| The trend towards outsourcing will
| |
| | employed by a temporary agency, or
|
| continue to grow as market pressures
| |
| | similar entity
|
| force corporations to be more tightly
| |
| | is not a guarantee against
|
| focused on core business functions,
| |
| | misclassification under the joint
|
| gaining competitive advantage and
| |
| | employer rule applied by the
|
| reducing costs. Outsourcing is an
| |
| | Ninth Cir. Court in Microsoft III. If a
|
| attractive alternative in good times and
| |
| | misclassification does occur a firm may
|
| bad times. Shifting back end
| |
| | qualify for
|
| administrative and business functions to
| |
| | an IRS Section 530 "safe harbor"
|
| an external provider in good times, may
| |
| | exception if it can show the following:1.
|
| be a means for quicker time to market and
| |
| | Reasonable basis for classification of
|
| focusing resources on core business
| |
| | individuals as ICs based on:- Reliance on
|
| activities to grow the business. In bad
| |
| | a relevant court case, the advice of a
|
| times, outsourcing is a means for
| |
| | qualified accountant or attorney,
|
| streamlining the enterprise by
| |
| | or IRS ruling;- The IRS did not
|
| eliminating functions, which create a
| |
| | reclassify the same or similar workers in
|
| drag on capital and/or do not provide any
| |
| | a previous audit;- It is standard
|
| competitive advantage.In the current
| |
| | industry practice to treat the particular
|
| economic environment, concerns over,
| |
| | workers as ICs.2. Consistently treated
|
| shrinking margins, liquidity and the
| |
| | same or similar workers as ICs in the
|
| need to reduce operating cost structures
| |
| | past.3. Consistently filed federal tax
|
| is accelerating a trend towards shifting
| |
| | forms 1099 on these same or similar
|
| certain
| |
| | workers.Outsourcing any critical business
|
| back office administrative functions to
| |
| | function and especially one like HR must
|
| outside suppliers. This trend is seen as
| |
| | be carefully
|
| a major
| |
| | planned and executed to be an economic
|
| paradigm shift within enterprises, which
| |
| | and strategic success. HR operations
|
| have realigned their internal corporate
| |
| | require
|
| infrastructure to focus on more
| |
| | trained and specialized personnel to
|
| strategic areas of their core
| |
| | handle complex processes and manage the
|
| business.Although the human resources
| |
| | compliance responsibilities created
|
| (HR) function is viewed as critical
| |
| | under the myriad of federal and state
|
| within corporations,
| |
| | employment
|
| increasingly, small, medium and even
| |
| | regulations. Outsourcing of this
|
| large corporations are moving to
| |
| | function carries the risk of losing
|
| outsource this
| |
| | qualified personnel and
|
| service.The case for outsourcing has
| |
| | a degradation of the function. A firm
|
| three basic rationales. First the
| |
| | can ill afford the risk of entering into
|
| regulatory
| |
| | a relationship
|
| compliance obligations imposed under
| |
| | with a vendor whose lack of expertise in
|
| ERISA, COBRA and IRS regulations, have
| |
| | payroll and benefit administration causes
|
| become extremely burdensome and
| |
| | disruptions and a loss of efficiency.
|
| expensive for companies. Consequently,
| |
| | This may, in the worst case, demoralize
|
| avoiding
| |
| | the work
|
| major legal problems and financial
| |
| | force and expose the firm to significant
|
| liability requires substantial investment
| |
| | legal liability. Partial success in this
|
| in resources
| |
| | area can
|
| and capital in an area outside of the
| |
| | mean total failure and the loss of
|
| core business of most companies. This
| |
| | strategic initiative.Contracting of the
|
| makes
| |
| | outsource service is a process which
|
| outsourcing a viable option even if it
| |
| | requires inputs from all of the
|
| does not necessarily result in a cost
| |
| | stakeholders (HR personnel, users of the
|
| savings in the
| |
| | service, and the management team) and
|
| near term. Second, the need to upgrade
| |
| | those
|
| HR systems and invest in new technology
| |
| | persons within or outside of the
|
| is
| |
| | organization with expertise in the
|
| increasingly difficult when companies
| |
| | function. Before talks
|
| are hard pressed to invest in functions
| |
| | are ever initiated with a vendor, the
|
| aligned with
| |
| | key goal is to define the scope of the
|
| the core competency of the enterprise.
