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As offshoring takes an ever firmer hold in the UK, Gilbert McClung examines new regulations that protect the vulnerable UK workforce

The fundamental purpose of a company, however enshrined in its Memorandum of Association, is to maximise profits and shareholder returns. If the best way of doing this (at least in the eyes of the board) is by offshoring certain functions, then the company can do so legitimately, even if this means that some UK jobs are lost in the process.

On the other hand, one of the fundamental purposes of a union, if not the fundamental purpose, is to safeguard the interests of its members. This almost inevitably involves trying to protect the jobs of its members. Can these seemingly contradictory objectives be reconciled? And given that in the vast majority of cases offshoring will involve redundancies, how does a company ensure the staff/union buy-in necessary to ensure a smooth transition to an offshored environment?

The debate over the benefits and associated risks to companies of offshoring continues, as does the question over the wider socio-economic effect of offshoring on the economy and jobs in the UK. Political interest in offshoring has increased over the last year or so, as issues such as security and the possibility of job losses associated with offshoring have become more apparent. In the US, several states have passed legislation preventing or restricting the offshoring of government contracts, and the issue was prominent in the 2004 presidential elections. The UK Government’s reaction has been more measured. A Department of Trade and Industry (DTI) report in December 2003 suggested that, while offshoring can result in UK job losses, the UK also gains in the sense that cost savings generated by offshoring allow UK companies to remain competitive in world markets, thus generating new jobs and business opportunities.

Trade unions have a very different view of offshoring, and have generally reacted strongly to the potential transfer of
jobs from the UK to lower-cost overseas locations, calling for companies to have a greater responsibility to their UK employees. David Fleming of Amicus, the UK’s largest manufacturing, technical and skilled persons’ union, memorably predicted that a continuation of the current offshoring trend could lead to “a nation of fat cats and hairdressers, with nothing in between”.

Supporters of offshoring claim that the growth in employment in places such as India as a result of offshoring will help increase trade and exports, in turn creating jobs in the UK, but this has done little to convince unions that offshoring is in the interests of their members or the UK economy.

While these debates continue, UK companies are continuing to offshore business functions, and this has encouraged a more practical attitude from some of the participants. For example, Barclays Bank concluded a deal with the Unifi trade union in early 2004 over its plans to relocate low-wage work to Asia. Under this deal, it has been reported that the union acknowledges the benefits of relocating support functions such as call centres and IT to low-wage countries overseas in return for Barclays offering an improved consultation process with employees regarding major decisions that may affect staff.

The timing of this deal, with its emphasis on an improved consultation process, is interesting in light of the pending implementation of the Information and Consultation of Employees Regulations 2004 (the regulations), which are due to come into force on 6 April 2005. Historically, a company’s duty to consult with its employees in relation to outsourcing and offshoring has been governed by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) and the Trade Union and Labour Relations (Consolidation) Act 1992 (Tulrca). While most companies seek to comply with their obligations to consult under Tupe and Tulrca, there has been little consistency, at least in relation to Tupe, as to when in the outsourcing or offshoring process this consultation should occur. Regulation 10(2) of Tupe requires the transfer or company to provide certain information to the employee representatives long enough before the transfer to enable the transferor to consult with them. However, for various commercial reasons such as confidentiality or the need to maximise negotiation leverage, companies may seek to delay the start of this consultation process until a deal is actually concluded. This can lead to a situation where there is employee and union dissatisfaction over what is perceived to be an inadequate consultation exercise, and this in turn can have a negative impact on the success of the transition to the new supplier.

The regulations are designed to implement the EU Information and Consultation Directive, and will apply to employers with 150 or more employees by 6 April 2005, to employers with 100 or more employees by 6 April 2007 and to employers with 50 or more employees by 6 April 2008. Potentially, they represent a significant change in the way companies are required to consult with their staff in relation to outsourcing and offshoring. Under the regulations, employees could have the right to be informed and consulted about employment prospects and changes in employment patterns (particularly if employment is under threat), and decisions likely to lead to substantial changes in work organisation or in contractual relations, such as changes to terms and conditions, Tupe transfers or redundancies.

Both of these scenarios clearly encompass offshoring, as well as potentially most outsourcing situations.

Where, in accordance with the regulations, 10 per cent or more of employees have made a request to negotiate an agreement and the employer has failed to do so, the onerous standard information and consultation provisions will apply (the standard provisions) unless an alternative agreement is reached between the company and its workforce, such as the deal between Barclays and Unifi. The standard provisions require the consultation to take place at the earliest possible stage and, in relation to decisions likely to lead to substantial changes in work organisation or in contractual relations, to be conducted with a view to securing employee agreement. It must be real and cannot be a sham exercise – where employees are informed at the eleventh hour, then no true consultation can take place. And it must take place before any final decisions are made.

There may be some overlap between Tupe or Tulrca and the regulations; however, it is not necessary to consult under both statutory regimes. The regulations provide that an employer is not obliged to inform and consult under the standard provisions where it notifies the appointed employee representatives in writing that they will be consulting under Tupe or Tulrca.

As with any traditional outsourcing arrangement, the buy-in and support of a company’s employees is critical to the success of any transition to an offshored service. An important means of securing this is for a company to engage in meaningful consultation with its workforce to ensure that it understands the rationale behind the decision. While Tupe and Tulrca do provide a framework for consultation, they have perhaps not always led to the type of consultation envisaged originally, at least from the employee and union perspective. The regulations have the potential, then, to impose a heavier and more extensive burden on those employers considering outsourcing or offshoring.

Gilbert McClung is a partner in the technology team at McGrigors London