Outsourcing human resources and erosion of worker rights

By J.T. Rex Fernando (The writer is a retired sq Ldr. SLAF and a Human Resource Consultant)

During the last few years there has been an increasing and unprecedented trend on the part of business institutions to outsource their core and ancillary business functions. This is because outsourcing encourages the organisation to have greater focus on core business products and growth, while saving time and money.

While various reasons are given by manufacturers for outsourcing, it is an undisputed fact that with outsourcing of Human resources the rights and privileges of the workers are gradually eroded as well as those in permanent employment run the risk of losing their employment. There is a growing concern of security of employment.

Outsourcing is the transfer of delegation to an external service provider the operation and day- to- day management of a business process. The customer receives a service that performs a distinct business function that fits into the customer’s overall business operations. It is the general belief that outsourcing gives greater efficiency to the main organisation, and helps the organisation to achieve economies of scale with outside service providers.

Outsourcing of labour takes place where employees of another entity (contract) are hired to carry out particular functions in a company. Outsourcing is not an illegal mechanism and is indeed recognised by law.

But by subtle and insidious ways manpower suppliers underpay and deprive employees of certain basic privileges and benefits. While various reasons are given by manufacturers and business enterprises for outsourcing their business functions, the primary considerations are the cost factor and the concern for uninterrupted business operations without being affected by industrial unrest.

Globalisation and liberalisation that overran the world during the last three decades have created new forms of employment, like outsourcing, subcontracting and casualisation. It is accepted without dispute that the need to be competitive in the open market has resulted in the new forms of employment like outsourcing, casualisation and in subcontracting arrangements. These arrangements are preferred by manufacturers as they are cost effective and help them to effect speedy deliveries of quality goods to consumers without interruption of industrial operations by industrial unrest. Globalisation has made it essential that if an industry is to survive or better still to make profits, its products and services, should be of attractive quality and available at an affordable and satisfactory price and in time.

Small and medium sized companies are today substituting for big industries, particularly to the extent that production processes have developed from mass production to services , tailored to consumer demand and taste, with zero margins of error and prompt deliveries. Today we find Multi National , Blue Chip and even Indigenous business establishments. shedding their excess weight and outsourcing part of their production from various parts of the world . You find software dealers in India processing data and coding text for banks in the west. Thousands of call centre jobs have been created in India, and software and service exports are expected to earn about Rs. 40 bn ($19.9bn)in the year up to March 2008.Thus the demand to outsourcing remains strong.

Changes during the last two decades

During the last two decades dramatic changes in the macro and micro environment of various countries have forced the rules of the businesses to undergo rapid change, as the new challenges faced by organisations expect a great deal of flexibility from the organisations. This has changed the traditional idea of continuous improvement. It isn’t merely enough for a business to consider on how to improve on what it is doing and ways and means of maximising profits. Rather the question is more fundamental; a business first needs to identify what and what it is doing and determine exactly what it should be doing in the first place and its moral obligation to its employees, then they would be able to get the other tasks through outside suppliers. This gives a chance for the organisation to focus on its core products while outsourcing the other tasks and activities. As a result from the computer room floor to the C.E.O.’s office, business executives are attempting to answer this question by identifying their core capabilities and strategic applications, and more often than not they are finding that such burdensome administrative tasks such as payroll processing, payroll tax filing and benefits administration don’t make the list.

Employer – employee relationship

It is quite important that an organisation resorting to outsourcing ensure that both parties are benefited through it, more important that the outsourced personnel are not deprived of their basic rights and privileges. It has to create a win-win situation where both parties enjoy tangible and intangible benefits through their relationship. This has to be examined in the provision in the Industrial Disputes Act No43 of 1950 where it defines an employer as” any person who employs or on whose behalf any person employs any “workman”, The Act also defines “A Workman” as any person who has entered into or works under a contract with any employer in any capacity, whether expressed or implied, oral or in writing or whether it is a contract of service or of apprenticeship or contract personally to execute any work or labour and includes a person ordinarilyemployed under contract, whether such a person is or is not in employment at any particular time and include s any person whose services have been terminated.

Organisations which promote outsourcing need to understand the need for knowledge sharing with the supplier and encouraging the suppliers to be part of the programme. This helps both parties to understand the requirements and work together by devising a common plan that could drive both the organisation to a win-win situation.

Contractual obligations

The existence of a contract of service is essential to determine employer employee relationship. A common law contract of service must subsist between the employer and the workmen before the two persons can be regarded as employer and workman.

A contract of employment is an agreement by which two or more persons regulate their relationship recognised legally. Not every contract to provide service creates employer employee relationship.

Outsourcing may create a contract of service or a contract for services depending on the fact s of each case. The circumstances and fact of each case have to be considered on its own merits, before a decision could be made. The distinction between an employee and an independent contractor, the tests to be applied are vague, and may, in a borderline case be difficult to apply.

