Legal Q&A – Outsourcing

Recent media reports alleging the use of child labour by a manufacturer of Gap’s children’s clothing in India have highlighted the problems that can arise where manufacturing is outsourced.

An outsourcer loses direct control of the employees working on its outsourced products and their working conditions, yet any problems that arise can seriously damage its reputation. However, there are steps outsourcers can take, working with their human resources (HR) professionals, to limit the potential damage.

Q When an employment outsourcing service goes wrong or a problem arises, is it a valid excuse to seek to shift the blame onto subcontractors or outsourced service providers?

A Ultimate responsibility for the working conditions of employees lies with the outsourced supplier to whom the employees are contracted. However, the contract between the outsourcer and the supplier should contain appropriate safeguards to allow the outsourcer to distance itself from the service provider should any unsavoury allegations surface.

Q Who do customers associate those issues with – the product, the brand or the subcontractor?

A Undoubtedly, the brand suffers the most. The public, including potential customers of the outsourcer, are increasingly sensitive to allegations regarding the operation of Western businesses and the exploitation of workers in the developing world, and companies like retailers Gap and Marks & Spencer, which outsource production, must be aware of the importance of protecting themselves against such practices.

Q From the outset of any outsourcing relationship, what should the contract detail to ensure the supplier’s adherence to the global policies in place for that brand?

A Above all, the outsourcer, together with its HR professionals, must undertake detailed and thorough research, prior to any agreement, into the supplier and more generally into the jurisdiction in which the supplier operates. By outsourcing, a business is effectively putting its good name in the hands of another party. Often much time will have been spent nurturing a brand and ensuring employees act according to the values of the business. All this hard work can be undone by choosing the wrong partner. Clearly, the outsourcer must be satisfied that a supplier is an appropriate guardian of its brand.

Warranties by the supplier as to the quality of services are often built into an outsourcing contract, but outsourcers should also ensure suppliers agree to provide satisfactory working conditions. The standards should not only be benchmarked against local laws, but also by reference to international standards such as those proposed by the International Labour Organisation. HR teams should also check that the values are aligned with the supplier, and the contract should include the right to terminate in the event of any allegations being made.

However, exiting an outsourcing agreement can be a costly and complex procedure. The outsourcer may wish to protect itself against the significant financial ramifications of halting production by ensuring the supplier shares the cost. Both parties should also agree a clear exit plan, which should set out in detail what will happen with any assets, software, products and employees if a contract is terminated.

Q What must the company outsourcing the activity or process do to monitor the supplier’s adherence to the contract for it to be worthwhile?

A Regular checks of supplier premises and production methods are an option that could be built into an outsourcing contract. For example, child labour has been largely eradicated from India’s carpet industry through the work of the Rugmark Foundation, which certifies carpets as free of illegal child labour following random inspections of factory premises. Ultimately, there is no substitute for inspections and monitoring by the outsourcer according to criteria agreed with the outsourced service supplier. An outsourcer’s HR team should take a lead in this.

Q What can contracts require suppliers to do with regard to monitoring, especially where services are offshored?

A As part of the contract, outsourcers could request that suppliers agree to third-party inspections of their premises. Although introducing genuine, independent monitoring may prove complicated, the Rugmark scheme demonstrates the benefits. Outsourcers will need to take into account the cost of instituting such a system when assessing the costs and benefits of outsourcing and in negotiations with suppliers. It may be that suppliers take it upon themselves to organise a suitable inspection programme to protect their own reputation.

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