Offshoring is an emotive subject that is guaranteed to rile trade unionists and grab headlines. Despite union claims that it has to stop, and some very vocal campaigns to that effect, a survey by the Confederation of British Industry (CBI) found that 51 per cent of businesses says pressure to offshore has increased over the past two years, with 21 per cent describing these pressures as ‘very great’.
A third says they have already taken some activities overseas, and almost one in four are considering doing so in the future.
Manufacturing is where the real movement is. The CBI found that almost half of the companies that had relocated operations overseas had offshored manufacturing. Of those that have yet to begin offshoring, 49 per cent are considering sending manufacturing abroad.
CBI director-general Digby Jones puts the situation into stark perspective. “Offshoring is now part-and-parcel of doing business in the global economy,” he says. “Make no mistake; this is a survival issue.
“Anyone who believes that firms have a great deal of choice is naïve,” he adds. “Companies know if they don’t do it, somebody else will. If competitors act and they don’t respond, they may put their business at risk.”
Martin Temple, director general of the EEF – the manufacturing employers’ organisation – says that it is true many are moving away from traditional definitions of what constitutes a ‘manufacturing’ company, and also from a purely nationalistic attitude to location.
“Companies must consider where manufacturing and other functions should be located to achieve maximum global advantage and also benefit from rapidly growing new markets,” he says.
Moreover, if you do choose to take this path, the Government is right behind you.
In a recent consultation on offshoring, Patricia Hewitt, secretary of state for trade and industry, says the Government would fight the protectionism mooted by trade unionists.
“Attempting to prevent offshoring by putting up trade barriers would be costly and, in the long run, ineffective,” she says. “It would risk forcing companies to locate completely out of the UK, or would deter future inward investment, which would not be in our long-term interest.”
There are unquestionable benefits to offshoring. According to the CBI survey, these include improved processes, fast adaption and learning by overseas staff, and the avoidance of restrictive UK legislation.
However, it can also have major legal repercussions if employers aren’t careful.
As Marie Allen, a solicitor at law firm Steeles, explains, tribunals can still take a dim view of a company if they are considered to have acted unreasonably.
“The relocation of part or all of a business will amount to a redundancy situation for the purposes of unfair dismissal law and a dismissal for that reason will, in principle, be fair,” she says.
“A dismissal will nevertheless be unfair – even if genuinely caused by redundancy – if an employment tribunal considers that in all the circumstances the employer behaved unreasonably,” she warns.
“A dismissal by reason of redundancy will, for example, be unfair if proper procedures, including individual and, where applicable, collective consultation, are not followed, or if there is a total failure to consider alternative employment,” she adds.
Unfair dismissal awards are currently capped at £63,100, including the compensatory and basic awards.
The law that governs such redundancies to do with transferring work overseas is the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), explains Stefan Martin, from law firm Allen and Overy.
“This involves having to show that dismissals carried out in connection with the transfer are for an ‘economic, technical or organisational (ETO) reason entailing changes in the workforce’ (reg 8(2) of TUPE), ” he says. “Genuine redundancies would usually be regarded as an ETO.”
The number of staff to be made redundant will also be important, Martin says.
If the offshoring involves more than 20 employees being made redundant at any one place within a period of 90 days or less, employers are obliged to consult with employee representatives about the dismissals.
Where 100 or more employees are to be dismissed, consultation must last for at least 90 days, and where between 20 and 100 employees are to be dismissed, 30 days (see section 188 of the Trade Union and Labour Relations Consolidation Act 1992).
Bearing in mind the strength of union opposition towards offshoring, it seems the more time spent on consultation, the better.
Peter Weidenbaum, executive chairman of Trumeter, a manufacturer specialising in counting and measuring instruments, says that the company was forced to offshore part of the business after one of its products was copied and offered at a lower price.
To limit the impact on employees, companies should make time and effort to explain the reasons why jobs would be lost, he says.
“[Staff] don’t like the fact jobs will be lost, but if you take the trouble to explain why, they can see the sense of it – they can understand your motivation,” he says.
Any philanthropy shown when informing staff about offshoring will soon become mandatory under forthcoming European legislation.
An additional obligation to consult may arise under the new Information and Consultation of Employees Regulations – which will apply to all organisations with 150 or more employees from April 2005 – as Asa Waring, from law firm Mishcon de Reya, explains.
“The effect of the new regulations will be that employers will be required to involve employees at an even earlier stage of the [outsourcing] decision process,” she says.
The new laws will give employees a right to be informed about the business’ economic situation, and informed and consulted on employment prospects decisions likely to lead to substantial changes in work organisation or contractual relations – including redundancies and transfers.
Staff can invoke this right if at least 10 per cent of employees request it.
