What is outsourcing?

This is where a company arranges for a separate third party to undertake a service which, until then, the company has undertaken itself i.e. Company A has historically managed and run its own payroll but decides to outsource this to an external payroll services provider or Company B used to employ its own cleaners directly but decides to outsource its cleaning needs to an external cleaning provider.

Outsourcing is also known as “contracting-out”.

What are the commercial implications?

One motivation for outsourcing is for the company to seek to save some costs.  Also, the responsibility for that particular function no longer rests with the company, but rests with someone else.  It also means that the company will have fewer employees so there is a reduction in headcount and fewer individuals with employment rights against the company.

The employees who work in the function which is to be outsourced will no longer have any work and therefore would be redundant if it weren’t for the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). 

What are the legal implications?

If the employees working in the outsourced function transfer to the new provider under TUPE, they will not be redundant although there will be a change in their employer.  The rationale behind TUPE is to protect employees’ jobs on a transfer of a business or relevant entity.  There was much legal debate under the old TUPE Regulations (i.e. the 1981 Regulations) about whether or not outsourcing, especially a change in contractor or service provider was a TUPE transfer.  The 2006 TUPE Regulations make it very likely that the vast majority of outsourcing scenarios – whether that means contracting-out, a change in contractor or contracting-in (i.e. the company taking the activity or function back in-house) – will now be caught under TUPE. 

There is therefore a high chance that the employees involved in a particular activity to be outsourced will not be redundant but will transfer with the relevant activity to the new contractor.  Detailed information as to the TUPE Regulations is beyond the scope of this article but, essentially, the new contractor inherits the employees of the company who are ‘in-scope’, namely, those employees who worked on the activity in question.  The new contractor also inherits all the employment rights and liabilities of the in-scope employees and it cannot vary their terms and conditions of employment save in very exceptional circumstances.  This obviously has commercial implications as to the cost to be charged by the contractors for providing that particular service. 

Clearly, where services and functions are outsourced abroad (e.g. India), which has become popular recently, the employees involved are very unlikely to be willing to relocate to India, in which case they will be made redundant by the company.  The new contractor will therefore be free from the constraints of TUPE and will be able to provide the relevant service at a fraction of the amount it has historically cost the company to provide this service itself.

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