Technological Outsourcing and transfer of undertakings

Written on 22 Jul 2016

According to all attendant circumstances, the outsourcing of IT services may be understood as the transfer of a business or part of it as a going concern, with the guarantees provided by article 44 of the Statute of Workers Rights, in relation to any employees affected by these services being outsourced.

Technological Outsourcing is becoming more frequent as companies with internal IT departments proceed to outsource their activities to third party businesses that, at times, provide the services willingly taking all or part of the company’s IT workforce.

In this type of situations, and according to attending circumstances, we could be facing a transfer of undertakings (“TUPE“) in respect of article 44 of the Statute of Workers Rights (“SWR“).

Generally, article 44 of the SWR provides a guarantee aimed at retaining the labour relationship, as well as joint responsibility between the transferring businessman and the succeeding one, as regards the labour and Social Security employee contributions, in the event of transferring an entire company or one of its businesses, which are susceptible of being independently exploited.

Article 44, section 2 of the SWR sets out the elements that make up the “economic entity”, for this purpose:

  1. a transfer of an economic entity, or of a group of organized resources, that aims to carry out an essential or ancillary business activity; and
  2. that the economic entity is susceptible of being exploited after the transfer.

Conventionally, it was accepted that the transfer of undertakings always required a transfer of assets. However, the European Union’s (“EU“) case-law modified the said perception by extending TUPE guarantees to the following situations: concurrence of “stable economic entity” mainly formed by an “organised grouping of employees” assigned to a service, for example in activities related to specific computer services.

In this respect, and attending to the applicable EU’s regulations the Supreme Court (“SC“) set out in its judgements, dated 20 and 27 October 2004, the following guidelines to determine the concurrence of an “organized grouping of employees” (“sucesión de plantillas“) :

  • it must be an activity rendered with an “organised grouping of wage earners”;
  • anyone linked to the activity must have provided their services uninterruptedly, “specifically and permanently assigned to a common task”;
  • a significant number of employees rendering the services must be taken by the new services provider, that is, the new employer ” takes over a major part, in terms of their numbers and skills “; and 
  • it results in the continuation of the activity maintaining its identity.

Additionally, the SC also requires the analysis of the features of the transferring company, that is, how the company that, until the transfer of undertakings, carried out the activity organized itself and its financial and production circumstances.

This has been brought up in the judgement issued by the SC on 27 February 2012, concerning a case where the services of a company’s IT department were outsourced. This company carried out activities that were not related to the provision of computer services and, although the totality of the assets had not been transferred, the contracting company continued to provide the service taking on a significant part of the employees that had previously been assigned to the service. The SC ruled that article 44 of the SWR should apply because the transferred assets were relevant to the provision of the services. However, it reasoned that an “organized grouping of employees” would have been recognized if it had been proved that the human resources were more relevant to the services than the transferred assets.

An issue closely related to the one above, is the application of the thesis of “organized grouping of employees”, in the event that commissions or the successive award of computer services bids to different contractors had occurred. The SC, in its judgement issued on 27 April 2015, considered the existence of a transfer of undertakings in such an event, due to the concurrence since there had been a transfer of an “organized grouping of employees”. The SC understood that the failure to transfer assets in order to provide the service was irrelevant because: the value of the assets was marginal in comparison to the value of the provision of services agreement, the activity mostly relied on the workforce that was transferred at a great scale (87% of the former employer’s employees), in addition the services would have been halted without the continuation of the workforce.

Also, although the thesis of “organized grouping of employees” continues to be subject to judicial interpretation, in those Technological Outsourcing situations where the transfer of assets, considered relevant to the provision of the service, takes place at the same time as the services being outsourced, the SC has ruled in its sentence of 16 April 2016 that the guarantees of article 44 of the SWR should be applied because the transfer of an economic entity had been carried out in the strictest terms.

In view of the above, both in outsourcing and succession of computer services agreements, provided that the new party providing the service considers hiring all or part of the workforce linked to the service, it will be necessary to previously assess the impact that this decision might have in order to determine the existence of an “organized grouping of employees”. If this was the case, all the guarantees set out in article 44 would automatically apply. Also, the transfer of significant parts of the assets linked to the outsourced services may trigger the application of article 44 of the SWR if it is understood that there is an “economic entity” susceptible of being financially exploited.