Jurisdiction may be the most important factor organizations should take into consideration when offshoring. Some countries do not recognize certain U.S. legal doctrines, such as confidentiality agreements, and without proper jurisdiction an organization may be unable to enforce its contract with a vendor.
When selecting an offshore country, organizations should consider whether the country permits a choice of law provision which would allow courts to apply U.S. law. If the country permits choice of law provisions, the provision should be well defined in the contract so that there is no ambiguity. Organizations should also consider working with counsel in the offshore country to assist with legal intricacies, even if a United States choice of law provision is permissible.
In settling disputes associated with offshoring, organizations may have to rely on arbitration. As in the United States, an arbitration agreement should address factors such as arbitrator selection and responsibility for arbitration costs. The agreement should also address the place of arbitration and choice of law. A properly drafted arbitration agreement can save time, travel, and money, and establish a more favorable controlling law.
When outsourcing work to a third-party vendor, organizations will no longer have the same control they had over their own employees. Vendor employees may be unqualified or improperly trained, and this can lead to quality control issues. Organizations should consider initiating measures to ensure a standard of quality, especially if the outsourced workers interact with the public. Organizations may want to set up a training program for vendor employees, and establish evaluation criteria. Organizations may want to have one of their employees travel to the country to evaluate the vendor.
Many countries outside of the United States do not recognize confidentiality or non-compete agreements. When choosing an offshore country, organizations should take into consideration the country’s laws on confidentiality agreements, especially if workers will be handling proprietary information. Organizations should also take care in selecting a vendor, taking into account their reputation for maintaining secrecy. Also, in the case of contract termination, organizations should have knowledge of foreign laws regarding recovery of confidential property, as courts in some countries do not require the return of confidential material. Failure to take care in making these decisions could lead to the leak of trade secrets.
A country’s non-compete laws should also be taken into consideration. Organizations should look into whether countries even permit non-compete clauses, and if so what the country’s courts consider to be overbroad in terms of duration and scope.
Hopefully an organization’s relationship with a vendor will go smoothly, but this is not always the case. Sometimes vendor contracts need to be terminated, and the contract should address this scenario. Organizations should consider adding a provision for performance expectations, and clearly state what deficiencies equate to a breach of the contract and require termination.
Also, since laws can vary by country, the contract should address who owns goods, materials, and intellectual property rights on termination.
Some countries restrict a vendor’s ability to hire or terminate employees. For this reason, organizations will want to know the laws in various countries. Other factors to take into consideration include whether the vendor is working with employees or independent contractors and how the two are treated differently, and how long employees has been with the vendor. Organizations should also be aware of which countries have unionization laws, and if they will have to negotiate with foreign unions.
Organizations need to know a country’s laws regarding workers’ rights and how this can affect work. Organizations should know of any restrictions on a workers’ ability to work, including holidays and religious practices and restrictions, language barriers, and political instability.
Considerations in the United States
In addition to foreign rules and regulations, organizations need to take into account restrictions in the United States associated with offshoring. Organizations may have to collectively bargain with unions before sending work overseas, and if offshoring results in mass layoffs then large organizations will need to provide at least 60 days’ advance notice of termination under the WARN Act.
Also, there has been a recent surge of anti-offshoring sentiment in the United States, and many states have attempted to restrict offshoring. Although much of the proposed anti-offshoring legislation was rejected, a few states have enacted legislation which places restrictions on offshoring. Check with your state to see if there are any offshoring restrictions.
United States Employees Abroad
Organizations who send U.S. employees abroad to help facilitate offshoring need to be aware of which U.S. employment laws apply extraterritorially. For example, Title VII applies extraterritorially, while the FLSA likely does not (depending on how much work an employee performs overseas in a week).
When outsourcing work offshore, organizations should consider the potential backlash at home. Offshoring is a very controversial issue, and organizations could face boycotts and scrutiny if they choose to outsource jobs overseas.