as it provides flexibility to move people in and out of scope (and perhaps to cherry pick good employees for the retained organisation). The second option is usually the service provider's preferred option, as it provides certainty over who is coming across and potentially limits the customer s ability to cherry pick good employees to be retained. The customer may want some flexibility up until the date of transfer, as employees may leave, or be moved around. That flexibility can be achieved by retaining a (limited) contractual right to vary the list. The third option is not often used and is normally unacceptable to the service provider because of the lack of certainty as to numbers and identities of those it will inherit. However, in deals where fees are structured so that the service provider can pass through the employee costs to the customer, the service provider may be less concerned about the number of employees who transfer and this option may be acceptable. What happens if any of the identified employees do not transfer, or if additional employees transfer? If the parties agree which employees will transfer, the agreement should set out what happens if fewer, more or different, employees, transfer. Provisions in the agreement should address two eventualities: (i) (ii) what happens if any employees on the agreed list do not transfer; and what happens if employees who are not on the agreed list transfer (or claim that they have transferred or should transfer). The parties' commercial interests and needs will differ from deal to deal, and will depend to some extent on the nature of the services, the service provider's existing workforce, and the service provider's need for certain skills. There is no standard outcome. A review of the detailed provisions needed to deal with each eventuality is beyond the scope of this article, but a brief look at the options is set out below. What if identified employees do not transfer? The customer will want all identified employees to transfer, otherwise it will have to make redundancies. Since it has contracted on the basis that it expects the agreed employees to transfer, the service provider will usually be happy to help persuade the identified employees to transfer, and is unlikely to object to offering them a contract of employment on the same terms (again, since it will have contracted with the customer on that basis). However, the service provider may argue that if it is willing to employ the employee, and encourage him to transfer, it should not have to pay dismissal costs if the employee refuses. Not getting all of the agreed employees will be an issue for the service provider where it needs the employees to provide the services, particularly if they are highly skilled or have significant knowhow. In that scenario the service provider may require the customer to provide transitional support for a period of time (or until the service provider manages to recruit replacement employees), for example by way of secondment of the customer's employees. 6

7 The service provider may also want to consider seeking the agreement of the customer to reimbursing it for any consequential recruitment costs, if replacements are needed. Where the agreed employees are crucial to the service provision, the service provider may want to treat the non-transfer of the agreed employees as a "relief event", e.g. the customer waives any right to claim for the service provider's failure to provide the services to the required standard if the failure results from the non-transfer of the agreed employees. What if too many employees (or employees not on the agreed list) transfer? The agreement should also set out what happens if employees who are not on the agreed list transfer, or claim that they should transfer. This is more likely to be a concern for the service provider, which often does not need, or want, additional employees. The three main options which are often included in agreements are: (i) (ii) (iii) The service provider has the option (but is not obliged) to dismiss any excess employees or employees not on the agreed list, supported by an indemnity from the customer in respect of dismissal liabilities and the cost of employing the individual pending the dismissal (remember in some countries dismissal procedures can take a long time). The service provider often prefers this option because it gives it the flexibility to keep employees on if they have useful skills. The service provider is obliged to dismiss any additional employees who claim that they transfer. Again, this provision is often supported by an indemnity from the customer in respect of any dismissal liabilities and the cost of employing the individual pending the dismissal. The service provider has an obligation to take on any additional employees if they are genuinely covered by the ARD. 2.5 Employees are entitled to be employed on the same terms and conditions of employment That employees are entitled to be employed by the service provider on the same terms and conditions of employment as they enjoyed with the customer can be problematic. Under the ARD, "same" does actually mean for the most part exactly the same or identical, so in theory the service provider will need to replicate each and every benefit provided by the customer before the transfer (with very few exceptions permitted by the ARD for pensions and potentially equity awards). Clearly this can be extremely costly and in some cases actually difficult to impossible to achieve in practice (e.g., favourable banking terms in the financial services sector or discounts in the retail sector). The cost piece can usually be addressed through pricing although it may dent the cost savings the customer anticipated it would make as a result of outsourcing its functions. The difficulty with replicating terms and benefits usually leads suppliers to want to know whether they can make changes to terms and conditions of employment. Again, the position varies depending on country. In France, Germany and The Netherlands, changes will be permitted with employee consent, but often in those countries key employment terms derive from collectively bargaining and so that apparent flexibility may not be all that significant. The customer may not want the service provider to make changes even if the service provider is legally permitted to make them. Customers sometimes want to do the right thing by its employees, and so 7

8 may seek to impose a contractual limitation on the supplier s ability to make changes to terms and conditions of employment for a period, often 12 months, post transfer. It may also be a concession the service provider is willing to make as a result of discussions with relevant trade unions. 2.6 Terminations because of the transfer of the services will be invalid or automatically unfair Where the ARD applies, terminations because of the transfer of the services will be invalid or automatically unfair. There is one caveat to this, where the party terminating has a so-called economic, technical or organisational (ETO) reason for the termination. The most common ETO reason is redundancy. A customer is unlikely to have an ETO reason for any terminations of employees who should otherwise transfer, because on a strict legal analysis the reason for the dismissal is the service provider s not the customer s and so terminations are likely to be invalid or automatically unfair. We have outlined above possible practical approaches to dealing with the issue of terminations in connection with an ARD transfer, and highlight below some additional considerations which need to be taken into account when considering the termination of employees in Europe. 2.7 Information and consultation obligations The starting point for the parties when considering the extent of the obligation to inform and/ or consult should be the customer s existing agreements and arrangements with trade unions, works councils or other employee representative bodies. Irrespective of whether any such agreements exist, if it is an ARD transfer, there are specific information and consultation requirements which need to be followed. Extent of the obligation The customer needs to inform the employee representatives about: (i) (ii) (iii) the fact the transfer is proposed; the social and economic implications of the transfer; the consequences of the transfer for the employees. If either party is planning on taking any measures as a result of the transfer (measures includes redundancies, changes to terms and conditions, relocation, changes in role etc) they must consult with employee representatives about those proposed measures. The information and consultation rules differ significantly by country. France is usually the most challenging. There the parties cannot go ahead with the proposed outsourcing until the works council has given its opinion. The position in The Netherlands is similar the company must wait for the works council s advice to be given. If the advice is negative, the company must wait a month before proceeding with the proposed activity. In France, it is vital to ensure that the works council is given all the necessary information and details regarding the proposal to outsource. Works councils will often seek to delay the process by refusing to give an opinion. The more information that is given, the harder it is for the works council to try this tactic. In Germany, Italy and Spain, the relationship between company and its employees is strongly influenced by the unions and works councils and so in those countries great care also has to be taken to get the union or works council on-side. 8

9 Other countries are generally recognised to be less challenging, but each has its own approach, so advice on what is required in each country is a necessary planning step. Sanction for failure to comply with the information and consultation obligation It is strongly advisable to take information and consultation requirements seriously. Although employee representatives and works councils cannot usually prevent the deal from going ahead, they can cause delays. The works council may bring a civil law suit requesting a court order barring the company from implementing the outsourcing until such time that the works council has properly been informed and consulted in, for example, France, The Netherlands, Germany and Italy. In France, the failure to consult with a works council regarding the decision to outsource can also subject the local manager to a criminal sentence of up to one year imprisonment and/ or a fine. The company may also be subject to a fine. In the United Kingdom, the sanction is financial. Affected employees may obtain an award of up to 13 weeks' pay if the customer fails to inform and consult. In all countries and particularly those with works councils or unions, a failure to comply with information and consultation requirements is likely to result in an adverse impact on industrial relations which is likely to damage the transition from customer to service provider and may impact upon service delivery. (c) Timing The ARD does not set out a specific timeframe for consultation. It states only that consultation with employee representatives must begin "in good time" before the transfer. In implementing the ARD, Member countries have taken varying approaches as to when consultation must begin. Some do have specified a timeframe: e.g., in Italy consultation must commence at least 25 days before and in Poland consultation must commence at least 30 days before an outsourcing. In The Netherlands and France, consultation must be completed before a binding legal commitment is entered