Employment: When in Rome…

Companies hoping to save money by outsourcing their operations abroad need to do their research, says Martin Warren

For some time UK businesses have been looking across the globe at new or traditionally weak or troublesome markets, such as Eastern Europe, Russia and South Africa, as the next big market into which they can sell their products and services.

Others have more limited ambitions. For them the main attraction is the opportunity to outsource non-core activities to countries where there is a skilled, well-motivated labour force that is much less costly than in the UK. Call centres and labour-intensive back-office activities are popular examples.

In both cases many of the employment issues for managers are the same as those that have been faced by multinational companies for several years.

Companies need to identify the skills available and where they are in the target country; the normal employment practices and who their competitors are and what they are doing in the labour market.

They will probably want to bring in some of their own managers and people with specialist skills, at least until they can train locals to the standards required. They have to consider how and where these expatriate staff are to be accommodated and whether it makes sense to suggest they bring their families, having due regard to the facilities and support available locally – which may in turn bring with it issues of ‘trailing spouses’ and how far the company will, or can, help them to also find suitable work.

Then there is the cultural dimension – not just a euphemism for the possible need to grease the palms of various authorities, but a vital knowledge set covering such matters as the stability of the regime; the role of trade unions, if any; what religious sensibilities must be observed; and attitudes to matters of diversity, which may be divergent from what they have come to accept as appropriate under anti-discrimination employment laws in the UK.

Companies may expect their employment lawyers to give them guidance on some or all of these HR issues. Accurate and up-to-date knowledge of the labour law in the target country and how the legal system applies it certainly has to be a due diligence requirement for any business thinking of extending its global reach. This presents a problem for UK law firms unless they have the global reach to provide comparative local knowledge.

Many UK businesses have achieved significant success in outsourcing activities to India. For a lot of UK and US companies the subcontinent has the major attraction that good English language skills are common.

For others, however, the experience has proved less happy – not least because they did not properly understand how labour laws would impact when it came to local hiring.

There are 45 laws at national level in India that impact on the functioning of the labour market, and perhaps four times as many at state level. And the mills of the legal system are busy, if sometimes painfully slow to grind. More than 500,000 disputes were pending in the labour courts in 2000, and 5 per cent of them had dragged on for at least 10 years.

Running even a medium-sized business in Calcutta can be rather like managing academic staff in UK universities during the era of tenure – employees can choose not to resist dismissal, but effectively enjoy the right not to be dismissed.

As more businesses have stuck their toes in the Indian outsourcing pool, the availability of skills has inevitably been affected. What that can mean is key employees with highly marketable skills will leave with little notice for a pay hike elsewhere. Meanwhile, the poor performers are almost impossible to shift.

It is no accident that, of a working age population in India comprising nearly 700 million, only 10 million are actually employed in the formal private sector. Many of the restrictive laws apply only if a business has more than 50 or 100 employees. Local businesses keep small so they drop beneath the regulatory bar. Nor does security of employment offer bigger employers protection against industrial disputes. These may not be a big issue compared with the UK experience 30 years ago, but with 15 million days being lost through industrial disputes in 2004 according to World Bank estimates, it is a contingency that has to be considered.

Legislation covering hiring and firing, minimum wages and the scope for collective bargaining varies considerably across different parts of Asia. Not all have such restrictive provisions as India, nor offer as much scope for collective bargaining.

However, the law as ever is a moving target. Those who have looked to an easier labour law regime in post-Maoist China will be aware that the Beijing government created a wave of concern among foreign corporations last autumn by unveiling proposals that some say would make it very difficult to dismiss for poor performance and would enhance the authority of unions to bargain collectively and pursue workers’ grievances. It looks to some worried US commentators all too similar to European legislation.

The spectre of Tupe
Companies that want to use tried-and-tested people to manage a new operation on the other side of the world need to appreciate that it is not only the old developed countries that place legal hurdles in the way of those who come and work in their economy. Many governments look askance at ‘parachutists’ dropping in from afar and snapping up all the plum jobs in foreign-owned ventures. Those who have sought to do business in China, including law firms, will know all about the decrees that limit access for those not of Chinese nationality.

If outsourcing is proposed within the UK, then the Transfer of Undertakings (Protection of Employment) Regulations (Tupe) would be an issue – the information and consultation requirements, the automatic transfer of people with their existing rights and the protections against Tupe-related dismissals or changes.

But when work is offshored, does Tupe apply?Tupe has always posed some interesting questions for lawyers about extra-territoriality. The issue has gained further interest because, under ‘new Tupe’ (the 2006 regulations), service provision changes are covered. Prima facie, many offshoring cases fall within the definition of a service provision change. This may well produce some interesting case law in the future.

What gave the debate added reality was the 2003 case of Englischer Dienst. Here a news service that operated out of Hamburg was transferred to Cork. The service was unchanged, the same software packages were used and the PCs in Cork remained connected to the server in Hamburg. The managing editor remained in Hamburg. The Landesarbeitsgericht (Higher Labour Court) determined that, while great geographic distance generally militates against the preservation of economic unity, in this case the news editing and dissemination were determined much more by the information systems used rather than the establishment’s location. Tupe did apply and a dismissal made was consequently invalid under German law.

The individual in this case pursued his case against the German transferrer, not the Irish transferee; and both countries are within the EU and therefore subject to the Acquired Rights Directives. So we have not seen yet how a court in one country would view enforcement of transfer rights brought by an employee of the transferring company in another state, let alone how this would operate if one of the countries involved was outside the EU.

It is an issue that the European Commission is now examining in the context of ‘new Tupe’ to see if, and how far, the Acquired Rights Directive should be applied transnationally, with a view to making proposals to the member states.

Such a development would please those who see outsourcing as a threat to ‘old world’ jobs. Strong lobbying against it can be expected from business – and also from the governments of some countries currently benefiting from the spread of wealth that growth of globalisation has brought.

Martin Warren is head of the HR practice group at Eversheds