Issues Related to Human Resources Outsourcing

By: James E. Meadows and Terese M. Connolly, Culhane Meadows PLLC

This article discusses special issues that may arise in the context of Human Resources Outsourcing (HRO). HRO is a form of business process outsourcing (BPO) focused on the functions that have typically been performed or managed through a company’s human resources (HR) or personnel department. The accepted industry definition of an HRO transaction is that it includes a minimum of three HR functions and service to more than 3,000 employees.

CONTRACTING WITH A MANAGEMENT SERVICES COMPANY to process the company’s payroll is not considered outsourcing, even though some of the concepts discussed may be relevant to a customer’s hiring of such a company. The issues that customers should address in connection with the outsourcing of HR functions can be broadly grouped into three types: compliance, contractual, and operational. This article explores these issues and provides best practices for how to address them so that the HRO deal is successful.

An HRO deal involves the management and processing of people, so the issues likely to be encountered in such a transaction, and the solutions designed to address them, are specific to this type of deal. Contractual issues are typically addressed in the agreement itself, or the legal front end of the statement of work (i.e., not the business-specific schedules thereto). Operational issues are often addressed in the back end of the statement of work and certainly in the schedules thereto. Compliance issues are a subset of each of the foregoing two issue types and are focused on the heavily regulated nature of the subject matter.

The key to the success of any type of outsourcing deal is establishing a review process for gaining an in-depth understanding of the tasks or functions that are within the scope for outsourcing. This is particularly the case in an HRO transaction where the tasks and functions were previously a part of a worker’s job description. Sometimes the review will lead to an expansion or contraction of the scope as more is learned, but such an in-depth review will always allow the customer to include in its requirements (e.g., in a request for proposal) precisely what the customer is seeking to procure and the desired standards to be achieved. This indepth understanding will allow the customer to discuss such requirements with the prospective service provider(s) to ensure that a meeting of the minds is achieved at the outset. The customer will also be able to document such requirements, and the methodology by which the requirements will evolve, in a definitive contract.

Functional Area and Compliance Issues

Compliance issues are identified through a detailed understanding of the subject matter of the proposed outsourcing. The purpose of this section is to describe select subject matter types (often called functional areas) that might be encountered in a particular HRO deal in order to facilitate spotting compliance issues. The next section, on contractual issues, identifies the general approach to the compliance-withlaw topics in the main agreement. In general, the customer looks to the service provider to propose industry best practices for the customer’s review and approval, based upon the service provider’s domain expertise.

To read the full practice note in Lexis Practice Advisor, follow this link.

James E. Meadows is a managing partner and chair of the Outsourcing Practice Group in Culhane Meadows’ New York City office. Jim has over 30 years of experience focused almost exclusively on outsourcing and technology transactions and related legal matters, including counseling clients on structuring (or terminating) long-term or strategic information technology or business process outsourcing relationships. His clients are among the largest companies in the world, spanning a wide range of industries, including financial services and insurance, energy, transportation and logistics, travel, telecommunications, technology and related services, manufacturing and media services. Terese M. Connolly is a partner in the Labor and Employment Practice Group in Culhane Meadows’ Chicago office. Terri has over a decade of experience focused exclusively in the area of domestic and international labor and employment. She regularly assists clients and manages international counsel in providing advice and counseling on domestic and cross-border transaction issues involved in mergers and acquisitions, corporate reorganizations, outsourcing, and privacy transactions, as well as post-acquisition integration, global audits, and global codes of conduct.

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