into - there is no set minimum period. If the outsourcing will not lead to redundancies, the consultation can usually take place after the main agreement has been signed but before commencement of the services. However, consulting after signing will be too late in virtually all multi-country outsourcings, in particular those where the services are being offshored. The reason for that is that where a business decision is very likely to lead to redundancies, consultation must be completed before that business decision is finalised. That said, the parties interests in when consultation takes place are not always aligned. The position of the customer is usually clear. If it will inevitably make redundancies as a result of its decision to outsource or offshore (either among its retained workforce, or employees it makes redundant prior to the transfer), consultation must take place before the decision to outsource/ offshore is taken. Importantly this would mean consulting before the outsourcing agreement is signed. For the service provider it is more difficult. If it is clear that the decision will inevitably lead to redundancies then consultation needs to take place before the service provider decides to proceed. The added complication is that the service provider is not the employer until after the transfer date. If it leaves consultation until after the transfer (when it is the employer) it is too late. If it tries to carry out 9

10 consultation before the transfer date, there is a doubt as to whether that is effective consultation since the service provider is not the employer at the relevant time. In practice, although consultation often takes place before the transfer it is unusual for consultation to take place before the outsourcing agreement is signed. However, that would be the prudent approach where redundancies are inevitable as a result of signing the deal. One option would be to include wording in the agreement saying that the deal is subject to consultation, but that is commercially unattractive. Another option, and what we have seen in a large number of multi-country deals is for the parties to sign a master agreement which is not binding locally. The key is that the master agreement is not binding in each country, so the parties can say to local works councils that decisions are being made on a country by country basis whether there will be redundancies and that consultation will take place before any decision is taken. (d) The approach to transferring the services In any outsourcing, but particularly where there is an offshoring, the approach which the parties take to transferring the services can raise labor issues. There are two approaches: the "staggered" approach, where transition is phased, for example, by service or territory; or the "big bang" approach, where the service provider takes over responsibility for providing all of the services in all of the countries on one date. The most significant labor issue which flows from a decision to adopt a staggered approach or big bang approach is the ease, or otherwise, of ensuring that all necessary employee information and consultation obligations are fulfilled. As we have explained, information and consultation obligations vary on a country by country basis. In France and The Netherlands, it is very difficult to specify precisely how long it will take to complete consultation. If a big bang approach is adopted, it will be impossible in practice to co-ordinate the various countries so that the consultation requirements all complete at near enough the same time to make a big bang approach feasible. The consequences of getting it wrong could be significant. In France and The Netherlands, going ahead with the outsourcing without the local works council's opinion will leave the outsourcing open to challenge, and possible delay by the courts. In the UK, cutting short the consultation period to ensure a particular transfer date is achieved could expose the customer to claims for up to 13 weeks' pay per affected employee. A staggered transition, where elements of the services are migrated over time, is likely to have a bigger impact on business as usual activities and employee morale will be detrimentally affected for a longer period of time than with the big bang approach. The detrimental effect on morale may be countered to some extent by offering retention incentives to key employees, but of course that creates an additional cost at a time when the customer is trying to save costs. However, from a labor point of view, we consider that a staggered approach to service commencement in outsourcings where the ARD applies is the preferred approach. 10

11 Again, the key, in a deal involving several countries, is to understand the various timing requirements and to plan carefully to coordinate timing between the various countries. 3. Other labor law issues that arise in outsourcing deals As we have noted, the parties will not usually want all of the customer's employees to transfer to the service provider, and pricing of the deal is often based on the assumption that a number of the customers' employees will be terminated. 3.1 Terminations in the United States In the United States there are generally very few restrictions on a customer's ability to terminate non transferring employees. Therefore, cherry picking the employees the parties wish to transfer to the service provider is usually a relatively straightforward process, provided that the decision as to which employees will be re-badged and which will be terminated are made on non discriminatory grounds. Consideration will also need to be given to whether advance notice of termination is required under the WARN Act. 3.2 Terminations outside the United States As we have noted, in the EU, the termination of employees where the ARD applies can be problematic. We have considered above some practical approaches to the timing issues which arise when terminations are carried out, and in this section, we look at some additional issues to consider when planning redundancies in a multi-country outsourcing. Selection pool The supplier will often want to protect its existing employees. The general rule is that all comparable employees should be in the selection pool. If the employees who transfer perform similar work to those already employed by the supplier, both groups should be in the selection pool. A failure to do that may result in increased severance costs or additional risk of terminations being challenged. Selection criteria Another issue to consider is that the selection criteria which will need to be applied in order to select employees for redundancy may not match business needs. For example, the parties may want to achieve the greatest possible cost savings or they may want to retain those employees with certain key skills. However, in some EU countries, the selection criteria which must be applied do not make it easy to achieve those goals. For example in France and Germany employers have to use social criteria. In France, age, family changes, seniority and skills/ past performance must be considered, although the weight to be applied to each can be determined by the employer. In Germany, length of service, age, private obligations and severe disabilities have priority over any other selection criteria which may reasonably be considered. Excluded from consideration are performance related criteria such as level of performance in relation to other employees. In The Netherlands, when selecting the employees who will be made redundant, the "last-in-first-out" principle should be applied within each group of employees who have positions that are 11

12 interchangeable, and within each group of employees, the principle should be applied within specified age groups. In certain countries (e.g., Germany), if the employer does not apply the correct criteria, the dismissal will be invalid, with the result that the employee is deemed not to have been dismissed. (c) Special protection for certain categories of employee Certain categories of employee may benefit from special protection on redundancy. For example, in Spain, special protection is afforded to works council members, which means that even if they are the poorest performers, they will be retained ahead of any other employees who are in the pool for redundancy. Again the different approaches taken in the different EU countries highlights the need to plan fully. 4. Key money issues 4.1 Termination payments As we have noted, in many circumstances, the parties will want the customer employees to be made redundant and replaced by lower cost service provider employees. Those redundancies will however, in most countries, result in a cost. For example, in France employees with up to 10 years service are entitled to a mandatory severance payment equal to one fifth of a month's salary per year of service and employees with 10 or more years service the payment is one-third of a month's salary per year of service. Employees are also entitled to advance notice of the lay-off, the length of which is also determined by the employee's years of service with the company. In Germany, the minimum severance payment is half of the employee's gross monthly salary per year of service. In Spain, the severance payment is 20 days' salary per year of service, up to a maximum of 12 months' salary. How costs associated with dismissals are apportioned will usually be a matter for commercial negotiation. However, items such as notice pay and statutory or mandatory severance payments are usually calculable during due diligence and can be factored into pricing. They do vary on a country by country basis, and local input would be needed to determine what they will be in each case. However, given the potential impact of the ARD on outsourcings, and the risk that any terminations will be invalid or automatically unfair, there are other costs which may not be straightforward to calculate. For example, in the UK, dismissals in connection with a transfer which are not for an ETO reason will be automatically unfair. Employees successfully claiming unfair dismissal may be awarded up to c.gbp76,000 (or 52 weeks pay where lower). The amount actually awarded will depend on a number of factors, but essentially how long the employment tribunal considers that the employee will be out of work, and so it is not possible to accurately calculate how much these claims may be worth. The risk of claims is heightened if the parties decide to proceed on the basis that the ARD does not apply, and dismissals are carried out by the customer before the commencement of services by the service provider. Given the uncertainty around the quantum of the liability associated with such claims, they are usually covered by an indemnity, rather than being factored into the price. 12

