New rules put staff rights in the spotlight

When looking at an IT outsourcing deal, it may not be immediately apparent how employees are going to be affected.

When looking at an IT outsourcing deal, it may not be immediately apparent how employees are going to be affected.

Customer business cases for IT outsourcing deals may focus on cost savings, improved efficiency and standard of service. Employee issues may only be considered later, or when it becomes apparent that claims are likely to arise.

However, one of the biggest changes for 25 years is taking place in respect of employee rights in IT outsourcing deals. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (the New Tupe Regulations) came into force on 6 April and will replace the 1981 regulations. This will turn the spotlight onto employee rights in outsourcing deals.

The basic idea behind both the old and the new regulations is that, in general, if services are outsourced by a customer to an outsourcing provider, then the employee contracts that are within the scope of the transfer will automatically transfer to the outsourcing provider on the same terms and conditions (together with any historic and outstanding employment liabilities).

At the end of the outsourcing deal, employees within the scope of the transfer will transfer from the outsourcing provider back to the customer or the customer's  replacement outsourcing provider.

Of course, the party that is obliged to inherit these employment contracts and associated liabilities under these regulations may not wish to do so. A key issue here is how the risks, liabilities and costs will be shared between the customer and the outsourcing provider (and any replacement outsourcing provider) in respect of these employee transfer issues.

The New Tupe Regulations will cover more situations than previously relating to transferring employees and will help provide further clarity on some issues.

Cases covered

The new regulations will cover cases where services are outsourced to the supplier, brought back in-house by a customer or assigned by a customer to a new outsourcing provider.

Supplying staff information

The customer will now be required to provide the outsourcing provider with certain information about the employees, including the age and identity of the employees within the scope of the transfer, any collective agreements, as well as certain grievances or litigation that apply to these employees.

This "employee liability information" must be provided in writing to the outsourcing provider at least two weeks before the transfer or as soon as reasonably practicable unless special circumstances apply.

Staff terms and conditions

Employers and employees will be able to agree changes to the terms of employment in certain circumstances. However, transferring employees cannot have their terms and conditions changed to that of the outsourcing provider's simply for the purpose of standardisation.

Clarifying unfair dismissal

The New Tupe Regulations will clarify when it is unfair to dismiss employees for reasons connected with the transfer. An employee cannot be dismissed by the customer or outsourcing provider for a reason that is connected with the transfer unless there is an "ETO reason" or an "ETO defence".

This is an "economic, technical or organisational reason entailing changes to the workforce". The most commonly cited reason is a redundancy situation. If this reason does not apply and the employee has been employed for a year or more, the dismissal will be automatically unfair.

Consulting affected employees

The customer and outsourcing provider will be obliged to inform and consult employee representatives of affected employees. Both parties are liable here.

If this duty is not complied with it could result in a complaint by an affected employee or appropriate representative to an employment tribunal (although this would have to be made within three months of the transfer).

The complaint can be made against the customer, the outsourcing provider or both, and if the complaint is upheld, the employment tribunal can make a protective award of up to 13 weeks' full pay per employee.

Some areas where the New Tupe Regulations will not apply include:

  • The supply of goods and the "one-off buying in of services"
  • Where an outsourcing provider removes key staff from a contract prior to it being transferred back to the customer or a replacement outsourcing provider.

Employees of both the customer and the outsourcing provider are likely to welcome the New Tupe Regulations. Increased transparency will mean that transferring and affected employees are likely to find out more and be consulted about the outsourcing and how it will affect them.

The New Tupe Regulations will also need to be read alongside the Pensions Act 2004 and the Transfer of Employment (Pensions Protection) Regulations 2005 in terms of the pension provision that a transferring employee can expect the outsourcing provider to make.

IT outsourcing is often driven by businesses trying to reduce costs, improve efficiency, obtain better value for money and improve standards. However, this will now have to be balanced against the costs of having to comply with the New Tupe Regulations, as well as other existing laws relating to items such as data protection, tax, pensions and regulatory matters.

It is essential for companies that are thinking of entering into, are already in, or are coming out of an IT outsourcing deal to seek advice on the New Tupe Regulations.

This is because there are many legal and practical ways to eliminate or reduce customer employment liabilities, including amending the outsourcing contract and redeploying or reaching compromises with employees.

Jimmy Desai is a partner in the IT and outsourcing group at law firm Tarlo Lyons

Some likely effects of the new Tupe regulations

  • Some customer business cases for IT outsourcing not fully taking into account employee issues at the start of, during and at the end of an IT outsourcing deal, particularly if the customer decides to appoint a replacement outsourcing provider at the end of the existing deal
  • Delays due to employee consultation and customers locating, compiling and providing employee liability information to the outsourcing provider (with the relevant knock-on effects such as deals not commencing when scheduled at the end of existing contracts or upon the designated start date)
  • Increases in the overall deal set-up cost
  • Possible adverse public relations due to breaches of the New Tupe Regulations - for example, employees making claims at employment tribunals
  • Imposition of terms and conditions upon the customer by a replacement outsourcing provider in respect of compliance by the customer and original outsourcing provider with the New Tupe Regulations
  • Customers not being aware of all of their obligations under the New Tupe Regulations and walking into unexpected employment liabilities
This was last published in April 2006

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