Employee protection law is a headache when renewing tendering contracts, but careful planning eases the process.

Outsourcing is big business. Private corporations and public bodies are attracted to the idea of tendering non-core activities, such as IT support, facilities management, catering and cleaning. The driving force is lower costs and better service.

However, some outsourcing pioneers in Europe, particularly in the UK, are encountering problems as contracts come up for re-tendering. These problems were not envisaged when the agreements were negotiated and the lack of legislation to address them is causing users and contractors serious headaches.

The source of many problems is the European Acquired Rights Directive. When the first outsourcing agreements were negotiated in the UK, it was assumed that the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), the UK legislative expression of the Acquired Rights Directive, did not apply to the outsourcing of non-core business activities. Case law and amendments to the TUPE regulations have made clear that this assumption is no longer correct.

TUPE has no equivalent in the US. It provides that when an undertaking (a business division or an IT support service) is transferred to another party that is responsible for its day-to-day management, if the undertaking retains its distinct identity, the staff automatically become employees of the acquiring party.

The new employer inherits responsibility for outstanding liabilities, such as wage arrears. The terms of employment with the new employer (save those rights relating to occupational pensions) are protected against changes connected with the transfer.

US executives with no previous exposure to TUPE are often stunned by the implications of its application. In practical terms, when an outsourcing contract is re-tendered, subject to broadly the same specifications, the departing contractor's employees together with liabilities relating to them will usually automatically become the new contractor's responsibility.

The new contractor could therefore find himself responsible for delivering a service saddled with a bloated workforce employed on conditions more favourable than those enjoyed by his own workforce.

On the sale of a business or a first stage outsourcing, when TUPE applies, the parties can quantify these risks by way of due diligence and then address them in the form of warranties and indemnities. The problem in a re-tendering situation is that there is no contractual relationship between the rival contractors (the contract is with the user) and no way of establishing accurately the extent of the liabilities the incoming contractor may inherit.

Unless the departing contractor has agreed something to the contrary with the user in the originally negotiated services agreement, there is no obligation, for example, to provide information regarding the workforce. In the UK, outsourcing agreements are negotiated in the knowledge that TUPE applies and these problems are discussed when the termination provisions are addressed. The departing contractor typically is obliged to provide information on the composition and terms of employment of his workforce. He is usually prohibited from redeploying employees or changing terms and conditions within a set period prior to the termination. He remains contractually liable for any of his actions relating to the employees prior to the transfer date. This last point is usually sufficient to cover issues such as arrears of pay and other employee-related claims.

The lack of termination provisions in some outsourcing agreements coming up for renewal plays into the hands of the incumbent contractors. Unless the user can put commercial pressure on such contractors to co-operate, perhaps by threatening to exclude them from any re-tendering process, there is little incentive for these

contractors to co-operate. Anything that helps rival contractors may prejudice their chances of winning a contract renewal.

Executives responsible for managing outsourced contracts would be well advised to consider the termination provisions right away, rather than waiting until the contract comes up for renewal. If the agreements do not contain adequate protection, it may be possible to get the contract to agree to sensible termination provisions well in advance of any re-tendering process. Clearly, if the user continues with the current contractor it is essential to ensure that deficiencies in employment-related provisions are addressed. Revised draft TUPE regulations - due to be published this year - are expected to address the supply of employee information to new contractors. But while helpful, they are unlikely to resolve all the problems customers encounter.

First published in the Financial Times on 19 September 2000.