13 4.2 ARD-related costs As noted above, in some countries, such as the UK, if the customer fails to tell employees about the potential ARD transfer, they may be able to claim for failure to inform and consult over the employee transfers. That failure can result in awards of up to 13 weeks' pay for each affected employee being made. 4.3 Pensions Although the ARD provides for the automatic transfer of contracts of employment, it contains an exception in the case of "employees' rights for old age, invalidity or survivors' benefits under supplementary company... pension schemes". This permits, but does not require, EU member countries to exempt certain pension rights from automatic transfers. As a result different approaches have been taken by different EU countries, with some providing for the automatic transfer of all pension rights and some, including the UK, exempting certain pension rights. In Germany, pensions issues would be a key area for initial due diligence, and in particular to understand any pensions gap under the customer's scheme(s) in Germany. Although occupational pension schemes do not transfer in the UK under TUPE, certain ancillary rights which are often provided as part of the occupational pension scheme (such as enhanced early retirement benefits and enhanced redundancy benefits) may transfer as a contractual right. The actual risk involved with any such rights will depend to some extent on the age profile of the in-scope employees, and whether they are likely to be made redundant and eligible for early retirement in the foreseeable future. Service providers will often seek an indemnity in respect of this, since it can be an expensive contingent liability. 5. Points to plan and address early on in the process The planning and implementation phases of an outsourcing transaction are a crucial part of a successful outsourcing transaction. It is vital that labor issues are considered as early as possible. The costs and complexities of labor issues may affect the timing and even feasibility of the deal. If the following points are considered early in the process of a multi-country outsourcing, that early planning will go a long way to ensuring that the labor-related aspects of the outsourcing run smoothly. (c) (d) Obtain advice from local counsel to determine whether the ARD applies, including where work will be offshored. When the extent to which the ARD applies is better understood, the focus should be on the information and consultation obligations (including any steps which may be required to prepare for consultation) and, where necessary to ensure consistency in timing, a plan to coordinate the employee and works council/ trade union communications in each country will also be needed. Identify which employees will transfer (in the EU, this should follow an assessment of the likelihood of the ARD applying). Customers will need to consider which employees are critical during the preparation and negotiation phases, and then initially post-transfer and/ or in the long term. If there are such employees, will any retention measures be put in place, e.g. retention bonuses, 13

14 control over key employee decisions, and service levels and services credits/ bonuses linked to retention. (e) (f) (g) Pull together an HR team, specifically responsible for due diligence, HR decisions during the negotiations, and information and consultation. Identifying an HR person with a clear understanding of the business needs, who is empowered to take decisions on HR issues during the negotiations should help reduce the number of issues which need to be escalated to the top table, and reduce the need to put HR discussions on hold whilst the commercial team are busy on other issues. Gather due diligence materials early. From a customer's point of view, gathering this data early will mean that HR can identify any benefits which employees will want to ensure are maintained or replicated, e.g. pensions. Due diligence will also help to establish whether other issues are likely to affect pricing (less likely) or may require provision in the master agreement - e.g. the approach to agency staff, and existing subcontractors and their employees. Confirm position on exit i.e., will employees transfer back to the customer or on to a replacement service provider, or will the service provider be expected to redeploy them or make them redundant, and if there will be redundancies, who picks up the cost. This last stage is often given insufficient attention in outsourcing agreement but it is a vital part of a successful deal for both parties. 6. Contractual provisions We have already looked at a couple of the key areas where contractual provisions will be needed: agreeing which employees the parties intend to transfer and how to deal with the situations where too many or too few employees transfer. The employment provisions of the agreement will often cover a number of other issues. We highlight below a few of the more common provisions. 6.1 Warranties and indemnities The service provider will generally expect the customer to provide a series of warranties and indemnities relating to the employees, although the service provider should be conscious of the fact that the customer will normally seek mirror warranties and indemnities in respect of the exit provisions. Therefore, it is advisable to be reasonable in the approach taken. That said, there may be good reasons why some provisions should not be reciprocal. One important difference between the commencement provisions and the exit provisions, at least on a first generation outsourcing, is that at commencement there is much greater certainty. The parties know who the employees are, in relation to transfers in the EU what the current law is, and (particularly for the service provider) what their short-term plans are. On second and subsequent generation outsourcings, elements of that argument are often not available as the customer may not know who the employees are. The same is not true in respect of the exit provisions, and may justify not agreeing to reciprocal provisions. Warranties There are a number of warranties a service provider will typically ask for. These will include: completeness and accuracy of the employee information provided; details of any ongoing employee 14