| |
| | service and the
|
| HR outsourcing service providers are
| |
| | performance metrics, which will be
|
| better
| |
| | applied to measure success. The use of
|
| positioned to invest in new technologies
| |
| | metrics will
|
| and software more likely to conform to
| |
| | be covered in greater detail below in
|
| "best
| |
| | respect to Service Level Agreements
|
| practices" for delivery of the service.
| |
| | (SLAs).Important to both parties in the
|
| Third, for companies with global
| |
| | transaction, is defining the kind of
|
| operations,
| |
| | relationship, which
|
| employee self-service can substantially
| |
| | must be established for the arrangement
|
| reduce costs and improve employee
| |
| | to succeed. If the entire HR Dept
|
| satisfaction
| |
| | function is to
|
| with the service. However, this requires
| |
| | be outsourced then it will be in the
|
| integration of all processes- HRIS,
| |
| | interest of both parties to enter into a
|
| payroll and
| |
| | long-term
|
| benefits administration- across the
| |
| | relationship that will justify the
|
| entire HR operation including its global
| |
| | up-front costs and investments that will
|
| ones.Because of the business exigencies
| |
| | be required of
|
| driving the shift towards HR outsourcing,
| |
| | each of them. This type of arrangement
|
| the industry
| |
| | as previously mentioned is subject to the
|
| is expected to grow to $37.7 Billion in
| |
| | firms
|
| 2003.
| |
| | particular circumstances, and will
|
| Currently HR outsourcing services fall
| |
| | probably result in selecting either the
|
| primarily within three categories:
| |
| | BPO or PEO
|
| Professional
| |
| | alternative because of the broad scope
|
| Employer Organization (PEO), Business
| |
| | of the outsourced service. For the buyer
|
| Processing Outsourcing (BPO) and
| |
| | this type
|
| Application
| |
| | of wholesale delegation is expensive,
|
| Service Providers (ASPs).4
| |
| | complex and risky. If it doesn't work
|
| PEOs assume and take full responsibility
| |
| | out, the
|
| for the human resources administration,
| |
| | buyers will incur significant costs and,
|
| including the legal liability for the
| |
| | disruption to the business in replacing
|
| company's workers. It becomes in essence
| |
| | the vendor
|
| a coemployer
| |
| | or in bringing the function back
|
| with final say over, hiring, firing, and
| |
| | in-house.Typically, total outsourcing of
|
| compensation decisions. The PEO
| |
| | a function is a major undertaking with
|
| becomes a partner, in the non-legal
| |
| | broad implications
|
| sense, with ownership of the HR function
| |
| | for both the buyer and vendor. In this
|
| while the
| |
| | situation the preferred relationship is
|
| company retains responsibility over all
| |
| | one that is
|
| business matters.BPO refers to all
| |
| | more of a partnership, in the non-legal
|
| business processes and not just HR.
| |
| | sense, where the parties view their
|
| Typically this involves transferring
| |
| | interests as
|
| the entire function to a service
| |
| | mutually benefited by the
|
| provider and is differentiated from PEOs
| |
| | relationship.On the other end of the
|
| because it
| |
| | continuum is the outsourcing of
|
| usually involves introducing new
| |
| | processes, like payroll, which is
|
| technologies and processes to bear in the
| |
| | very specific and straightforward and
|
| HR service.
| |
| | can be executed on a short-term basis.
|
| Because of the complexity of HR systems
| |
| | Normally, in the HR area, firms will
|
| in large corporations, shifting to BPO
| |
| | retain part of the function in-house, and
|
| may be
| |
| | delegate
|
| more expensive in the short term.
