Tech & Sourcing @ Morgan Lewis


In this two-part edition of our Spotlight series, we welcome Lee Harding to discuss key labor and employment law issues in relation to outsourcing transactions, predominantly in the United Kingdom and European Union.

A partner in Morgan Lewis’s labor and employment practice, Lee helps clients successfully anticipate, respond to, and navigate personnel challenges. He supports clients on complex, often groundbreaking integration exercises and outsourcing transactions, working seamlessly with local counsel on any cross-border issues. Lee has a particular focus on the crossover between employment law and regulatory issues, especially in the insurance and financial services sectors.

Lee, we are excited to welcome you to our Tech & Sourcing blog! Let’s jump straight in. Labor and employment issues can be key to an outsourcing transaction; in particular, where the services are being carried out by employees who are based in countries that have automatic employee transfer provisions. Can you tell us what the main labor and employment considerations are in relation to outsourcing arrangements?

There are myriad different labor and employment law considerations to take into account in global outsourcing arrangements.

As you rightly identify, the legal considerations are the starting point. For many countries, the application of the automatic transfer principle will not be clear cut and will be heavily fact dependent. Even in those countries where employees do not transfer with the services as a matter of law and where “fire and rehire” applies, the legal issues may not be straightforward, and there may be different ways to structure matters so as to avoid expensive severance obligations at the outset of the transaction.

A connected issue is the broader HR and people considerations. What are the opinions of any affected customers on the transaction? In many countries, there may be a need to inform and consult with works councils or other employee representative groups, or even trade unions in certain industries. There is often a need to protect the confidentiality of these transactions, which can be difficult when balancing the commercial need for secrecy against the need to ensure harmonious employee relations and minimize the risk of disputes, litigation, and industry action.

A critical question will focus on what will happen to the affected staff. The answer will be determined in the first instance with reference to what both parties (i.e., the supplier and customer) want to achieve. There may be important commercial or operational reasons why the customer would want to ensure a smooth knowledge transfer as part of the outsourcing transaction.

In other words, the customer will not want key personnel to leave the supplier and for this to have consequential effects on the ability of that customer to meet their own business obligations. In this situation, it may be important for the supplier to replicate pay and benefits for a limited time and to properly incentivize those key personnel. On the other hand, there may be a greater focus on the need to achieve cost savings and/or drive efficiency gains. If so, there will need to be a discussion about who will bear the cost of any necessary restructuring and the timing for when that will be achieved. It may not always be the appropriate answer for the customer to push those costs onto the supplier, as those costs may ultimately flow through to the price for the services.

Of course, geography will play an important role when deciding whether and to what extent any restructuring will be carried out, as there will be significant differences in regulation on a country-by-country basis. For example, in some continental European countries, it can amount to a criminal offense not to go through the appropriate consultation process and any consequent dismissals can be rendered void.

Further, it is not always the case that the parties will be able to buy their way out of trouble by offering enhanced severance packages to exited employees. Increasingly, we are seeing companies come under pressure from investors and even politicians when taking this type of approach. It is essential that clients are aware of the wider PR and communication challenges when implementing such a course of action in a country that is viewed as having less restrictive labor and employment practices.

So, it sounds like there is a lot to consider. Are there specific timescales involved and when should businesses start considering potential labor and employment issues?

Often it will be important to work backward from any important business milestones to ensure that there is sufficient time built into any outsourcing scenario.

Much will depend on which countries are in scope and what the parties are seeking to achieve. As a general rule, the more that the parties are seeking to change from an HR or people perspective, the more time that will be required, often many months out from the go-live date.

In many automatic transfer countries, there will be a legal requirement to replicate existing benefits and a prohibition on harmonization of benefits with existing staff. There may be some creative legal solutions that can be deployed to achieve the objectives of the parties, but it is prudent to assume that there will be some resistance. Accordingly, the parties should not assume that they will be able to stick to any minimum legal timeframes, but they will need to be nimble and adapt to employee concerns as they arise.

Logistically, it can also be time consuming and administratively burdensome to simply have all of the conversations that need to take place in a timely fashion and to create a purposeful audit and documentary trail that mitigates legal risk.

Labor and employment issues should not be an afterthought—the safest approach is to start early in the process if the parties want to ensure a smooth transition from the customer to the supplier. A failure to do so can even lead to regulatory intervention in certain scenarios, such as if the parties have failed to engage with the pension scheme trustees of an unfunded pension scheme until very late in the process. Deciding not to do so because of the need to protect confidential information will rarely be viewed as a satisfactory defense by an interested regulatory body.

Given the timing and administrative burdens that can arise for parties in an outsourcing scenario, parties sometimes decide to structure the transition of staff from a customer to a supplier (or a supplier to another supplier on a second or third generation transaction) in different waves rather than implementing a big-bang event.

Check back next week as we chat with Lee on more key labor and employment law issues in outsourcing transactions.