Information and consultation has to take place at an appropriate time and at the relevant level of management. Normally, it will be done via employee representatives, defined according to national law and practice. Having received the appropriate information, may meet the employer, the employee representatives can present their opinion to the employer and receive a reasoned response.
While April might seem a mere blot on the horizon, experts recommend that companies act well in advance of the deadline.
A recent survey by the Involvement and Participation Association found that three-quarters of UK companies have no procedures to cover the provisions of the directive.
Only half of all the HR professionals surveyed were aware of when the law comes into operation, yet nine in 10 believe it will impact on their business.
Ben Willmott, employee relations adviser at the Chartered Institute of Personnel and Development (CIPD), says it was worrying that so few companies were prepared for the forthcoming legislation, as information and consultation arrangements were not something that could be put into place at the last minute.
“With the small amount of staff necessary [to make a consultation request], employers are at risk of having procedures imposed on them that don’t suit, rather than having a process that fits their own culture, shape and strategic objectives,” he says.
Once they have dealt with the workers based in the UK, companies then need to consider the implications of sending staff out to a remote location to establish the offshore service.
In this case, employers will need to ensure that the requirements of Section 1 of the Employment Rights Act 1996 are met. This requires the employer to provide a written statement of terms relating to the employee’s employment outside of the UK if this is to last more than one month.
Helena Derbyshire, a partner in law firm Shoosmiths employment team, explains that this statement should include details of the period for which the employee is to work outside of the UK, the currency in which they are to be paid, and any additional remuneration or other benefits in connection with the work outside the UK (for example, accommodation, subsistence allowance, or travel subsidy).
The Act also requires the employer to provide a statement of terms and conditions relating to the employee’s return to the UK.
“The employer should consider what commitment it is willing and able to make to find another position within its organisation on the employee’s return,” Derbyshire says. “If the employee is unlikely to have any work to return to, he or she may be redundant. The employer will have to ensure that he consults with the employee throughout the process to avoid unfair dismissal.”
She also recommends that companies investigate compliance with immigration requirements of the host country as well as the employee’s tax position if the stay is to be of significant duration.
While the law creates many obstacles to offshoring, companies are increasingly seeing that it is worth the time and effort getting it right.
There wasn’t a single company in the CBI survey that regretted offshoring, and all of them said they would consider doing it again.
As Temple of the EEF says, it’s all about profit and ensuring the long-term survival of the business.
“There are no safe jobs anymore,” he says. “However, jobs in companies based on the efficient use of resources… have a much more sustainable position.”
The role of HR in offshoring
There is not a single offshoring decision that can be made without HR’s input, according to experts.
Nigel Fretwell, group employee relations director for Barclays, believes that offshoring involves so many decisions with a people impact that HR simply cannot be ignored.
Considerations such as which country to offshore to, its human rights records, the laws and the industrial relations issues meant that HR has to be at the top table, he says.
The decisions would impact on both the staff and communities in the UK, and those in the country where the offshoring is taking place, Fretwell says. This would in turn impact on the business’ brand
“If you believe what you read, the value of an organisation is tied up its brand, not in its physical resources, so this could have huge potential impact on the whole reputation and value of your organisation,” he says.
Alan Davis, director of HR at BT Retail, advised HR to trust and engage with employees and unions early on in the process to get buy-in.
He also warned that HR should beware of setting a ‘ceiling’ by declaring how many jobs would be offshored, as unions would see that as a figure that must not be exceeded.
What to consider before deciding to offshore
Employers are understandably attracted by offshoring’s ability to obtain the same services at a lower cost. But they should consider the following factors from an employment law perspective.
The cost of redundancies in the UK:
This will not just be financial, as the morale of the remaining workforce is likely to be affected.
The need to consult with representatives of the affected employees:
Currently, if more than 20 employees are to be made redundant within 90 days, there will be an obligation to consult with a recognised trade union or, if there is none, with elected employee representatives. Also, if the service to be outsourced is labour intensive, there is a chance that the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) will apply to the transfer, and there will be a similar requirement to consult.
Information & Consultation Regulations:
From April 2005 – depending on the size of the employer’s business and the total number of staff – employers will be obliged to inform and consult any employee representative body established in accordance with an information and consultation agreement (if it exists) about changes to the business that will affect the staff.
How offshore staff are to be managed and trained:
If UK-based employees are going to a remote location to establish the off-shore service, the employer will need to ensure that the requirements of Section 1 of the Employment Rights Act 1996 are met. This requires the employer to provide a written statement of terms relating to the employee’s employment outside the UK if this is to last for more than a month. The Act also requires the employer to provide a statement of terms and conditions relating to the employee’s return to the UK.
If remote employees are to handle personal data (about customers or employees) outside the European Eco-nomic Area (EEA), the organisation will need their permission. The consent to process their personal data outside the EEA also needs to be explicit.