The source of the problem

Utility Computing has been defined at this site as outsourcing all or part of your IT functionality to a third party and paying for the service as you use it “on demand”. To a European employment lawyer, that definition would set off alarm bells.

The root of the problem in the EU is Directive 77/187 enacted 25 years ago and since incorporated in national laws throughout the EU. That law, as reflected for instance in the Dutch Civil Code, requires that, under the right circumstances, a transfer of (part of) a company’s duties through an outsourcing deal must actually be seen as a transfer of (part of) the company itself, including the affected employees.

If, in a Utility Computing deal, you cede some degree of control that you previously had over your IT infrastructure or functionality to a third party, then this may be considered a transfer of a part of the business within the meaning of the Directive. The result may be that you transfer your employees along with the IT functionality whether you intended to or not.

The notion underlying this law is to safeguard employees’ existing employment relationships in the event of a change of ownership. The law mandates that, after the transfer, the employees will continue to be employed on the same terms and conditions with the Utility Computing service provider as they were with their former employer who outsourced the work.

When are the circumstances right?

The one criterion controlling the question whether a transfer of certain duties constitutes a transfer within the meaning of the Directive is whether the activity being outsourced “retains its identity” after the transfer. The principal test for that question is whether the activity continues or resumes after the transfer.

In order to determine whether this criterion has been met, you should consider the facts and circumstances characteristic of the transfer concerned, such as:

• the nature of the company or branch office involved;
• the fact that tangible assets such as hardware, servers, etc. are included in the transfer;
• the value of the intangible assets at the moment of transfer;
• the fact that the service provider takes over (or leaves) nearly all staff of the former employer;
• the fact that the clientele is taken over as part of the transfer, or is not;
• the extent to which the economic activities pursued after the transfer are similar or identical to those performed before;
• the duration of any period during which those activities ceased.

These are merely aspects in the total investigation that you should carry out. They cannot be assessed in isolation. Generally, though, if the activity that is being transferred retains its identity after the transfer, then the transition is likely to be considered a transfer of a business (or part thereof) within the meaning of the Directive.

Transfer of labor-intensive work

Utility Computing deals can involve the outsourcing of labor. If in such a case, no assets are being transferred, does that mean that the activity being transferred still “retains its identity” when transferred?

To answer this question, courts would look at the nature of the company or branch office, among other factors, when assessing the facts and circumstances of the transaction. In labor-intensive sectors, the entity at issue may comprise a group of employees performing a common activity on a permanent basis. An IT department is an example that springs to mind.

If the common activity of this group is its main characteristic, and if the service provider takes over not just the economic activity but also a substantial number of the affected employees and their expertise, then the rule of thumb is that this activity retains its identity in the transfer, and is caught by the law.

Thus, the service provider acquires the organized set of “elements” required to continue the activity at issue. The identity of the team is preserved and the Directive applies.

The consequence? All of the members of the transferred team enter the service of the service provider under the same terms of employment as they had in their previous jobs.

It will come as no surprise to hear that the consequences of the transfer of employment contracts can pose significant risks and exposure, unless properly anticipated. The issues that courts will consider in assessing whether outsourcing in connection with Utility Computing constitutes a transfer of (part of) a company within the meaning of the Directive will be fact-based. This is certainly an area which deserves careful analysis before writing on that dotted line.

Alan Steele-Nicholson is head of the IT-Telecom law department in the Rotterdam, the Netherlands, office of the global law firm Simmons & Simmons, and can be contacted on alan.steelenicholson@simmons-simmons.com. Peter Brudenall is Senior Lawyer in Simmons & Simmons’ London office, and can be contacted on peter.brudenall@simmons-simmons.com. Both are specialists in IT and telecom outsourcing law.