In the event of an outsourcing of IT services, would any employees, assets or third party contracts transfer automatically to the outsourcing supplier?

Technology

United States Small Flag United States

No transfer of employees, assets, or contracts would occur automatically. If the organization has contracts with other service providers or independent contractors to perform work that will be transferred, the organization and the other service providers and contractors can agree to transfer those services to the new outsourcing provider. The organization and affected employees can also negotiate with the outsourcing provider to hire the organization’s affected employees. There is no requirement, however, that the organization, the employees, or the new outsourcing provider agree to such employment transfers.

Malta Small Flag Malta

Under the Employment and Industrial Relations Act, Chapter 452 of the Laws of Malta (“EIRA”), when a business is taken over, in whole or in part, any employee in employment with the transferor shall be deemed to be in employment with the transferee, and the transferee takes on the rights and obligations which the transferor as employer has in respect of the employees.

The Transfer of Business (Protection of Employment) Regulations, Subsidiary Legislation 452.85 (“TBR”), provides that the above also applies in case of service provision change, i.e. where activities cease to be carried out by a person (client) on his own behalf and are carried out instead by another person on the client’s behalf (contractor); or where activities cease to be carried out by a contract on a client’s behalf, whether or not those activities had previously been carried out by the client on his own behalf, and are carried out instead by another subsequent contractor on the client’s behalf; or activities cease to be carried out by a contractor or a subsequent contractor on a client’s behalf, whether or not those activities had previously been carried out by the client on his own behalf, and are carried out instead by the client on his own behalf.

The TBR apply irrespective of the services being provided, and thus include also IT services, but are limited to undertakings that are being transferred and that employ more than 20 employees.

Assets or third party contracts are not automatically assigned, and such transfers would need to be agreed to by the parties in appropriate contractual arrangements.

Norway Small Flag Norway

When outsourcing IT services, a company will decide which assets, resources or otherwise it will transfer to the outsourcing company. The parties will then enter into an outsourcing service contract, which governs the sale or disposal of rights to systems, source code, infrastructure, personnel and other intellectual property rights or assets. As such, the transfer of employees, assets or third party contracts is contingent on the parties understanding as stipulated in their outsourcing service contract. The transfer of third party contracts may also be subject to assignment clauses contained in such contracts.

Turkey Small Flag Turkey

No, it is accepted that the outsourcing supplier is in the nature of independent contractors and employees, assets or third party contracts do not transfer automatically.

China Small Flag China

In practice, we include provisions in IT outsourcing contracts if any employees, assets or third party contracts need to be transferred to the outsourcing supplier. Otherwise, there is little room to argue these things have been automatically transferred to the outsourcing supplier.

Mexico Small Flag Mexico

There are no automatic transfers or assignments of employees, assets or third-party contracts in the event of an outsourcing of IT services, unless an agreement on such matter has been consented by the relevant parties and formalities are met (for example in the event of employee transfers a dully notice shall be given to the employee).

United Kingdom Small Flag United Kingdom

No transfers of assets or third party contracts would occur automatically. However, there will frequently be detailed Contract provisions negotiated between the parties to the outsourcing arrangement to facilitate this. In the case of the other signatories to the third party contracts, their consent to the proposed transfer of their contracts to the new outsource service provider will ordinary be required.

If there are individuals who are wholly or substantially engaged in the services/functions which are being outsourced, however (and whether they be employed by the customer entity or its other service providers), then their contracts of employment may transfer automatically to the outsource service provider by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). In such event, all of their rights and obligations (including claims arising from employment related mistreatment by their previous employer) will transfer to the outsource service provider.

Romania Small Flag Romania

When a company is outsourcing certain services that can be seen as a stand-alone function, and the outsourcing supplier also takes over the outsourced activity as such or certain assets/equipment pertaining thereto, there is a chance that we are dealing with a transfer of undertaking. In this case, the outsourcing supplier has the obligation to take over the employees attached to the relevant activity/assets/equipment.

