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British employment law challenges offshoring

Service providers up in arms over TUPE changes

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Recent changes to rules that protect British employees when a business changes hands have angered offshore service providers who fear becoming liable to British workers who lose their jobs. An employment law expert says the concern is justified, at least in part.

Under the Transfer of Undertakings (Protection of Employment) Regulations, better known as TUPE, when a business changes hands, the existing terms and conditions in an employee's contract of employment will continue automatically with the new employer.

Earlier this month, the rules were updated in response to widespread concerns about their ambiguity and the burden they presented to British business. But among the updates was an extension of the rules to service provision changes.

India-based TataSoft was highly critical. "[It] could not only possibly leave Indian BPO service providers with enormous liabilities but could also assist in protectionism capturing root in a country that was so far believed open to offshore outsourcing services," it said in a statement.

The software development firm acts for UK clients and argues that "new TUPE", as it is sometimes known, "slaps overseas contractors with legal and financial accountability for the British employees". It warns that the law could also inflate overseas service costs for British companies.

Edward Goodwyn, a partner with Pinsent Masons' employment group, agreed that new TUPE is likely to heighten the risk of TUPE claims in future when BPO services are sent to India.

He explains that, even under old TUPE, there was always a risk that TUPE would apply in relation to offshoring to India. The issue was whether or not there had been a "transfer of an undertaking or business or part of an undertaking or business". The fact that the undertaking ended up outside the EU was not fatal to the question of whether TUPE applied; old TUPE made it clear that TUPE can apply if the undertaking was situated immediately before the transfer in the UK.

"Clearly, a UK based IT service being outsourced to India met that criteria and potentially there could be a TUPE transfer of risk," Goodwyn said.

But the crucial question of whether old TUPE did apply, always turned on whether the undertaking effectively retained its identity after the transfer. "There is very little case law to determine the issue where a service has been moved out of the EU," said Goodwyn. "However, the central issue under old TUPE was whether the operation in India was sufficiently different so as to be a different undertaking to that which had been previously operational in the UK."

Goodwyn said that under old TUPE, it could be argued that the mere change in geography meant the undertaking is different – so that TUPE did not apply. "This argument had some merit – but it was always, in our view, equally arguable that if BPO services in the UK were likely to be the same BPO services in India, then TUPE would apply.

Where TUPE did apply under old TUPE, the consequence was that the UK employer would have various consultation and information obligations in relation to the transfer. Additionally, any dismissals by reason of the TUPE transfer were arguably automatically unfair by the fact that they were connected to the TUPE transfer. However, in relation to both obligations, liability for failure to consult and liability for any unfair dismissal would transfer to the new Indian transferee.

In other words, while TUPE would apply, the practical consequence of this would be that the employees or trade union would be left with seeking to enforce their claim against the Indian company. Practically, this would lead to the difficulty of seeking to enforce UK TUPE rights in India. The only exception to this was if the Indian outsourcing company had some UK presence which allowed the employees or union to sue the UK Indian company in the UK.

Whilst matters remain broadly the same under new TUPE, there are some substantial differences that, in Goodwyn's view, increase the risks to both the outgoing UK employer and the incoming Indian employer.

Firstly, the issue of when TUPE applies and when it does not has been modified. New TUPE makes it clear that TUPE will apply where there has been a "service provision change". The definition now means that the so called "innovative defence" is no longer available where you are talking about a service provision change.

So the Indian company would no longer be able to argue that the mere fact that the services are being undertaken in India in an innovative and different way means that new TUPE will not apply in circumstances where the basic BPO service is still being provided. To this extent, it is more likely that TUPE will apply to offshoring of BPO Services.

Additionally, there has been a change under new TUPE as to who bears responsibility for any failure to consult or inform the employees in relation to TUPE. As mentioned, the obligation to inform and consult predominately falls to the outgoing employer; but liability for any failure would transfer under TUPE to the incoming Indian company.

Under new TUPE, the liability for failure to consult or inform is now joint and several between the transferor and transferee. As such, if there has been a failure to inform and consult, the UK employees and their trade union will be able to sue the outgoing UK employer, who will be joint and severally liable for the whole claim.

"The consequence of this," said Goodwyn, "is a higher likelihood of employees and unions who have not been properly informed and consulted under new TUPE after an offshoring bringing claims for protective awards against the outgoing UK employer."

"Indian offshoring companies should continue to be aware of the TUPE risk and indeed be advised that by reason of new TUPE, the risk of TUPE applying and it inheriting employee claims has increased," he said.

But Goodwyn points out that the UK employees will still face the substantial practical problem of seeking to enforce their TUPE rights which, more often than not, will need to be enforced against the Indian company in India. "Nonetheless, it will be prudent for Indian outsourcing companies to look for an indemnity in relation to such claims as part of the offshoring agreement," he said.

Copyright © 2006, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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