15 litigation or anticipated litigation; disclosure of proposals to change terms and conditions of employment and compliance with laws. Indemnities In the EU, the ARD operates to transfer all of the customer's rights, powers, duties and liabilities in respect of the employees to the service provider (although in some cases the local implementing legislation provides for a period of joint and several liability in respect of pre-transfer liabilities (The Netherlands, Poland and Spain)). The service provider will want an indemnity from the customer covering those liabilities which arise from acts or omissions which take place prior to the date on which the employees transfer to the service provider. Equally common is for the service provider to indemnify the customer against liabilities connected with the transferred employees which arise out of the service provider's acts and omissions following the transfer. Other indemnities may be included depending on the particular issues which arise. 6.2 Apportionment An apportionment provision is common, with the customer being liable for payments and costs relating to the transferring employees prior to the transfer, and the service provider being responsible for those payments and costs which relate to the period after transfer. The clause is needed because under the ARD all liabilities would otherwise transfer to the service provider. There may be a general commercial apportionment provision, and that should be checked to make sure the two do not overlap. For some employee benefits, it may not be equitable to apportion liabilities in this way, and separate clauses may be needed to deal with for example holiday pay, employee loans and bonus payments. 6.3 Provisions applying during the term of the agreement Primarily, the customer will wish to ensure that the services are provided adequately by means of "service level agreements". However, the customer may also want to retain some control over the services through the HR aspects of the arrangements. Provisions which the customer commonly seeks to include to achieve that include the following. Stability period The customer will want transition to be as smooth as possible, and to avoid disruption to its other services. One way of helping to achieve that is to impose a stability period post-transfer during which there is: a restriction on redundancies and changes to terms and conditions of employment; a requirement that the transferring employees remain assigned to the services, with no change to their role or the proportion of time they spend on the services; a right for the customer to control which employees are assigned to certain functions. Control over key employees Customers often want to retain control over certain key employees during the whole term of the agreement. Control may take a number of forms, including the customer reserving the right to remove or prevent removal of the key employee from the services; to have a veto over replacement key employees; and/ or to be involved in the selection of key employees. (c) Right to remove employees 15

16 Customers may seek a right to request the removal of a wider group of employees, as well as the key employees referred to above, usually to apply if an employee performs unsatisfactorily, or is guilty of misconduct. (d) Restrictions on changing terms and conditions Customers sometimes seek to impose restrictions on the service provider changing the transferring employees' terms and conditions of employment. This may be because the customer wants to give a strong message to employees during the consultation process that their terms and conditions are protected. The service provider may be willing to make a concession made as a result of discussions with relevant trade unions. However, it may be an issue for the service provider if it intended to harmonise terms and conditions with its existing employees, despite the fact that legally such harmonisation is invalid. 6.4 Exit provisions The parties must consider their employment needs in the period following the termination of the agreement, e.g., does the customer need the service provider employees to transfer on to a new provider. They should also consider what the legal position may be in respect of the transfer back of staff, i.e. will the ARD apply, and if so, will the service provider's staff be covered by it? The parties will not be able to predict what the legal position will be. Therefore, the agreement should contain clear exit provisions taking into account the possible legal eventualities. Options for exit provisions include any or all of the following: (c) (d) (e) (f) requiring the service provider to redeploy/ dismiss employees so that none are in scope and indemnify the customer/ a replacement provider for any liabilities if employees end up transferring; providing for an offer and acceptance model (which would apply in the EU over and above anyone who transfers under the ARD) at the customer's option; requiring the service provider to structure its workforce (or at least restructure at the end of the contract) in a way which ensures that a core group of employees will be largely dedicated to the customer's account at the end, and therefore in principle, in scope to transfer in the EU; ensure certain specified key roles are dedicated to the service, so that if the ARD does apply then at least the key ones will be assigned; include the right to require the service provider(s) to provide transitional services or even secondments for a period of time if insufficient staff transfer on exit (to give the new provider time to train its own staff, or fill crucial vacancies); the customer should also consider whether it wants to impose certain controls in the period running up to exit. It may want to obtain relevant HR information to determine whether the ARD may apply, and to which employees, or to guard against "cherry picking" and "dumping" (i.e. moving the best employees out of scope, or moving the poor performers in scope), or to prevent changes to the terms and conditions for employees who may transfer back, which could make the employees more expensive, and therefore the deal less attractive, to third parties. 16