The relevant provisions for the transfer of undertaking may be found in the Labour Code (Law no. 53/2003) and in Law no. 67/2006 on safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, which transposes EU Directive 2001/23 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses. Both enactments provide that all rights and obligations of the initial employer are automatically transferred in their entirety to the outsourcing supplier. A transfer of undertaking may not constitute ground for dismissal.

Moreover, the applicable legal framework provides that before any transfer of undertaking/outsource occurs, the employer and the outsourcing supplier must inform the employees on the following:

  • the date of the transfer or a proposed date;
  • the reasons why such transfer occurs;
  • the legal, economic and social consequences of such transfer for the employees;
  • any measures that may be taken with regard to the employees;
  • the working conditions.

Italy Small Flag Italy

The automatic transfer of employees and third-party contracts, without the need to obtain the prior consent of the relevant employee / contractual party, can occur only in the context of a transfer of a business or a business unit as a going-concern. If a court deems that the transferred assets did not form a going-concern, it may declare the transfer void. In such case, the transfer of the contracts will be deemed ineffective end the employees concerned will have the right to be reinstated by the customer. Thus, in the context of an outsourcing deal in Italy, it is extremely important to assess whether the assets which need to be transferred from the client to the supplier form a business or a business unit as a going-concern. If this is not the case, the individual consent of each transferred employee and contractual party of the contracts being transferred will need to be obtained.

The Netherlands Small Flag The Netherlands

No transfers of assets or third-party contracts would occur automatically. However, there will frequently be detailed Contract provisions negotiated between the parties to the outsourcing arrangement to facilitate this. In the case of the other signatories to the third-party contracts, their consent to the proposed transfer of their contracts to the new outsource service provider will ordinary be required.

If there are individuals who are wholly or substantially engaged in the services/functions which are being outsourced, however (and whether they be employed by the customer entity or its other service providers), then their contracts of employment may transfer automatically to the outsource service provider by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). In such event, all of their rights and obligations (including claims arising from employment related mistreatment by their previous employer) will transfer to the outsource service provider.

Brazil Small Flag Brazil

No. Employees, assets or contracts have to always to be formally assigned or transferred to a third party (e.g. an IT service provider) if necessary, as Brazilian laws does not provide for any automatic transfer in the event of outsourcing of IT services. Please note, however, that depending on how the relationship is managed, there may be a risk of an employment relationship between the IT service provider and the client housing the employees.

Indonesia Small Flag Indonesia

No. The employees, assets or third-party contracts remain with the outsourcing company unless otherwise regulated under the outsourcing contract or transferred under a separate transaction.

India Small Flag India

When a company enters into a contract to outsource certain functions or processes to a service provider, there will not be any automatic transfer of the company’s employees, assets or third-party contracts to such service provider. This follows from the concept of “privity of contract” under Indian contract law. The transferred employees, assets and/or third-party contracts of the company to the service provider would be possible only by entering into a specific contract with the service provider to that effect.

Israel Small Flag Israel

Not necessarily. The terms of each contract regarding such employees, assets and third party contracts would govern their transfer. Further, employees will not automatically be transferred to the outsourcing supplier.

Singapore Small Flag Singapore

If the outsourcing of IT services involves a transfer of business to the outsourcing supplier, there will be an automatic transfer of employees falling under the ambit of the Employment Act (Chapter 91) ("EA") to the outsourcing supplier. Under the EA, all employees who are:

(a) Workmen (generally people doing manual labour); or

(b) employed in a managerial or executive position and earning a basic salary not exceeding S$4,500 a month will be covered by such an automatic transfer.

The transfer of employees (not falling within the above categories), assets or third party contracts would have to be contractually agreed upon with the outsourcing supplier.

France Small Flag France

According to the Labour Code (art. L.1224-1), which implements EU directive 2001/23/EC of 12 March 2001 on safeguarding employees’ rights in the event of transfers of undertakings, businesses or parts thereof, an automatic transfer of all employment contracts may occur in the event of a change in the employer’s legal situation, in particular as a result of a sale or merger of an undertaking, provided the outsourced activities constitute an “autonomous economic entity” as defined by case law, that is, an organised group of persons and assets that will be able to continue business in pursuit of a specific goal.

