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

Technology (second edition)

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 are transferred under a separate transaction.

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.

Luxembourg Small Flag Luxembourg

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 other signatories to 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 and the provisions of article 5 of EU Directive 2015/1794 of the European Parliament and of the Council of 6 October 2015 amending Directives 2008/94/EC, 2009/38/EC and 2002/14/EC of the European Parliament and of the Council, and Council Directives 98/59/EC and 2001/23/EC, as regards seafarers. 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.

Spain Small Flag Spain

No, employees, assets or contracts are not normally automatically transferred in the event of an outsourcing of IT services. The parties involved in the provision of outsourcing services need to negotiate how the services are structured and the resources (employees, assets) to be managed. A mere provision of services with no transfer of a business unit, does not in principle entail a transfer of any resources.

Concerning the possible transfer of employees involved in an IT outsourcing, the most important point to consider is that for the employees to transfer automatically to the outsourcing supplier as per Article 44 of the Spanish Statute of Workers, the principal must transfer its own IT production unit (i.e. including all the assets, agreements etc.) as a whole, autonomous business unit. Otherwise, if the IT production unit is not entirely transferred by the principal to the supplier, the employees would not transfer automatically to the supplier and would remain employees of the principal.

Finally, note that that the outsourcing supplier must provide its services with its own resources and organisation, in order to avoid the declaration of an illegal transfer of employees, prohibited by Article 43 of the Spanish Statute of Workers.

India Small Flag India

The law does not provide for an automatic transfer of employees, assets or third-party contracts in case of an outsourcing arrangement. The transfers, if any, will only be guided by the contractual terms agreed to between the parties.

Turkey Small Flag Turkey

No. employees, assets or third-party contracts do not transfer automatically. Such outsourcing companies are considered as an ordinary third party contractor.

Sweden Small Flag Sweden

No, not automatically. However, if an asset of a business according to section 6 b of the Swedish Employment Protection Act (Sw. Lag om anställningsskydd), e.g. an IT service, which is deemed to be an “autonomous economic entity”, is being transferred, an employee working in that department might be transferred to the outsourcing supplier, unless he or she refuses. In practice, this is not an issue, since it tends to be solved by the involved parties.

As for assets and third-party contracts, no transfer to the outsourcing supplier will occur.

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.

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

No, outsourcing does not result in an automatic transfer of employees, assets or contracts, although certain legal consequences may be triggered.

Generally speaking, the transfer of employees to another entity requires giving notice of the transfer to the employees, who may opt-out and be entitled to severance payment. The transfer of third party contracts requires, in general terms, the consent of counterparty and the execution of an assignment, provided that the relevant agreement does not provide specific transfer mechanisms.

Malaysia Small Flag Malaysia

The Guidelines on Information Security in ICT Outsourcing published by CyberSecurity Malaysia (an agency under Ministry of Science, Technology and Innovation) ("Outsourcing Guidelines") states: “Before outsourcing, an organisation is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no longer are directly employed or responsible to the organisation. This causes legal, security and compliance issues that need to be addressed through the contract between the client and suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.”

The Outsourcing Guidelines advise that the organization ought to ensure that security requirements and processes to protect organizational assets ought to be incorporated into the formal agreement entered into with the outsourcing supplier and upon complete performance of the outsourcing agreement, the outsourcing supplier is responsible for returning all borrowed assets and the organization should ensure that “all assets borrowed and used by the outsourcing provider during the outsourcing project are returned promptly”.

Notwithstanding the advisory nature of the Outsourcing Guidelines, the treatment and status of employees, assets and/or third-party contracts would typically also be addressed in the outsourcing agreement and may not be automatically transferred.

France Small Flag France

According to the Labor 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, i.e., an organised group of persons and assets that will be able to continue business to reach a specific goal.

As regards assets, an automatic transfer may take place in the context 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 personally inherent to the co-contracting party (“intuitu personae”) may not follow the transfer, however, if such other party does not grant 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.

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.

In March 2018, the Singapore Government announced several amendments to be made to the EA. One such amendment is the removal of the salary cap for managerial and executive employees under (b) above, which will result in all managerial and executive employees being covered by the automatic transfer provision under the EA. Further details of the amendments are likely to be made public later this year and these amendments are expected to be effected by 1 April 2019.

Australia Small Flag Australia

Unlike the operation of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (UK) (in the case of employees), there is no automatic transfer of employees, third party contracts or assets by operation of law when outsourcing IT services. Generally the parties to an outsourcing agreement negotiate detailed contractual provisions to facilitate such transfers where required.

United States Small Flag United States

There are no statutes that would automatically transfer employees, assets or third party contracts to a service provider in the event of an outsourcing. Any such transfer would be part of the negotiated agreement between the customer and outsourcing provider. It is common for some segment of customer employees in the affected area to be "rebadged" as service provider employees. Although not as common as in the past, outsourcing providers do agree to the transfer of assets to be used in the outsourcing from the customer's balance sheet to the service provider's. It is also typical for some third party contracts relating to the outsourced scope of service to be assigned or at least managed by the service provider.

Japan Small Flag Japan

No transfer of employees, assets or third party contracts would occur automatically in the context of outsourcing IT services. A transfer will occur only if the parties agree to such a transfer. In the case that the parties agree to transfer a certain business (including employees, assets, third-party contracts and liabilities), and not merely an outsourcing of IT services, by way of a company split (kaisha-bunkatsu), however, employees who are primarily engaged in the transferred business but who will not be transferred, and employees who are not primarily engaged in the transferred business but who will be transferred, are entitled to certain opt-out rights concerning their non-transfer or transfer, respectively, under the Act on the Succession to Labor Contracts upon Company Split.

Updated: September 11, 2018