Outsourcing 2007/08 The Netherlands The Netherlands Ferdinand Mason and Casper Haket, Boekel De Nerée NV www.practicallaw.com/8-380-5308 General 1. To what extent does national law specifically regulate outsourcing transactions? Directive 2004/39/EC on markets in financial instruments has been implemented into Dutch law, with effect from 1 November 2007. Business process Outsourcing transactions are not specifically regulated. However, certain national laws are of relevance. General legislation regulates how assets are transferred. Generally, for property to pass legally there must be: Valid title. Delivery. Authority to dispose of the property. (See also Question 5.) Specific legislation may impose additional requirements in particular sectors or circumstances. For example, the following may be relevant: Rules on the Transfer of Undertakings (Protection of Employees) (TUPE rules) (see Questions 7 to 13). Legislation applicable to regulated industries (see Question 2). See above, Financial services. IT There is no legislation specific to IT outsourcings. However, data protection legislation is particularly relevant (see Question 14) (although it may also be relevant to outsourcings in other sectors, such as marketing). Telecommunications The telecommunications sector is regulated. Therefore, telecommunications outsourcings are subject to: In a majority of cases, anti-trust legislation, which is mostly set out in the Telecommunications Act 1998 (Telecomunicatiewet). Specific regulatory supervision by the Independent Post and Telecommunications Authority (Onafhankelijke Post en Telecommunicatie Autoriteit (OPTA)). Public sector 2. What additional regulations may be relevant on: A financial services outsourcing? A business process outsourcing? An IT outsourcing? A telecommunications outsourcing? A public sector outsourcing? Other outsourcings? Financial services The Financial Supervision Act 2007 (Wet Financieel Toezicht) imposes requirements on the outsourcing and supervision of banks, securities institutions and investment companies. These requirements relate to notification to the Dutch Central Bank (De Nederlandsche Bank) and back-up systems for outsourced activities. Outsourcing transactions may be subject to public tender legislation based on Directive 2004/18/EC on the co-ordination of procedures for awarding public works, supply and service contracts. This directive sets out several ceilings for the value of services, and then allocates specific government bodies to the different levels. New Dutch legislation is expected this year that will clarify the directive and oblige parties to also hold tender procedures for services of a lower value than the ceilings currently mentioned in the directive. Other legislation may apply depending on the outsourcing in question (for example, Directive 2004/17/EC co-ordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors). Other There are no other relevant additional regulations. CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook 169
The Netherlands Outsourcing 2007/08 Legal structures 3. In relation to the legal structures commonly used on an outsourcing, please describe how each structure works, and its potential advantages and disadvantages. Procurement 4. Please briefly describe the procurement process that is usually used to select a supplier of outsourced services (including due diligence and negotiation). The following legal structures are commonly used: Asset transfer. The assets and liabilities that comprise the activities that are to be outsourced are transferred. This has the following advantage and disadvantage: Advantage. It provides certainty in respect of assets and liabilities being transferred and associated liability exposure; Disadvantage. Each individual asset or debt being transferred must be legally transferred from the customer to the supplier. The procurement process is as follows: The customer circulates a request for proposal amongst potential suppliers. This usually includes: information on the desired services; information on service levels; information on the in-house infrastructure related to the services; the profile of the customer s ideal supplier; Share transfer. The customer transfers the shares of the corporate entity that is outsourcing its activities to the supplier. This has the following advantage and disadvantages: Advantage. As long as the activities that are subject to the outsourcing transaction are present in a corporate entity, the share transfer of such entity is usually enough to finalise the intended outsourcing transaction; Disadvantages. The supplier may have to: carry out a lengthy due diligence to establish whether any liabilities are present in the target company; negotiate suitable warranties and indemnities. Statutory division. The customer moves the activities that are to be outsourced to a separate entity. This has the following advantage and disadvantage: an invitation to submit a detailed proposal on how the services will be provided to the customer. The bidders respond to the request for proposal (binding offer). The customer selects its preferred bidders. The customer enters into confidentiality agreements with the bidders. The bidders undertake due diligence of the business to be outsourced, consisting of a review of the available infrastructure and personnel. Negotiations take place between the bidders and the customer. The relevant regulatory authority clears the outsourcing (competition and financial authorities). The customer concludes its agreement with its chosen supplier. Advantage. The assets and liabilities relating to the outsourced activities are isolated and contained in one entity. This entity s shares can then be transferred from the customer to the supplier; Disadvantage. Legal entities that were subject to or created under