Offshore outsourcing: will Brussels try to block the flow of jobs?

This article first appeared in the Spring 2004 issue of the OUT-LAW magazine. It has not been updated since.

When sound became a feature of the movies, thousands of piano players asked: Who will employ us now? This analogy was chosen by Scott McNealy, CEO of Sun Microsystems, when the San Francisco Chronicle asked him who would employ all the Silicon Valley workers whose jobs have gone overseas. McNealy observed, "You know, we could have kept all those piano players. Does anybody think that would have been a step forward?"

McNealy has a point, but it's hard not to sympathise with the pianists, as we did with textile workers, shipbuilders, steelworkers and farmers. In today's information age, white-collar workers, perhaps for the first time, have seen their jobs go the same way. Why pay a local programmer £40,000 a year when you can pay an offshore programmer with the same skills just £10,000? With the continuing migration of thousands of Western jobs, it is easy to see why offshoring is one of the most contentious issues in business today.

The ethics of outsourcing have been in the media's spotlight for some time. But very little is known about the proposals of lawmakers in this area, some of whom are pushing for change, seeking laws that would affect a company's freedom to travel East.

At present, there is little to prevent a company making staff redundant in the UK and paying a supplier to recruit overseas. With domestic outsourcing, the so-called TUPE Regulations (The Transfer of Undertakings (Protection of Employment) Regulations) will often apply to give staff the protection of an automatic transfer of employment to the external service provider, with preservation of existing employment benefits. However, it is less clear if TUPE applies to offshore outsourcing, in part because it would be uneconomic to transfer staff overseas.

"Most of the UK staff will be made redundant. Even if TUPE does apply, a call centre worker in Cardiff is hardly likely to move with the job to Bangalore," says Michael Ryley, partner in the Employment Law team at Pinsent Masons. "So all that TUPE really determines is who pays the cost of the redundancies." Ryley explains that this will be worked into the price of an outsourcing contract. "Where TUPE applies has not been tested because it rarely becomes an issue," he says. "In practice, most contracts will say that the UK company will pay the redundancy and that in the event of TUPE applying and liability switching, the UK company will indemnify the supplier."

Provided a company follows the proper redundancy procedures, with the required consultation, notice periods and payments, it is largely free to shed domestic jobs. So trade unions are lobbying the UK and US governments for more employee protection.

Bernadette Fisher, of finance union UNIFI, says UK workers feel betrayed that companies are only concerned with maximising profits. Fisher said: "People here are not willing to stand back and watch as companies take advantage of cheap labour."

The Department of Trade and Industry ( DTI ) announced in December 2003 that it will study the impact of offshoring on call centres to debunk the "myth" that UK jobs are being lost overseas. David Fleming, Amicus National Secretary, welcomed the study but warned: "The myth that wants to be exploded is that it is just call centre work. In the last few months we've seen many highly skilled jobs go too." Fleming predicts that, unless we take action now, we could be left as a nation of "fat cats and hairdressers with nothing in between."

Fleming hopes the DTI study "will get to the crux of the problem without just rubberstamping what the Prime Minister and other senior cabinet members have been saying, that the problem is just a fact of life that we have just got to live with."

In the US , many politicians see it as something that they do not have to live with. A bill before Congress seeks to prevent investment in any foreign aid that would harm American jobs or transfer US production facilities overseas. And it seems that a subtle form of protectionism is on Brussels' agenda, too.

The European Commission issued a consultation paper in 2002 on Corporate Social Responsibility, or CSR , a concept whereby companies integrate social and environmental concerns in their business operations. The Commission looked at ways to ensure that redundancies would be a last resort, that all other solutions should be exhausted first. "Downsizing," it says, "must include the involvement and participation of those workers affected, to safeguard their rights and enable them to undergo retraining where necessary."

It goes further. If an operation is profitable, outsourcing should not be an option, says the Commission. "That there must be immediate, real and serious economic grounds to justify job losses which are only envisaged after consideration of other less damaging options is widely acknowledged and observed in the Member States of the European Union," wrote the Commission in a 2002 paper on corporate restructuring. "A clear explanation of the serious nature of the economic grounds underlying the need for job losses is essential."

These proposals are almost two years old, but they have not been forgotten. Irish Prime Minister Bertie Ahern said that his country's EU Presidency (which began in January) will make CSR a priority policy across Europe.

At present, CSR is nothing more than a voluntary concept. Antonia Mochan, the Commission's spokesperson for employment and social affairs, explained that CSR "does include telling businesses that if they pack up and move offshore it will affect more than just their profits." But she adds: " CSR is not a legislative framework. There is no right to fine companies for failing to observe CSR principles."

Mochan said a forum of stakeholders in CSR has been "thrashing out the issues" for two years. It will report to the Commission in the summer. She admits that it may decide that legislation is necessary. "The problem is that trade unions want us to be more prescriptive and employers want us to be less prescriptive," she said. One issue in this conflict is how to legislate to limit the migration of jobs in a way that does not contradict either the duty of company directors to maximise returns for their shareholders or the basic principles of a free market.