As regards assets, an automatic transfer may take place in the frame of a company merger, a corporate split, or the contribution of a whole business branch that involves a transfer of all associated assets and liabilities. Agreements inherent in the person of the co-contracting party may, however, not follow the transfer if such other party does not give its consent thereto.

Germany Small Flag Germany

In some cases, yes. In the event of an outsourcing of IT services, there are rules for an automatic transfer by law to the outsourcing supplier in respect of employees (so called “transfer of undertaking”/“Betriebsübergang”). These rules are laid down in section 613a BGB. In accordance with this section the former employer has the duty to notify the employee about the date and the reason of the transfer and about the legal, economic and social consequences for the employee. The rights and obligations of the existing employment relationship cannot be changed to the detriment of the employee before expiry of one year as of the date of the transfer. In addition the employee can object to the transfer in writing within one month.

There are strategies on how to avoid a transfer of undertakings which can be applied in certain cases.

Switzerland Small Flag Switzerland

In a direct outsourcing setup in the private sector, the outsourcing agreement between the customer and the supplier is authoritative as regards the transfer (if any) of employees, assets or third party contracts. Where a transferor transfers a business (or part thereof) to a transferee, the employment agreements and all rights and obligations derived from them transfer by operation of law from the transferor to the transferee at the date of transfer of the business, unless the employee refuses this transfer. According to court practice and doctrine, "business" is any permanent self-contained organisational unit which is economically autonomous, and "part of a business" is an organisational unit which lacks economic autonomy. While the outsourcing supplier must generally use relevant customer assets, this can be achieved by granting a right to use the assets (on a shared or exclusive basis) rather than an outright transfer. Retaining title to an asset, license or contract can give the customer better protection in case of termination of the outsourcing agreement. A written assignment is usually sufficient to transfer movable property for evidential purposes. Transfer of title to real property must be made by public deed and, in many cases (depending on the nature of the title involved) requires registration. Where the asset is a lease, the landlord's consent is required.

The transfer of key contracts should be agreed in writing based on analysis whether such transfer requires the counterparty's consent (as is usually the case; e.g. generally in case of IP licenses) or not (where approval of the transfer is already given in the contract). Absent or pending consent of the counterparty to the transfer (and subject to the terms of the contract prohibiting this), the customer may retain ownership of the contract and allow the supplier to perform the contract in relation to the counterparty as an agent of the customer.

Ecuador Small Flag Ecuador

Starting on May 2008, with the enactment of Constituent Mandate No. 8, outsourcing and subcontracting or the precarization of labor relations in any form of core business activities of the company or employer was prohibited in Ecuador. As a result, labor relations must be direct and bilateral between employee and employer.

The law establishes that third companies can provide specialized technical services, meaning that said companies must have their own infrastructure and personnel and their activities must be different from the corporate purpose of the beneficiary of the service. As such, in Ecuador transferring employees to a telecommunications service provider, for example in the for of managed service contract, can be considered an infringement of the fore mentioned legislation, given that for the delivery of the service the provider would need to rely on the employees of the user.

Additionally, at the time of the provision of the specialized technical service, it is important that a labor relationship is not created between the employees of the provider and the beneficiary, in order for it not be considered outsourcing. For a labor relationship to exist, the following elements must be present: 1) lawful and personal services; 2) relationship of dependency and subordination; 3) salary.

A breach of this provision results in the imposition of a fine between three and twenty basic unified salaries of a worker in general.

Therefore, a third party that provides its services to telecommunications operators, can do so provided that it has its own personnel, dully trained, and that it can be evidenced that it meets the requirements of a technically specialized service as described above.

With regards to the transfer of assets for the provision of information technologies services, it is absolutely possible to do so without any restriction, based on the principle of party autonomy, which we suggest be contained in the contract that regulates the obligations and rights of the parties that allows the provision of the services.

Updated: October 10, 2017