| |
| | those functions to an ASP or BPO, which
|
| However, long term it can result in
| |
| | require major investments in technology
|
| benefits because
| |
| | or
|
| large HR outsource providers will invest
| |
| | software. An outside supplier whose core
|
| in systems and technology viewed as
| |
| | compency lies within function is better
|
| prohibitively expensive within a firm
| |
| | able to
|
| where this function lies outside of its
| |
| | absorb the costs, based on economies of
|
| core business.The BPO services market is
| |
| | scale. This type of arrangement will
|
| growing rapidly with analyst projecting
| |
| | generally
|
| revenues of $128
| |
| | result in an intermediate term
|
| billion this year and growth to $234
| |
| | relationship where the parties will have
|
| billion by 2005.Finally, ASPs host
| |
| | to develop close
|
| software on the web and rent it to users.
| |
| | collaboration but will not have to incur
|
| The most commonly known
| |
| | the high costs, and investment of
|
| of these packages is "People Soft". The
| |
| | resources
|
| latter application and other packages are
| |
| | required in a long-term
|
| used to
| |
| | relationship.Partnership arrangements
|
| manage payroll, benefits, head count and
| |
| | require provisions that maximize the
|
| other HR processes.Each of the HR
| |
| | flexibility of the vendor in
|
| outsourcing services described has
| |
| | performing the service. Typically
|
| advantages and disadvantages for
| |
| | because such relationships are
|
| particular enterprises depending, on the
| |
| | appropriate in contracts
|
| number of employees, affordability of the
| |
| | with long terms of duration, typically
|
| service, type of business and the degree
| |
| | five to seven years, and complex service
|
| to which an enterprise desires to retain
| |
| | arrangements, the approach ought to be
|
| control of
| |
| | less prescriptive with respect to the
|
| this function in-house.This paper will
| |
| | scope and
|
| briefly cover the legal aspects of HR
| |
| | level of service.
|
| outsourcing and will discuss some
| |
| | In shorter-term arrangements more
|
| of the most common contract issues faced
| |
| | typical of supplier/purchaser
|
| in outsourcing relationships, essential
| |
| | relationships, contracts
|
| items
| |
| | need to be more prescriptive in defining
|
| that ought to be considered by the
| |
| | the scope of the services and the client
|
| parties and key provisions within
| |
| | requirements.Generally contracts ought
|
| outsourcing service
| |
| | to build in some level of flexibility to
|
| agreements.As previously discussed,
| |
| | allow for changes in:business
|
| companies facing pressure to reduce costs
| |
| | circumstances,
|
| or address the
| |
| | technology
|
| personnel shortages due to corporate
| |
| | and the needs of the buyer.Transfer of
|
| down sizing have several different
| |
| | Personnel and Assets:Outsourcing
|
| outsourcing
| |
| | arrangements may require the transfer of
|
| alternatives available to them to
| |
| | assets and personnel to the vendor.
|
| delegate back-end administrative
| |
| | Defining the terms covering the transfer
|
| functions. Typically,
| |
| | of affected personnel will generally have
|
| the first alternative firms look to
| |
| | important implications for the buyer and
|
| before looking outside, is to retain
| |
| | its employees with respect to employment
|
| control of the
| |
| | or
|
| function in-house and reduce employment
| |
| | employment rights. When wholesale
|
| related costs (taxes, benefits,
| |
| | outsourcing of groups or functions occur,
|
| headcount), by
| |
| | it is
|
| using contingent staff or (temporary
| |
| | important for firms to take measures to
|
| workers) or persons classified as
| |
| | preserve the general morale, of those
|
| "independent
| |
| | remaining
|
| contractors" (IC) to perform the work.
| |
| | and communicate openly and honestly with
|
| Though this may be an appealing solution
| |
| | those persons transferred under the
|
| for
| |
| | outsourcing agreement. Contract terms
|
| many firms, given the legal and economic
| |
| | need to address how the outsourcing of
|
| benefits, improper classification of
| |
| | the
|
| someone as
| |
| | function and subsequent transfer will
|
| an IC, consultant or temporary worker,
| |
| | affect benefits, pensions and pay of
|
| who is later deemed an "employee" carries
| |
| | personnel
|
| serious financial risks.Friction has
| |
| | moved to the service provider.
