IT Outsourcing deals – taking employee rights into account

March 1, 2006

Parties negotiating IT outsourcing deals often focus heavily upon particular clauses relating to price and payment, service standards and targets, termination events, intellectual property and limitation of liability clauses.


This can often overshadow the discussions relating to how the employees in the IT outsourcing will be affected. The introduction of the new Transfer of Undertakings (Protection of Employment) Regulations 2006, which came into force on 6 April 2006, will focus the spotlight on employee rights in IT outsourcing deals.


The basic idea behind both the old and the new transfer regulations is that, in general, if services are outsourced by a customer to an outsourcing provider (the outsourcer) then the employee contracts that are within the scope of the transfer will automatically transfer to the outsourcer on the same terms and conditions (together with any historic and outstanding employment liabilities). By the same token, at the end of the outsourcing deal employees within the scope of the transfer will transfer from the outsourcer back to the customer or the customer’s replacement outsourcer.


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 outsourcer (and any replacement outsourcer) in respect of these employee transfer issues. The new TUPE Regulations will have a number of important effects in this context.


1. They will cover cases where services are outsourced to the outsourcer, brought back in-house by a customer or assigned by a customer to a new outsourcer.

2. They will require the customer to provide the outsourcer with certain information about the employees, including the age and identity of the employees within the scope of the transfer, any collective agreements or certain grievances or litigation that apply to these employees. This “employee liability information” must be provided in writing to the outsourcer at least two weeks before the transfer or as soon as reasonably practicable unless special circumstances apply.

3. 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 the outsourcer’s employee terms and conditions simply for the purpose of harmonisation of terms and conditions.

4. The Regulations clarify when it is unfair to dismiss employees for reasons connected with the transfer. An employee cannot be dismissed by the customer or outsourcer 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

5. They will oblige the customer and outsourcer to inform and consult the employee representatives of those affected. Both parties are now 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 outsourcer or both and if the complaint is upheld then 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 outsourcer removes key staff from a contract prior to it being transferred back to the customer or a replacement outsourcer.

Some effects of the new Regulations are likely to include:


·        some customer and outsourcer 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 outsourcer at the end of the existing deal

·        delays due to employee consultation and customers locating, compiling and providing employee liability information to the outsourcer (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 Regulations (for example, employees making claims at employment tribunals)

·        imposition of terms and conditions upon the customer by a replacement outsourcer in respect of compliance by the customer and original outsourcer with the new Regulations

·        customers not being aware at all of their obligations and walking into unexpected employment liabilities.

The new TUPE Regulations will 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 party taking the transfer to make.


IT outsourcing is often driven by customers trying to reduce costs, improve efficiency, obtain better value for money and improve standards but 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 customers and outsourcers that are involved in an IT outsourcing deal to consider the employment related aspects of the deal at a very early stage, particularly because there are many legal and practical ways to eliminate or reduce employment liabilities in the deal including amending the outsourcing contract and redeploying or reaching compromises with employees.  


Jimmy Desai is a partner in the Technology & Outsourcing Group at Tarlo Lyons: