Labour-law issues affecting outsourcing

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Outsourcing occurs when a company wants to outsource a single business unit and mandate a third party to provide services that were previously rendered by its own employees. An example would be a bank that wants to outsource an internal IT function to an IT service provider. In addition to economic, technical, fiscal and contractual issues, this also goes hand in hand with questions regarding labour law.

1. Problems

Depending on the way it is structured, an outsourcing transaction can qualify as the transfer of a business unit as defined in Art. 333 of the Swiss Code of Obligations (SCO) if the company not only replaces a service that was previously provided internally by a service bought from an external party, but also outsources operating resources and employees. If an outsourcing transaction falls within the scope of application of Art. 333 SCO, this will have serious consequences for the companies involved in the transaction as well as the affected employees. This impacts the relationship between the outsourcing company and its affected employees as well as the contract negotiations between the outsourcing company and the service company. The companies involved in the transaction cannot freely decide which employees should stay with the former employer and which should transfer to the new employer and what employment conditions should apply to the transferring employees. The employees affected by the transaction must also take specific decisions and comply with certain rules.

2. Outsourcing as a transfer of a business unit pursuant to Art. 333 SCO

A basic requirement for the application of Art. 333 SCO is that a company transfers an operational unit (or just part of an operational unit) to another company and that this operational unit (or part of an operational unit) is generally continued, i.e. the purpose of the operational unit, its organisational structure and individual character are retained. The vague formulation of these criteria already shows that it is not easy to decide in which situations an outsourcing transaction will qualify as the transfer of a business unit as defined in Art. 333 SCO, with the resulting consequences. A requirement for the transfer of a business unit is that tangible or intangible operational resources are transferred to the service provider and that these resources are generally used for the same purpose as before. A business unit can also be transferred without a takeover of operational resources if a significant number of employees are taken over. An important indication (but not a necessary requirement) that the transaction qualifies as the transfer of a business unit is the continuation of the services on the former business premises with former employees.

As a result, Art. 333 SCO not only applies to outsourcing transactions, but also to the reverse process, so that the insourcing of an operational function can also qualify as the transfer of a business unit. The same applies if services that were already outsourced in the past should be provided without any changes by a new service provider. Finally, Art. 333 SCO also applies if the outsourcing or insourcing process takes place in the form of a merger or a spin-off.

3. Consequences of the transfer of an enterprise
3.1 General principle: Transfer of the employment relationship

If an outsourcing transaction fulfils the conditions for the transfer of a business unit pursuant to Art. 333 SCO, the employment relationships of all employees who previously worked primarily for the affected company division will automatically transfer to the service company. The outsourcing company and the service company do not have to formally agree such a transfer, and a formal agreement is not relevant for the transfer of the employment relationships. It is therefore immaterial whether the employees are listed by name in the outsourcing contract or a transfer inventory, or not. The service company cannot decide which employees it wants to take over or not, as it is obliged to take over all employees. The outsourcing company is also not allowed to unilaterally decide to retain some employees.

The employment relationships pass to the service company with all rights and obligations. Except for a change of party with regard to the employer, the employment relationship does not change. All contractual conditions such as the salary, bonus plan or vacation entitlement continue to apply without any changes. The service years accrued with the former employer are credited to the employee when calculating termination and waiting periods, the period for which the continued payment of the salary applies, or for long service awards. The employee can also “take along” his/her accrued overtime. It is therefore a good idea for the service provider to carry out a due diligence of the employment contracts and to carefully inspect the salary, vacation and overtime accounting before signing the outsourcing agreement.

Difficulties can arise if some contractual agreements are incompatible with the service provider’s standards: If the service provider generally grants its employees four weeks’ vacation but the employment contracts of the employees taken over stipulate that they are entitled to five weeks’ vacation, unrest among the new teams is certain to occur. Practical problems can also arise with stock option plans or contractually agreed pension benefits which the new employer cannot guarantee.

The contractual conditions can, of course, be amended, but it is important that any amendments are agreed mutually by the new employer and the individual employees. Otherwise the only option left to the new employer will be a termination of the employment relationship pending a change of contract, in which case the relevant notice periods have to be observed. It often happens that the service provider submits new employment contracts to the affected employees before the transfer takes place. The employees, however, are not obliged to agree to the new contracts: If they refuse to agree, their employment relationship will still pass to the new employer without any changes. Alternatively, they can also reject the transfer of the employment relationship (see par. 3.2).

The new employer is also free to use its authority to issue instructions to unilaterally issue directives and instructions that do not have to comply with those of the former employer. However, such directives may not contradict the contractually agreed conditions.

3.2 Exception: Termination of the employment relationship

If an employee rejects the transfer, he/she does not remain with the former employer. On the contrary, the rejection means that the employment relationship is terminated on expiry of the statutory (rather than the contractual) notice period, but at the earliest on the date of transfer. If the statutory notice period only expires after the transfer of the business unit, the employment relationship will pass to the new employer for the remaining period until it is terminated. The law does not stipulate the period in which the employee must declare his/her rejection of a transfer. This period should therefore be determined in good faith. On the basis of the probation period as defined in Art. 335b SCO, a time for consideration of one month can be accepted as appropriate. This period starts to run as soon as the employer has met its information and consultation obligations (see par. 4). To avoid uncertainty it is a good idea to inform the employees of the upcoming transfer and to give them one month to reject the transfer.

Generally speaking, an employee working for the business unit to be transferred does not have the option to decide to stay with the former employer. However, he/she can agree with the former employer that he/she will in future work in a different division for the former employer, in which case the employee will not be affected by the transfer.

3.3 Liability of the employer

The new employer is not only liable to the employee for all claims that may arise after the transfer of the business unit, but is also jointly and severally liable with the former employer for all claims of the transferred employees that arose before the transfer, such as outstanding salary payments, vacation and overtime credits and expenses claims. According to the practice of the Federal Tribunal, the only exception to this liability occurs if the new employer acquires the business unit or division from the bankrupt estate of the former employer.

The former employer is not released from its obligations towards the employees with the transfer of the employment relationships. It is in any case liable for all claims of the employees that fell due before the transfer of the enterprise, and is also liable to a certain extent for claims that only fall due after the transfer. The only claims for which it is not liable are claims that fall due after the employment relationship could have been duly terminated (calculated from the date of transfer).

4. Employer’s information and consultation obligations

The transferring employer must inform the employees of the reason for the transfer and its legal, economic and social consequences. This information must be provided in good time before the execution of the transfer. It is not necessary, however, that the information is provided before the decision is taken to outsource an operational division. If measures are planned which will affect the employees (e.g. salary cuts, increase in working hours, etc.), the employees must also be consulted. The consultation obligation lies with the party who intends to implement such measures. As a result it applies not only to the transferring employer, but also the new employer. The consultation process must take place in good time before a decision about the measures is taken, with the actual dates depending on the specific circumstances (in particular the complexity of the issues and urgency of the measures). The employees must in any case have enough time to review the planned measures and submit suitable proposals to the employer so that these proposals can be taken into account in the decision-making process. It makes sense to give the employees a period for consideration that has been determined in good faith. The minimum should normally be two weeks, but this should usually also be sufficient time. The deadline starts running when the employees are in possession of all the information they need to exercise their right to be consulted. This right has been guaranteed if the employees can submit their proposals to the employer before the expiry of the deadline.

This information and consultation phase can be very important, for example if the new employer plans to offer the employees new contracts with changed conditions. The employees are likely to be rather sceptical and reserved. It is the duty of the new employer to present itself in a favourable light and “sell” the new employment conditions to the employees to ensure their acceptance of these conditions. If the employees do not accept the new contracts but also do not reject the transfer, their existing employment relationship will continue without any changes with the new employer, who can then only enforce its new employment conditions by termination of the employment relationship pending a change of contract. It is clear that such an approach will not be good for the working climate. It therefore makes sense to plan and execute the information of the employees very carefully.

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