|
| developed between the growing use of
| |
| | Consideration should also be given to the
|
| contract workers in lieu of full time
| |
| | rights, if any,
|
| employees and, the public policy aims of
| |
| | the transferring firm may have to either
|
| providing workers with protections under
| |
| | enforce special terms affecting
|
| federal labor laws to take the
| |
| | transferred
|
| Employment Retirement Income Security Act
| |
| | employees or the right to retain these
|
| ("ERISA")
| |
| | employees in the event of contract
|
| and state law employee remedial
| |
| | termination.
|
| measures. In addition to the tax risk of
| |
| | With respect to equipment and other
|
| an IRS audit, the
| |
| | assets, terms governing the use by the
|
| risks are higher today that workers will
| |
| | vendor of any
|
| bring claims for social security,
| |
| | equipment made available to it by the
|
| workman's
| |
| | buyer should specify rights of ownership
|
| compensation or other actions
| |
| | and other
|
| challenging the misclassification, so
| |
| | matters related to the transfer of
|
| that they may
| |
| | equipment or other items of
|
| participate in lucrative benefit
| |
| | value.Defining the rights to intellectual
|
| programs provided by the employer.
| |
| | property (IP) is critical in all
|
| The case that brought these issues to
| |
| | outsourcing agreements.
|
| the fore was Vizcaino v. Microsoft
| |
| | Typically the vendor will want to retain
|
| Corporation
| |
| | rights in any IP developed by it in the
|
| ("Microsoft I") and its progeny of
| |
| | course of
|
| cases. In Microsoft I, plaintiffs,
| |
| | the arrangement. The thought being that
|
| employees designated
| |
| | it is providing a service and not being
|
| as temporary workers or "free lancers",
| |
| | paid to
|
| brought an action against the corporation
| |
| | develop IP. The buyer on the other hand
|
| to
| |
| | will want all rights to IP developed
|
| recover savings benefits under ERISA and
| |
| | based on the
|
| for stock option benefits offered through
| |
| | transfer of proprietary or confidential
|
| a
| |
| | information to the vendor and any work
|
| stock purchase plan, that were available
| |
| | product
|
| to regular employees.6 The Court framed
| |
| | developed in performing the service.
|
| the
| |
| | This issue will usually be resolved
|
| legal and public policy issues in the
| |
| | through
|
| opinion's opening statement:
| |
| | negotiation.
|
| "Large corporations have increasingly
| |
| | Related to this are confidentiality
|
| adopted the practice of hiring temporary
| |
| | provisions, which provide important
|
| employees or
| |
| | contractual
|
| independent contractors as a means of
| |
| | protections with respect to each party's
|
| avoiding payment of employee benefits,
| |
| | right's in and use of IP in the
|
| and thereby
| |
| | arrangement.Services
|
| increasing their profits. This practice
| |
| | This is will probably be set out in a
|
| has understandably led to a number of
| |
| | schedule and negotiated based on the
|
| problems, legal and
| |
| | scope of the
|
| otherwise. One of the legal issues that
| |
| | services and the functions or processes
|
| sometimes arises is exemplified in this
| |
| | that will be outsourced. As stated
|
| lawsuit. The named
| |
| | previously, the
|
| plaintiffs, who were classified by
| |
| | nature of the relationship, partnership
|
| Microsoft as independent contractors seek
| |
| | or supplier/purchaser will determine how
|
| to strip that label of
| |
| | detailed
|
| its protective covering to obtain for
| |
| | and specific this ought to be.In any
|
| themselves certain benefits that the
| |
| | event there should be sufficient clarity
|
| company provided to all of
| |
| | and definition for the parties to be able
|
| its regular or permanent employees."The
| |
| | to
|
| problems for Microsoft arose as a result
| |
| | set mutual expectations and understand
|
| of an IRS tax audit for tax years 1989
| |
| | the deliverables that must be produced
|
| and
| |
| | under the
|
| 1990. The IRS examined the company's
| |
| | agreement.
