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Industrial relations considerations in outsourcing and offshoring

By Kristin Ramsey05 Oct 2016

Outsourcing and offshoring is particularly fashionable at the moment with businesses of all shapes and sizes exploring strategies to keep labour costs down whilst still maintaining high operational standards and efficiencies.

Outsourcing or offshoring can be an excellent way to address skills shortages here in Australia as well as save money on employment costs and keep overheads in check.

Using the right outsourcing or offshoring provider is a key element of implementing a successful outsourcing or offshoring strategy. There are also a number of industrial and workforce change management issues that need to be managed.


The first consideration in implementing an outsourcing or offshoring strategy is consultation.

Generally, an employer has an obligation to consult with affected employees when implementing a major workplace change that is likely to have a significant effect on the employees.  This obligation arises under the applicable modern award or enterprise agreement.

In most situations a decision to outsource or offshore will meet the definition of a “major change” as more often than not it ultimately results in redundancies, changes to the composition of the workplace and/or the restructuring of jobs.

The obligation to consult is triggered as soon as a decision regarding a major change is made.

At the very least consultation requires an employer to:

discuss with the relevant employees the introduction of the change, the likely effect of the change and the measures that will be taken to avert or mitigate any adverse effects;
provide affected employees with written confirmation of the above matters; and
give prompt and genuine consideration to any matters raised by the employees in relation to the anticipated change.

Genuine consultation takes time and employers often come unstuck by paying lip service to their obligations (either through delaying consultation, not providing sufficient or honest information, or not taking into account feedback provided).

Failure to comply with consultation obligations can result in prosecution and fines of up to $51,400 per breach and can also compromise an employer’s ability to defend unfair dismissal claims arising from subsequent redundancies.

Communication plan

It is also extremely important to have a communication plan so that both the internal and external message regarding the business’ offshoring or outsourcing decision is consistent.

Whilst your strict legal obligation to consult is only limited to those employees who may be affected by the change, for larger offshoring / outsourcing projects best practice is to keep the entire workforce in the loop at to what is happening. This helps reduce rumours, confusion and uncertainty and helps ensure smoother implementation of your offshoring / outsourcing project.

Consideration should also be given to proactive communication with key external stakeholders (including clients, customers, and the media) regarding the changes and the positive impact they will have on the business. By undertaking such communication at an early stage, you can lessen the impact of any negative or inaccurate comments that disgruntled employees may seek to put into the public domain.

Redundancy and termination of employment

In circumstances where an outsourcing or offshoring decision will result in the termination of an employee’s employment, this gives rise to a redundancy situation. 

When selecting employees for redundancy, it is important to ensure that you apply fair, non-discriminatory and transparent selection criteria. For example, a last on first off approach may be discriminatory in some workplaces if this approach results in a disproportionate number of women or younger employees being selected for redundancy.

When an employee’s employment is to be terminated by reason of redundancy they are typically entitled to notice of termination, redundancy pay and payment in respect of their accrued leave entitlements (including long service leave if they have met pro rata thresholds). These costs should be factored in when calculating the cost / benefit of an outsourcing or offshoring arrangement.

Finally, consideration needs to be given to whether or not the employee could be redeployed elsewhere in the business (or any associated entity). When considering redeployment opportunities, you should not assume that an employee would not be interested in a lower paying or less secure role. Instead, best practice is to make the employee aware of all vacancies and to let them decide whether they are interested in a particular role.

Risks on termination

The primary risks associated with termination in an outsourcing / offshoring situation are:

  • an unfair dismissal claim;
  • a general protections claim; or
  • a discrimination claim.

The risks associated with these sorts of claims can be significantly reduced by ensuring that you:

  • properly consult with employees;
  • adopt a fair, transparent and non-discriminatory process when selecting employees for redundancy; and
  • redeploy employees into available positions they are suitably qualified and skilled to perform.

Also, remember that an employee who feels they have been consulted with and treated fairly with dignity and respect is much less likely to commence legal proceedings to challenge any decision, disclose information to the media or seek intervention by the Fair Work Ombudsman or other relevant third parties.

Liability for actions of service provider

It is important to utilise the services of a reputable provider in relation to outsourcing or offshoring.

You need to do your homework and make sure that where they are engaging employees on your behalf or providing staff to perform work in your organisation, the service provider is meeting its legal obligations.

 A number of recent high-profile underpayment causes has resulted in the spotlight being thrown on businesses that outsource or offshore significant parts of their operations, and as such, there is a call for tougher laws which could hold end users liable for breaches of Australian laws committed by service providers in some circumstances.

Businesses can minimise these risks by engaging reputable service providers, including protective clauses in services agreement and taking steps to ensure legal compliance by the service provider it engages.

At Hynes Legal, we regularly act for businesses that wish to outsource or offshore certain operations and can provide advice on service agreements as well as industrial relation issues to ensure the smooth implementation of projects and reduction of legal risk.

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