Sourcing Speak

Under the previous 1981 Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) and the EU Acquired Rights Directive (ARD) it was not clear whether the definition of a relevant transfer caught “outsourcing” activities where there was a change of service providers or a contracting in or out of services. The UK and European courts used a number of factors to decide whether there was a “transfer of an undertaking” within the meaning of TUPE 1981, which led to a number of conflicting case law decisions on this point.

TUPE 2006 Regulations sought to address the difficulties in applying TUPE 1981 to outsourcing activities by extending the definition of a relevant transfer to include situations where:

• there was a “service provision change” for outsourced or in-sourced activities, or

The U.S. Department of Defense, General Services Administration and the National Aeronautics and Space Administration (NASA) have issued a proposal to amend the Federal Acquisition Regulation (FAR) implementing Executive Order 13495 , which will require government contractors that take over service work from other companies to offer jobs to certain categories of the predecessor’s employees.

The presidential order is intended to aid procurement efficiency and mitigate transition risk by preserving the service continuity of the predecessor’s employees, if the contract is awarded for the same or similar work in the same location. There are many similarities with the long standing protections offered to citizens of the European Union, whose jobs are protected in certain circumstances by the Acquired Rights Directive (ARD). Under the ARD, an employee’s job is safeguarded by requiring a successor contractor to hire the employee from its predecessor on substantially the same terms and conditions (e.g., salary, benefits, years of services) as the employee enjoyed with its predecessor. Notably, the ARD applies to private sector outsourcing transactions, not just to government contracts as is the case under the proposed FAR regulations.

For any company that has sought to outsource its IT or BPO functions on a global basis, the implications of the ARD are impossible to ignore. It requires suppliers to conduct substantial due diligence on the customer’s HR policies and personnel before signing an outsourcing deal, and to make offers to its predecessor’s employees as opposed to using its own employees to perform the services. As a result, the supplier must factor the cost of hiring the new personnel into its solution, and in turn, pass that cost back as a charge to the customer. Although the consequences vary from country to country, ARD non-compliance violations can result in hefty fines for both customers and suppliers as well as potential criminal liability for certain breaches of consultation requirements in countries such as France.