This article is written by Pallavi Chandrasekhar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from lawsikho.com.

Meaning

To facilitate saving costs and to focus more on strategic efforts, human resources (HR) functions are oftentimes outsourced.  Due to this, HR professionals are asked to look out for outsourcing solutions for organizations.  Some HR functions that can be outsourced include: compensation, administering employees, external hiring, relocation, rewarding employees, etc. 

HR outsourcing agreement is a contractual document signed between an employer and a third-party provider wherein the employer transfers certain HR functions to the third-party provider.  There are several types of HR outsourcing options available to an employer.  It could be something as specific as the document collection and evaluation process [example various universities in the United States and Canada have outsourced the document collection, evaluation, and tracking process to the Law School Admission Council(LSAC) for their LL.M and J.D. programs] to an entire HR department being outsourced.  

Let us look at the different types of HR Outsourcing arrangements. 

Types

• Software as a Service (SAAS): This is a model where licensing of software and its delivery is hosted remotely by a seller or provider and is available to the consumer through a website browser.  This model provides greater flexibility to the organization and saves costs.  In this field, employers pay for getting access to talent management and payroll applications.  For example, a cloud HR software.
• Business Process Outsourcing (BPO): In the BPO model arrangement, an employer outsources a single business job such as customer care calls to a third-party service provider.  This is different from the SAAS model because the BPO provider is giving the service as well as the software.  For example: An American Bank such as Citi Bank is outsourcing its customer care calls to a BPO provider in India.  A lot of call centres in India work on this model and provide cheap employees for American corporations. 
• Single Source Outsourcing: Under this arrangement, one solution is used by HR professionals to meet all their requirements.  This ranges from new recruits being welcomed to turnover management, and the in-between tracking.  The entire lifecycle of an employee is covered by a single supplier.  Using a provider for the entire lifecycle of an employee from hiring to pension benefits on retirement is an example.
• Shared Services and Shared Services Centers: When a business function is consolidated within an enterprise to a highly skilled internal department.  This may also be provided to third parties.  When offering of services by a shared services team is combined into a central operation, they are called shared services centers. Here, administrative functions would be either in-house or outsourced. Advances in technology has increased the use of shared services models in recent times. 
• Professional Employer Organizations (PEO): This model provides an employee leasing arrangement. Herein the PEO and the employer share the employee’s responsibilities. The management and control of the employee’s work would be retained by the employer and the co-responsibility of the employee benefits, taxes and payroll is taken by the PEO.  Since the PEO is the co-employer, the wages and taxes are paid by it from its own account.  The PEO also collects and reports taxes to the states and central government.  Maintenance of a long term relationship with the worksite employees is also with the PEO. On paper, it also holds the right to recruit, fire and reassign employees.  The PEO is reimbursed by the employer for these functions and the employer also pays a monthly administration fee to the PEO.  The monthly administration fee would be based on the number of employees employed by the employer through the PEO.  
• Application Service Providers (ASPs): This model hosts software on the internet and rents it to different users. For example: ASPs like ‘People Soft’ are used to manage payroll, benefits to employees, head count and other HR processes.

Uses

Apart from the in-House HR personnel getting an opportunity to focus on strategies for the company, HR outsourcing can give corporates access to specialized HR expertise, aid with regulatory compliances, and improve response times for HR functions such as payroll and benefits enrollment. There can also be technological advantages such as using an SAAS provider helps the employer reap the benefits of advanced systems avoid technical problems.

Clauses to be included in the HR Outsourcing agreement

HR arrangements need clauses in the contracts that increase the flexibility of the provider to provide the HR service.  Mostly such relationships are appropriate for long term such as five to seven years.  In service arrangements that are more complex, the approach must be less rigid regarding the scope of services.  However, in short term agreements, where there is a supplier and purchaser-like relationship, the agreements need to be more defined in the scope of services and the requirements of the employer.  Furthermore, contracts must have certain built-in flexibility to permit changes in business situations, technology and needs of the employer or purchaser.