a statutory division remain jointly and severally liable for non-divisible liabilities (section 2:334t, Civil Code (Burgerlijk Wetboek)). Therefore, the parties must undertake adequate due diligence investigations and obtain suitable indemnities and warranties. Transferring or leasing assets 5. What formalities are required to transfer the following assets on an outsourcing: Immovable property? IP rights and licences? Movable property? Joint ventures (JV). Various JV structures can be created. A JV has the advantage that the customer can retain negative control over the outsourced function, that is, it retains certain rights to veto the JV s material decisions. In addition, there is currently a major trend towards the multicustomer supplier model. A number of customers form a consortium to form a collaborative sourcing model. This model usually deals with outsourced functions that are quite general in character, like facility management, security, catering, and so on. Key contracts? Generally, for property to pass legally there must be valid title, delivery and authority to dispose of the property (see Question 1). 170 CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook
Outsourcing 2007/08 The Netherlands Immovable property Immovable property is transferred by both: A notarial deed of transfer. Registration in the Land Registry to ensure its effect on third parties. IP rights and licences IP rights and licences are transferred by one of two ways: A deed of assignment, followed, if applicable, by notification to the authority that registers the IP right (for example, the Office of Harmonisation for the Internal Market (European Trademarks Office)). Request for transfer to the relevant authorities. Movable property Physical delivery is the only formality necessary to transfer movable property. Key contracts Rights under a contract can be assigned, unless this has been excluded. However, the following must be considered: Movable property Each type of movable property has its own specific formalities for its lease or license. For example, the supplier and the customer may have to make arrangements for the supplier to take possession of certain equipment, or be required by the relevant registering authority to register motor vehicles in the supplier s name. Key contracts In an asset transfer, approval is required from the parties to the contracts in order for an assignment to take place. However, key contracts may be subject to change of control clauses. In addition, the assignment of rights under key contracts may be excluded. (See also Question 5, Key contracts.) Transferring employees 7. In what circumstances (if any) are employees transferred by operation of law: To an incoming supplier on an initial outsourcing? To an incoming supplier on a change of supplier? Back to the customer on termination of an outsourcing? The transfer of a key contract requires the parties to the contract to give consent and approval. Some contracts may include change of control clauses, which entitle a contracting party to terminate the contract if the ownership of an entity materially changes. 6. What formalities are required to lease or license the following assets on an outsourcing: Immovable property? Initial outsourcing Section 7:662 of the Civil Code implements Directive 77/187/ EEC on the approximation of the laws of the member states relating to the safeguarding of employees rights in the event of transfers of undertakings, businesses or parts of businesses. Employees transfer by law on a transfer of an undertaking. A transfer of an undertaking happens when the transferred undertaking (section 7:662, Civil Code): Retains its own identity. IP rights and licences? Movable property? Key contracts? Immovable property A lease contract is likely to require the landlord s consent to a sub-lease. If the parties opt to transfer the lease rather than sublet it, the original tenant (customer) can request that the new tenant (supplier) replace it as the contracting party under the lease. Usually this request is granted, as long as the supplier is of good repute and has the same level of creditworthiness as the customer. IP rights and licences Subject to the relevant contract, the consent of the holder of an IP right or licence may be required for its lease or license. Is potentially financially independent. Therefore, if the transferee takes over the material assets or persons engaged in the business, the outsourcing is a transfer of an undertaking and the employees transfer automatically to the transferee. Case law, which is biased towards the protection of employees, provides additional guidance on when employees transfer on an outsourcing. For example, the Dutch Supreme Court s decision NJ/2005/106 of 10 December 2004 ruled that when determining if a transfer of undertaking has taken place, it is important to assess whether the identity of the part of the business that is transferred has remained the same. An example given in this case is the transfer of a customer base. CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook 171