Mochan points out that if legislation is introduced to toughen the principles of CSR , it will be at least two years away from implementation in Member States. Ultimately, she says, the offshoring concern may end up being characterised as a national issue. "What can you usefully legislate for?," she asks.

The answer from Labour's Stephen Hughes MEP is that you can legislate to make offshoring less attractive. A member of the European Parliament's Employment and Social Affairs Committee, Hughes told OUT-LAW that he thinks the Commission is getting it wrong.

He said its proposals on CSR do not go far enough: "This is where there is tension between the Commission and Parliament. We don't think it's all about returns to shareholders. Social and environmental issues should be reported to shareholders."

He believes this can be written into law: "The Commission says this should be voluntary. We disagree because good companies will continue to do the right thing; but other companies will continue their bad practices."

Hughes continued, "We don't need a draconian Directive but we do need more than a voluntary scheme. Unless we see progress, we want to require mandatory CSR reporting – on jobs, sustainable development etc."

He adds that "penalties must be proportionate." We asked whether he meant penalties for failure to report or for failure to follow CSR . "Failure to report is an indication in itself that something may be wrong," he replied. "There should be a financial penalty against companies that fail to respect CSR ."

Amicus and UNIFI recently approached Hughes to express their concerns about the increase in offshoring. "The unions were not being protectionist," he said. "They were mature in their approach, saying, 'look, we need to think about what's happening.' They estimate that two million jobs will be lost in the EU ."

Hughes agreed with the unions to have a hearing in the European Parliament and said the Directorate-General for Enterprise and the Directorate-General for Employment have been invited. "I expect one unholy battle between DG Enterprise and DG Employment," he warned.

The most positive indication that some companies will voluntarily protect workers when offshoring came in January, with the announcement of a deal between Barclays and UNIFI. The bank undertook, wherever possible, to redeploy domestic staff hit by offshoring, supplemented if necessary by internal and external career support. It also promised early consultation and a voluntary redundancy register, coupled with voluntary job-matching.

Nigel Fretwell, Barclays' Employee Relations Director said: "If globalisation is an inevitability we cannot and should not ignore the responsibilities that are attached."

This may be good news for Barclays' workers, but Stephen Hughes' point is that, for as long as these are voluntary responsibilities, many companies can and will ignore them.

So developments that affect offshoring may be climbing the legislative agendas of the EU , the US and the UK . But perhaps it is a battle that cannot be won, because, in a free market economy, it is unlikely that the conflicting interests of pianists and board rooms can ever be resolved to the satisfaction of all players.

Top tips: winning offshore

• Post-deal relationship management is one of the key factors to a successful deal; ultimately, outsourcing is just another form of delegation.
• When assessing costs, factor in the added expenses of overseas telecoms links, additional managers and frequent travel to the offshore site. Remember the onerous travel and time differences.
• Perform due diligence on the supplier.
• Check the insurance implications.
• Ensure the contract has review and benchmarking rights to ensure the prices and service levels remain competitive throughout the term.
• Don't overlook the political, cultural and linguistic differences.
• Focus on termination and effective exit management strategies.
• Assess information security and ensure appropriate protections and backups are in place.
• Set appropriate remedies for failure to meet the Service Level Agreement.
• What foreign laws affect the deal itself or employment issues? (Even if the parties have selected their choice of laws, there may be overseas laws that affect the enforceability of the contract.)

Focus on offshoring to India

India is undoubtedly the king of offshoring, winning 95% of overseas sales in the UK , according to Ovum Holway. With the largest pool of English-speaking graduates outside the US , the country is a natural choice for EU and US companies. India already has a strong information communications technology infrastructure. It is now working to improve its legal infrastructure to encourage even more foreign investment. The stringent data protection laws of the EU restrict businesses from transferring data to and storing data in countries without equivalent standards and enforcement procedures, and India is among those countries deemed by the European Commission to have inadequate protections.

Currently, companies can use contractual and technological safeguards to ensure that outsourcing their services to India complies with the EU 's data protection regime; but India is working on its own legislative developments to make these deals simpler and the legal risks more palatable.

In October, the country's National Association of Software and Service Companies, NASSCOM, met with members of government to discuss how to achieve this. The consensus was that there is no immediate need to pass a new Data Protection Act. Instead, it was suggested that the country's IT Act of 2000 should be strengthened to meet the adequacy norms specified by the EU .

India's Minister of Commerce and industry, Arun Jaitley, told the World Economic Forum in November 2003 that his country is working to improve other laws to encourage foreign investment. He singled out its laws on intellectual property rights, particularly as they affect the pharmaceutical and biotechnology industries, as being ripe for a makeover.

For more information on outsourcing contact angela.cha@pinsentmasons.com