• Personnel and assets transfer: HR outsourcing invariably involves transfer of assets and personnel.  Defining these terms have an important implication for the employer and its employees especially when large scale outsourcing occurs, it is crucial for employers to take steps to preserve employee morale, etc.  The agreement must specify how outsourcing would affect benefits, pensions and salary of people moved to the employer.  The drafter of the agreement must also think about rights of the employer if it wants to retain such employees even after termination of the HR outsourcing agreement.

Regarding equipment and other assets, the provider’s rights and duties regarding such use must be specified by the employer, also specifying the ownership and other issues related to transfer of assets or other valuable objects. 

For example: The pensions and salaries of the employees shall be paid by the provider and in case of dispute, the employer shall not be held liable for such payments.

• Rights Retained: It explains the previous or pre-existing Intellectual Property Rights (IPRs) owned by the employer and the provider and that parties would retain the previously created by them.
• Intellectual Property Rights already existing: This is related to the rights retained.  This clause explains how the pre-owned IPRs shall be used during the period of employment.

For example: The Employer shall retain all the Intellectual Property Rights related to any material or product or service(s) used by the Employee or the Provider during the time of the Employee’s employment with the Employer.

• Services: Mostly this is set out in the Schedule of the Agreement and is negotiated based on the scope of the services and processes outsourced.  The nature of the relationship between the provider and employer would determine how detailed and specific this clause must be.  There must always be clarity in defining the terms for the parties to be able to set mutual understanding of the deliverables.
• Ownership Deliverable: This clause discusses the ownership of the deliverable.  Usually the client or the employer owns the deliverable product or service.
• No rights to third-party IP: This clause states that the provider shall not own any IPRs from their clients or employer even though the employer or client is letting the provider use its IPRs.
• Confidentiality: This would be a lengthy clause since the employer would like all of its information disclosed to the provider and its agents during the course of their employment to be held in confidence.
• Non-Disclosure: This clause would include what information can be disclosed to third parties, during the course of employment with the employer and other such related aspects regarding confidential information.
• Conflict of Interest: In the event, the provider is also providing HR to other competitors of the employer, then the employer shall have the right to terminate its agreement with the provider to make the provider terminate its agreement with the competitor, depending on the terms agreed between the parties.
• Termination: Defining what constitutes termination in an HR outsourcing agreement is one of the most important things.  In general, early termination clauses should be resorted to last except when there is material breach or force majeure.  The default clauses should enumerate escalation provisions and a realistic cure period to make sure that the parties have dispute resolutions procedures. There should be a clause for exit management as well which would include provider cooperation for transferring service to another provider and returning of all equipment etc. to the employer which were used by the provider and its agents during the term of the contract.  It must also be considered that there should be no disruption to the employer’s operation due to the termination of the HR outsourcing agreement.
• Compliance: This clause is used to ensure that the provider is abiding by all labour and employment laws, rules, and orders of the center and state.  This also ensures that the provider and its agents comply with all the terms of the agreement imposed by the employer, the provider has all the requisite licenses and permits to complete the tasks in a professional manner, etc.
• Inspection and Acceptance: The employer shall have a right to inspect the work or deliverable of the provider and its agents.  Only after its reasonable satisfaction shall the employer accept the product or service and make payments.
• Insurance Policy: The provider shall take out insurance for its agents working with the employer and shall also indemnify the employer against any losses committed by the agent or the provider during the course of their employment.
• Miscellaneous: Boilerplate clauses such as dispute resolution, jurisdiction, notices, governing law, signatures, etc. would also have to be included.

Conclusion

The growth of HR outsourcing was thought would grow rapidly, as market pressures pressurize companies and firms to concentrate on core business functions. However, in the current COVID-19 pandemic time, such outsourcing would be abandoned to make in-house personnel do most of the HR related work.  Firms and companies would loathe to spend extra money on new personnel and their providers as their own clients are filing for bankruptcy or not making payments on time. However, software doing the HR work such as the ASP model would probably work as a one-time investment in the HR outsourcing software or the multiple renewal model (whichever payment model is used by the ASP owner).

References

• https://www.shrm.org/resourcesandtools/tools-andsamples/toolkits/pages/outsourc i n gth e hrfunction.aspx
• http://www.rojaslawfirm.com/docs/SpecialIssuesinOutsourcingAgreements1.pdf
• https://blog.careerminds.com/outsourcing-contract

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