|
| employment records to determine if it was
| |
| | Termination
|
| in
| |
| | Defining the terms for exiting an
|
| compliance with tax laws. Applying the
| |
| | arrangement is one of the most critical
|
| common-law principles defining the
| |
| | issues in an
|
| employer-employee relationship, the IRS
| |
| | outsource agreement. Generally, early
|
| concluded Mircosoft's "freelancers" were
| |
| | termination provisions, which set out
|
| not
| |
| | rights and
|
| independent contractors but employees
| |
| | applicable penalties due in such event,
|
| for withholding and tax purposes.
| |
| | should be a matter of last resort except
|
| In reaching this conclusion, the IRS
| |
| | in cases, of
|
| applied the test set out under the common
| |
| | material breach or force majeure.Default
|
| law of
| |
| | provisions should set out escalation
|
| agency, which requires, in determining
| |
| | clauses and a reasonable cure period to
|
| if a hired party is an "employee",
| |
| | ensure the parties have procedures for
|
| consideration of
| |
| | resolving disputes and issues related to
|
| the hiring party's right to control the
| |
| | the
|
| manner and means by which the product is
| |
| | performance of their respective
|
| accomplished. The IRS applies a 20
| |
| | obligations.
|
| factor "control test" to "assess all of
| |
| | There should also be provisions
|
| the incidents
| |
| | governing the management of the exit.
|
| of the relationship" with no one factor
| |
| | These should
|
| being determinative of the employment
| |
| | include the vendor cooperation in
|
| relationship of the parties.9 The US
| |
| | facilitating the transfer of the service
|
| Supreme Court reached asimilion
| |
| | to another vendor
|
| conclusion in
| |
| | and the return of any equipment or other
|
| Nationwide Mutual Insurance Company vs.
| |
| | items to the buyer, which were used by
|
| Darden party not to adopt the IRS factors
| |
| | vendor
|
| and, instead applied a twelve factors
| |
| | during the contract.
|
| that it considered. In assessing the
| |
| | Consideration should be given to other
|
| relationship of
| |
| | provisions, which might help to reduce
|
| the parties the court decided for
| |
| | the level
|
| determining whether an individual
| |
| | of disruption to the buyer's operations
|
| qualifies as a
| |
| | as a result of the termination of the
|
| "common law employee".Microsoft, on
| |
| | agreement.What is a Service Level
|
| first impression, appeared to have taken
| |
| | Agreement (SLA)?SLAs in an outsourcing
|
| the appropriate measures to avoid
| |
| | arrangement identify the service levels
|
| stumbling into an employer-employee
| |
| | or performance standards
|
| relationship- the workers were told they
| |
| | that the vendor must meet or exceed. The
|
| were
| |
| | SLA also specifies consequences for
|
| freelancers and signed various
| |
| | failing to
|
| agreements classifying them as
| |
| | achieve the minimum service level set by
|
| independent contractors,
| |
| | the buyer.
|
| that included provisions that the
| |
| | SLAs should be applied to the key parts
|
| workers would be responsible for paying
| |
| | of the outsourced service and not
|
| their own taxes
| |
| | necessarily to
|
| and benefits. However, after having
| |
| | every aspect. The purpose of SLAs is to
|
| taken these steps with respect to the
| |
| | ensure the buyer has the means to control
|
| form of the
| |
| | the
|
| relationship, the court found that
| |
| | level and the consistency of the service
|
| Microsoft had fully integrated these
| |
| | received from the provider.
|
| workers into its
| |
| | Generally, the minimum level that ought
|
| workforce, placing them alongside
| |
| | to be set is that which is required to
|
| regular employees, sharing the same
| |
| | support the
|
| supervisors,
| |
| | buyer's on-going business operations and
|
| performing identical functions and
| |
| | HR requirements. An important rationale
|
| working the same core hours. Because
| |
| | for
|
| Microsoft
| |
| | outsourcing should be to improve the
|
| required them to work on site, they were
| |
| | level and quality of the function that is
|
| given admittance keys, office equipment
| |
| | being
|
| and
| |
| | outsourced. Therefore the minimum level
|
| supplies of the company.Even after the
| |
| | of service should be at least equal to
|
| IRS determined that plaintiffs were
| |
| | the level
|
| "common law employees", Microsoft
| |
| | that existed before the function was
|
| attempted to use a temporary agency to
| |
| | outsourced to the provider.