In determining whether an employer- employee relationship exists, a variety of tests have been adapted by the courts and these tests become ultimately one of Control and Supervision. The ultimate decision would depend on the facts of the case the extent to which the court would exercise its discretionary power. In brief , the following are examples of tests which have been used to determine whether “ an employer – employee” relationship exists;

Performance of the work by the employee himself is a feature of contract of service.

Whether the employee has a right of exclusive service of a person has been taken as material in deciding whether a person is an employee.

Sometimes when the services are to be performed in the employers’ premises, it is an indication that the person is an employee. Whether the work done is an integral part or core activity of the “virtual principle”. Whether the contractor is a person in business in his own right.

Who owns the tools or equipment used to provide goods and services. The right to supervise, give orders, dismiss and exercise disciplinary control is the most fundamental test.

The Labour Tribunal established under section 31A of the Industrial Disputes Act has the right to vary contracts of service of the employer and employee and impose its own conditions which it considers are just and equitable.

Safeguards/Precautions

Having regard to the dangers involved if a policy decision has been taken to outsource the core business of a company, certain precautions are required before entering into and administering these requirements.: Care should be taken to ensure that instructions are given to the worker by the contractor and not directly by the employer.

Employees on the permanent cadre not being involved in the recruitment of workers. Preventing employees of the permanent cadre from performing the same functions as those performed by workers of the contractor.

There are those outsourcing arrangements whereby a part of a business operation is outsourced entirely to another person or company, which has the expertise to carry out the particular function. Also companies may outsource ancillary functions such as janitorial work, security, transport to outsiders. These functions are not “core businesses” of the company. This type of arrangement is less likely to give rise to an assumption of an employer – employee relationship, although the fundamental principle referred to above should be adhered to.

In all types of outsourcing arrangements, if the outsourcing is in respect of a trade to which the wages board applies, the following provisions of the wages board should be kept in mind and the precautions taken to mitigate the liability under the WBO. In this context where core business of a company are being outsourced additional care must be taken to ensure that no contract of employment is imputed to the company as it would be much more difficult to prove that outsourcing is a “sub-contracting”.

Section 59A of the WBO imposes restrictions on an employer’s right to execute work through an independent contractor or sub- contractor in the following manner;

The Commissioner is empowered (with the approval of the Minister ) to require an employer from refraining from having any work executed through any contractor if he considers it expedient to do so.

He has taken all practical steps to ensure payment of wages by the contractor. Section 45 of the WBO also provides that where the immediate employer of any worker is in the employment of some other person and that worker is employed to do work in the course of and for the purpose of trade and that other person shall for the purpose of the WBO be deemed to be an employer of that worker jointly with the immediate employer.

Further Section 45A provides that where a person (Contractor) has undertaken to execute any work enters into a contract with any other person (sub contractor) for the execution of the sub contractor of whole or part of that work, then if the sub contractor fails to pay wages to any worker employed by him in the performance of that contract, the contractor shall be liable to pay the wages due to that worker.

Erosion of worker rights

The statutory regulations which regulate the reciprocal obligations of the employer and Service Providers(outsourcing agencies) are quite adequate. While there are safeguards to ensure that employees are not exploited, it is however in the implementation of the contractual obligations that the agencies subtly deprive the workers of certain privileges and tend to underpay its employees.

While various reasons are adduced for outsourcing certain business functions both core and ancillary , the main considerations are the cost factor and desire to ensure uninterrupted business activity without Industrial Disputes. While certain establishments confronted with Industrial Disputes due to the persistent intransigent attitude of the Trade Unions have subtly resorted to “Voluntary Retirement Schemes” to lay off its staff on the permanent cadre. Successfully launching Voluntary Retirement schemes they have subsequently outsourced the particular function. Despite the stringent labour regulations of “Laying Off” staff and mandatory compensation, many multinational companies circumvent these regulations by insidious ways. Regrettably Trade Unions have so far failed to make any meaningful and tangible effort to combat the adverse effect of “outsourcing”.

One of the main factors of outsourcing being the cost factor, manufacturers endeavour to obtain the services at competitive rates, in the process the employees are deprived of certain benefits than their counterparts in the permanent cadre enjoy while performing the same type of work. While this is blatant discrimination it has also had an adverse effect on morale. Naturally the degree of commitment and dedication to duty is relatively low. Further “outsourcing “ endangers job security”.

It is relevant to examine how far new forms of work arrangements, outsourcing, subcontracting and casualisation provide for any form of secutity of employment.

The main beneficiaries of “outsourcing” are the manpower suppliers or service providers. No wonder that during the last two decades there has been a proliferation of “manpower agencies”.

They are pursuing a lucrative business unabated depriving its employees of some of the basic rights.

The fact that “outsourcing is gradually eroding the basic rights and privileges of outsourced personnel cannot be disputed. It is timely that the Department of Labour make an analytical survey of the various multinational business institutions that have outsourced its core and ancillary functions and ascertain

The reasons for outsourcing

Whether permanent staff have been replaced by outsourced staff. Whether any outsourced staff were deprived of any legitimate entitlements. This is an urgent requirement to ensure that worker rights are not eroded by outsourcing.