The Netherlands Outsourcing 2007/08 Change of supplier This depends on how the change is structured. If there is a transfer of an undertaking, the employees transfer by law (see above, Initial outsourcing). Termination This depends on the conditions of the outsourcing agreement. If ownership of material assets reverts back to the transferor, this usually implies a transfer of an undertaking, which means that the employees are also transferred back (see above, Initial outsourcing). 8. Please describe the terms on which employees would transfer by law, including any effect on pensions, employee benefits or other matters (including collective agreements) that the transfer may have. General terms On a transfer of an undertaking, employees transfer to the transferee, with the same rights and obligations that are included in their current employment agreements (see Question 7, Initial outsourcing). Pensions 10. What information and consultation obligations arise for the transferor and the transferee in relation to employees or employees representatives? Collective agreements may require discussions with trade unions before starting an outsourcing transaction. This can apply to the transferor as well as to the transferee. In addition, prior consultation with the works council may be required. Companies with 50 employees or more must attempt to establish a works council made up of elected employees (Works Council Act 1979 (Wet op de Ondernemingsraden)). The following decisions, among others, require consultation to give the works council an opportunity to materially influence the decision-making process: Acquisition or disposal of interests in other companies. Termination of activities. Expansion or reduction of activities. Significant changes in organisation. Attracting or extending significant credit. Providing security for material loans. On a transfer of an undertaking, employees retain any pension rights that they had before the transfer. Employee benefits On a transfer of an undertaking, employees retain any employment benefits that they had before the transfer. Other matters On a transfer of an undertaking, employees retain any collective agreements that were in place before the transfer. There is no qualifying period for these rules to apply. 9. What information must the transferor or the transferee provide to the other party in relation to any employees? Major changes to technical facilities (including IT systems). Material financial issues. If the appropriate procedures are not followed, the works council can object to the implementation of management decisions and bring a court action against such a decision. This may lead to expensive delays in implementation and management time. In a number of cases of major change, prior approval (and not just consultation) is required. These include changes to: Remuneration schemes. Performance evaluation arrangements. Labour condition schemes, illness absence and re-integration policies. The transferee must obtain information from the transferor on: Employment terms. History of employees. Absence due to illness. Pension conditions (to calculate whether any back service obligations exist). The release of this information is a matter to be negotiated. Training schemes. Direct employee consultation on work-related issues. Compliance mechanisms. In principle, if the works council refuses to grant permission, no management decision can be reached or put into practice. However, in that case, management can seek alternative permission from the Cantonal Court. The court grants permission where either: The works council unreasonably withheld its consent. There are important organisational or social reasons for the change. 172 CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook
Outsourcing 2007/08 The Netherlands 11. To what extent can a transferee harmonise terms and conditions of transferring employees with those of its existing workforce? The transferee can only harmonise the terms and conditions of the transferring employees to the extent that they are at least equal to those of its existing workforce. This can result in one-off payments to the employees as compensation. The transferee must honour all obligations that flow from the employment agreements. It is possible to negotiate with the transferring employees on their terms and conditions, but they cannot be forced to accept any changes that may be considered less favourable than their existing terms and conditions. Data protection 14. What data protection issues may potentially arise on an outsourcing and how are they typically dealt with in the contract documentation? Personal data protection issues may arise whenever, due to an outsourcing, personal data (that is, all data that can be traced to a natural person) are processed. Processing in this context includes every act entailing handling of personal data. Anyone processing personal data relating to individuals must implement appropriate technical and organisational measures so as to secure it against loss or any form of unlawful processing. Adequate guarantees to this end must be included in the contract between the customer and the supplier. 12. To what extent can dismissals be implemented before or after the outsourcing? In principle, no employees can be dismissed in an outsourcing procedure because it results in a transfer of an undertaking and they therefore transfer automatically under TUPE rules. Employers sometimes try to show that dismissal is not the result of the outsourcing procedure, but is only due to economic circumstances. However, any dismissal on or near the outsourcing s date is subject to the court s additional scrutiny and may not be accepted if it is deemed too strongly related to the (envisaged or newly implemented) outsourcing. Alternatively, employers can try to reach a settlement with the employee and agree to either: End the employment in exchange for severance pay. The court generally accepts this. Place the employee in a section of the business that is not being outsourced. In both cases, the employee s co-operation is required. Depending on the entity that is processing the personal data, the purpose of processing and the content of the personal data, the Personal Data Protection Act 1992 (Wet Bescherming Persoonsgegevens) and/or other specific legislation may apply. In the context of outsourcing specific rules apply that regulate the processing in the broadest sense by the customer and the supplier (in this context called the data processor), which may only take place for specific purposes and under certain