|
| "house" these workers as employees of the
| |
| | In the HR area metrics are difficult to
|
| agency, so that it could continue to use
| |
| | establish because much of what is being
|
| them in the same manner previously
| |
| | measured
|
| described.
| |
| | is intangible. For example if buyer
|
| On review in Vizcaino v. U.S. Dist.
| |
| | wants to determine the success of a web
|
| Court for Western District of Washington,
| |
| | based
|
| 173 F.3d
| |
| | application for benefits, this can only
|
| 713 (9th Cir. 1999) ("Microsoft III"),
| |
| | be ascertained by surveying user
|
| the Court in striking down the District
| |
| | satisfaction. As
|
| Court's
| |
| | such questionnaires and employee
|
| modification of the class of plaintiffs,
| |
| | satisfaction surveys become essential
|
| which it deemed a contravention of its
| |
| | tools for
|
| order on
| |
| | measuring the performance of the
|
| remand, rejected the lower court's
| |
| | vendor.SLAS must reflect the agreement
|
| assertion that the eligibility for
| |
| | understanding of the parties as to what
|
| benefits of these
| |
| | constitutes a
|
| temporary agency workers turned on
| |
| | good result and with respect to
|
| whether they were employees of the
| |
| | measuring performance, their agreement on
|
| Company or
| |
| | the
|
| the agency. The District Court's view
| |
| | mechanisms used to measure the result.
|
| precluded the possibility that the agency
| |
| | The SLA should also cover what
|
| and
| |
| | constitutes the best and the worst-case
|
| Microsoft could jointly employ the
| |
| | level of service.
|
| plaintiff. The Court held that at common
| |
| | In this regard the buyer will want to
|
| law it was
| |
| | incorporate service credits, which may
|
| possible for the plaintiff's to be
| |
| | become
|
| employees of both the temporary agency
| |
| | applicable in the event the vendor fails
|
| and of the
| |
| | to meet minimum service levels. At the
|
| recipient of their services (Microsoft),
| |
| | same time
|
| if, based on a determination using the
| |
| | it is also appropriate to consider
|
| Darden
| |
| | incentives or bonuses, which the vendor
|
| factors, an employee-employer
| |
| | can receive for
|
| relationship existed. In essence the
| |
| | achieving the best-case level of
|
| agency and Microsoft
| |
| | service.The point of any negotiation
|
| were joint employers and the triangular
| |
| | ought to be that it is in the interest of
|
| relationship that Microsoft created was
| |
| | both parties that the
|
| not
| |
| | vendor meet or exceed the service levels
|
| viewed as precluding or as being
| |
| | set in the SLA. The buyers should not
|
| mutually exclusive of a two- party
| |
| | exploit
|
| relationship that
| |
| | the use of SLAs, to reduce costs through
|
| existed between the company and the
| |
| | the application of credits or penalties,
|
| temporary workers. So what are the
| |
| | because
|
| lessons gleaned from the Microsoft
| |
| | this will only inject an unnecessary
|
| cases?- Review the language in the
| |
| | level of contention into the relationship
|
| company's benefit plans to ensure
| |
| | that will
|
| "covered
| |
| | under cut the development of a
|
| employees" is properly defined within
| |
| | partnership between the parties.
|
| the plan and not left to statutory or
| |
| | SLAs should not have a distorting effect
|
| judicial
| |
| | on behavior, where the vendor becomes
|
| interpretation.- The mere classification
| |
| | focused
|
| of workers as independent contractors is
| |
| | only on those aspects of the service,
|
| not sufficient,
| |
| | that are measured, at the expense of
|
| and behavioral, financial and the type
| |
| | other aspects,
|
| of relationship between the hiring party
| |
| | which may not be weighted as heavily in
|
| and
| |
| | the evaluation process. The vendor's goal
|
| the workers must support the
| |
| | should be to meet, or exceed
|
|