conditions. One of these conditions is prior notification to the Personal Data Protection Commission (College Bescherming Persoonsgegevens) or to a data protection officer as defined in the Personal Data Protection Act, although the Exemptions Decision (Vrijstellingsbesluit) may provide for an exemption. Whenever, as a result of outsourcing, personal data is transferred outside the EU to a country which does not have an adequate level of protection (countries which are considered to have an adequate level of protection are listed by the European Commission), a permit must be obtained from the Minister of Justice, even if the standard contractual clauses for the transfer of personal data to third countries based on the European Commission s decisions in this respect are being used. This request for a permit must be filed with the Personal Data Protection Commission. Services 13. In what circumstances (if any) is it possible for the parties to structure the employee arrangements of an outsourcing as a secondment? 15. How is the services specification typically drawn up and by whom? The outsourcing s employee arrangements can only be structured as a secondment if each employee agrees to this. This is because each employee has a basic right to continue his or her activities for the transferee, under section 7:662 and following sections of the Civil Code (see Question 7, Initial outsourcing). The outsourcing market in The Netherlands is strongly customer-driven. The customer, or experts engaged by the customer, generally predetermine services and service levels in as much detail as possible. 16. How are the service levels and the service credits scheme typically dealt with in the contract documentation? See Question 15. Generally, straightforward contractual service credit schemes are used. This means that if a service level is not reached, service charges are deducted in accordance with an agreed formula. How much is deducted depends on the relevant service level and by how much it was missed. CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook 173
The Netherlands Outsourcing 2007/08 Charging 17. Please describe the charging methods that are commonly used on an outsourcing (for example, risk or reward, fixed price, cost or cost plus, pay as you go, resourced-based charges, use of minimum charges and so on). All of the charging methods mentioned in this question can be used. It is unclear which of these is most common, but the customer s position is in many cases strong enough to negotiate a charging method that is directly related to cost. 18. Please briefly describe any other key terms used in relation to costs, such as charge variation mechanisms and indexation. If any form of fixed price is agreed on, it is usually made subject to a form of inflation-based indexation. Customer issues 19. If the supplier fails to perform its obligations, what relief is available to the customer under general law? If the supplier fails to perform its obligations, it is generally possible for a customer to: Demand rescission of the contract and claim damages (wanprestatie). Notice must be given to the supplier, and the supplier must be allowed a reasonable period to repair any breach. replace the managers of the supplier s departments that do not meet agreed service levels. Warranties and indemnities 21. What warranties and/or indemnities are typically included in the contract documentation? Outsourcing agreements usually include, from the supplier, extensive warranties and, to a certain extent, indemnities dealing mostly with specific risks. Typical warranties and indemnities relate to the state of affairs at the end of the outsourcing, such as the: Number of employees that will remain at the end of the contract period. State of the assets at the end of the contract period. The customer will want to seek indemnities for specified breaches of service level agreements and for TUPE-related risks that arise on termination of the outsourcing agreement. It is vital when drafting such indemnities to ensure that they can also benefit any new (replacing) supplier. The supplier usually receives access to a data room, and its contents typically qualify any warranties made by the supplier (see Question 22). Current market conditions (see Question 15) allow for the customer to also give limited warranties or indemnities. These mostly relate to the state of the assets that are transferred if the outsourcing is defined as a transfer of an undertaking. Enforce the supplier s performance of its obligations (nakoming vorderen) by starting court proceedings. A judge may, at the request of the customer, order a penalty for each time period that the supplier continues to fail to perform its obligations. 20. What customer protections are typically included in the contract documentation to supplement relief available under general law? The outsourcing market is customer-driven (see Question 15). Therefore, customer protection mechanisms such as audit rights, forms of quality assurance and reporting are usually already included in the service and service level agreements. Typical additional measures include: 22. What limitations are imposed by national law on fitness for purpose and quality of service warranties? The supplier usually has access to the customer s data room (see Question 21). The disclosure from this must be fair, and will form an exception to any warranties that the supplier gives. The Dutch legal doctrines of reasonableness and fairness are the basis for defining what fair disclosure includes and also form the defining factor in the implementation of quality of service warranties (see also Question 24). Term and notice period 23. Does national law impose any maximum or minimum term on an outsourcing? If so, can the parties vary this by agreement? The right to rescind or terminate the outsourcing-related agreements. Financial penalties, for example, a decrease in fees for the supplier if it fails to meet agreed service levels. Step-in rights, such as rights to: There are no maximum or minimum terms to an outsourcing, as long as these terms are not considered a constraint on competition. regain control of key assets if the supplier becomes insolvent; 174 CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook
Outsourcing 2007/08 The Netherlands 24. Does national law regulate the length of notice period required (maximum or minimum)? If so, can the parties vary this by agreement? a clause that excludes the possibility of terminating due to a material breach can be set aside. Dutch law does not regulate the length of notice required. Contractual freedom is the rule. However, the doctrines of reasonableness and fairness determine whether notice periods are reasonable and fair, in light of the circumstances at the time the notice period is made (see Question 23). If a notice period is deemed unreasonable or unfair, a court may either shorten it or disregard it altogether. If no specific notice term has been agreed, the body of case law offers guidance to determine what a reasonable and fair notice would be, depending on the relevant facts and circumstances. Consideration is given to the: Duration of the outsourcing agreement. Investment made by the supplier. Termination and termination consequences 25. What events are considered sufficient under national law to justify termination of an outsourcing rather than a claim in damages (for example, fundamental breach, repudiatory breach, insolvency events and so on)? 27. What implied rights are there for the supplier to continue to use licensed IP rights post-termination? To what extent can these be excluded or included by contract? Any rights for the supplier to continue to use IP, implied or otherwise, depend on the outsourcing agreement and do not arise from anything else. Any right to continue to use IP after termination of the contract generally only applies to transition activities. 28. To what extent can the customer gain access to the supplier s know-how post-termination and what use can it make of it? The customer typically arranges for specific rights to access and use the supplier s know-how post-termination. The parties usually agree on a nominal value for the use of this know-how, to help secure the position of the customer and the new supplier on termination. Liability 29. What liability can be excluded? In particular, is it possible for the supplier to exclude liability for indirect and consequential loss and also any loss of business, profit or revenue? Examples of events that justify termination of an outsourcing rather than a claim in damages include: Insolvency. Winding up. Change of control. Defaults under other related agreements (cross-defaults). 26. In what circumstances can the parties exclude or agree additional termination rights (for example, for breach, change of control, convenience and so on)? Liability can be limited to specific amounts of damages. Liability can also be excluded in certain cases, such as for force majeure. It is possible to exclude damages arising from consequential circumstances, which in The Netherlands includes loss of business. In that case, it is practical to include a non-exhaustive list of examples of consequential damages. However, liability cannot be excluded for gross negligence or deliberate acts, as this is likely to be contrary to the principles of reasonableness and fairness (see Question 22). 30. Are the parties free to agree a cap on liability? If so, how is this usually fixed? Parties are entirely free to include or exclude other termination rights. The only limits are that the: Effect of the inclusion or exclusion of termination rights must not be contrary to law or public order. Enforcement and exclusion of termination rights is subject to the legal doctrines of reasonableness and fairness (see Question 24). The following are examples of the effect that these doctrines may have: Parties are free to agree caps on liability. These limitations may not apply for gross negligence or deliberate acts. The basis for fixing caps is usually the assessed risk involved for the customer, which in turn very much depends on the types of services involved. There are no hard and fast rules although it is common for discussions to be based on multiples of annual fees. a customer may argue that it has made substantial investments during the term of the contract and may have a right to reimbursement if the contract has been terminated; CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook 175
The Netherlands Outsourcing 2007/08 Tax 31. What are the main tax issues that arise on an outsourcing in relation to: Transfers of assets to the supplier? Transfers of employees to the supplier? Value added tax (VAT) or the equivalent sales tax on the service being supplied? Other significant tax issues? Transfers of assets to the supplier Transfers of employees to the supplier See above, Transfers of assets to the supplier. VAT or sales tax See above, Transfers of assets to the supplier. In the banking and insurance sector, specific attention must be paid to VAT, as banks and insurance companies are exempt from charging VAT for their services, but services given to banks may incur a VAT charge. This can result in an increase in costs for the ultimate consumer of about 20%. Other See above, Transfers of assets to the supplier. All outsourcings require tax assessment at an early stage. However, most major outsourcing transactions in The Netherlands involve international tax assessments. Therefore, it is not possible to provide much detail on the main tax issues that arise. 176 CROSS-BORDER HANDBOOKS www.practicallaw.com/outsourcinghandbook