CHECKLIST: KEY ISSUES IN HUMAN RESOURCE OUTSOURCING AGREEMENTS

CHECKLIST: KEY ISSUES IN HUMAN RESOURCE OUTSOURCING AGREEMENTS

CHECKLIST: KEY ISSUES IN HUMAN RESOURCE OUTSOURCING AGREEMENTS RELIABILITY - 99% ACCURACY SAVINGS ECONOMIES OF SCALE INTERNATIONAL STANDARDS AUTOMATED PROCESSES RISK-FREE STATUTORY COMPLIANCE EASE OF TRANSITION ROLL OUT EXPERT (SUBJECT MATTER EXPERT) SUPPORT EMPLOYEE ASSISTANCE 24/7 HELP DESK END-TO-END PAYROLL OUTSOURCING SOLUTION WITH MARKET LEADING HR TECHNOLOGY, CONSOLIDATED REPORTING AND SUPPORT FOR WORKFORCE MANAGEMENT. FULLY COMPLIANT STANDARDISED PROCESS ACROSS PAYROLL, TIME & ATTENDANCE MULTIPLE INDUSTRY VERTICAL HR PRACTICE 1. Structure of the Human Resource Outsourcing (HRO) Agreement Determine how best to structure the transaction or transactions. A single-services agreement. A master agreement with documents underneath applicable to specific service streams or service towers. For example, a master agreement with overarching terms, then separate service stream documents that reflect the scope, service levels, and fees applicable to the specific service streams. This is often used for multi-process transactions. Separate site-specific, country-specific, or entity-specific service agreements. These are preferably agreements entered into under a global master agreement. Separate agreements for business process transformation, development, and ongoing managed services. 2

Separate agreements documenting the terms applicable to a joint venture/strategic alliance and the terms applicable to ongoing human resource services. What is the interrelationship between these agreements if separate (e.g., cross-termination, payment)? Factors that may affect the agreement structure include: Scope of services: Will Vendor be providing any business process transformation or development services? Geographic scope: Single country versus international agreement? Scope of services at specific sites: Will all Customer sites receive the same services or will each Customer site receive different services? Types of entities receiving/delivering the services: Is the contracting entity for each of the parties able to bind the entities that will receive/deliver the services, or must each of the recipient/delivering entities agree to be bound by the master agreement? Cost allocation: Are there any cost allocation requirements internal to customer that would drive separate site/entity agreements? Taxes: Are there any tax requirements that would drive separate service agreements (e.g., local billing)? 2. Contracting Party Who will sign the agreement on behalf of Customer? On behalf of Vendor? If there is a master agreement with separate service agreements, will the same party that signs the master agreement sign the services agreements? 3. Entities Receiving Services from Vendor Determine who will receive services from Vendor. Entities may include: Customer affiliates Joint ventures/alliances Contractors Suppliers Business partners Clients of Customer Will Customer have the option of adding/deleting entities over the term? How will mergers/acquisitions/divestitures be handled? What will Customer s and Vendor s ongoing obligations be? Note: This checklist is intended to illustrate the types of issues that may arise in connection with human resource outsourcing transactions. The issues identified in this checklist, while comprehensive, may not cover all of the issues relevant to a particular transaction. Issues will vary depending on the type of business process being outsourced and the scope of the outsourcing transaction. This checklist or any part thereof should only be used after consultation with your legal counsel, prior to entering into or negotiating any outsourcing transaction. 3

4. Entities Providing Services to Customer Determine which entity (or entities) will provide the services to Customer. Will there be any subcontracting/teaming relationships? For international deals, how will Vendor provide resources/services in each country? Will Vendor use affiliated entities or subcontractors? What are Customer s rights to approve/remove subcontractors? Which entity(ies) will have performance/indemnification obligations? 5. Term What is the commencement date of services? Will there be one commencement date for all sites? Will there be one commencement date for all services (e g., business process reengineering, development and ongoing human resource services)? How long is the term of the agreement? Will there be a pilot period? What are each party s renewal rights? What type of notice is required for renewal? 6. Scope of Services Determine the general scope of services to be provided by Vendor. For example: Payroll process Payroll financial services Governmental reporting Timekeeping solutions Customer service Benefits management/administration Executive compensation management HR systems development Training Learning services Job posting and placement Outplacement Employee relations Employee absence management Resource planning Strategic HR planning Employee data management Expatriate administration 4

Determine those human resource services that will be provided in house by Customer or to Customer by a third party. Describe in detail the human resource services (typically by service to be provided by Vendor). Define Customer s responsibilities with respect to the services to be provided by vendor (i.e., definition of requirements, strategic direction, approvals). Define existing and future requirements (e.g., capacity requirements, number of employees, business changes). Allocate managerial and financial responsibility. 7. Payment Services How will overpayments, underpayments, and duplicate payments be handled? How will third-party claims be handled? 8. Transition Plan How will the transition of services to Vendor be handled? Will there be any redundant/parallel environments? Determine the performance standards during transition. How long will the transition period be? 9. Methodologies Assess methodologies to be used by Vendor. Are the methodologies proprietary to Vendor or licensed from a third party? If licensed from a third party, are there any use restrictions? What are Customer s rights to use during the term and after expiration/termination? Will any of Customer s methodologies continue to be used during the term of the transaction? What are Vendor s use rights (e.g., use in connection with services to Customer only; use in connection with other customers)? How will Vendor transition Customer to Vendor s methodologies (if applicable)? How will the methodologies introduced by Vendor be integrated with Customer s existing and future methodologies (with respect to the applicable business function as well as other business areas, e.g., information systems)? Will Vendor be developing/providing any new methodologies? If so, how will ownership/use rights be allocated? How will new methodologies be rolled out (e.g., define time period, consequences for failure to meet deadlines, each party s responsibilities)? 5

10. Technology Assess technology to be used by Vendor. Is the technology proprietary to Vendor or licensed from a third party? If licensed from a third party, are there any use restrictions? What are Customer s rights to use during the term and after expiration/termination? Will any of Customer s technology continue to be used during the term of the transaction? What are Vendor s use rights (e.g., use in connection with services to Customer only; use in connection with other customers)? Will the environment be dedicated/shared? How will Vendor transition Customer to Vendor s technology (if applicable)? How will the technology introduced by Vendor be integrated with Customer s existing or future technology? Is Vendor technology compatible with technology used by Customer s information system group? Will Vendor be developing/providing any new technology? If so, how will ownership/use rights be allocated? How will new technology be rolled out (e.g., define time period, consequences for failure to meet deadlines, each party s responsibilities)? 11. Assets Will Vendor be purchasing any of Customer s assets (e.g., equipment, real estate)? If so, when will purchase be made (e.g., on date of signing)? How will assets be valued (e.g., book value, fair market value)? Is the transfer of assets necessary in conjunction with the transfer of employees in order to constitute an automatic transfer under the particular country s employment/redundancy laws? 12. Projects Identify any projects that Vendor will be responsible for implementing/managing as part of the transactional process. Will Vendor be responsible for any business process reengineering in connection with its provision of human resource services? If so, what are each party s responsibilities? What are the consequences if the reengineering is not successful or performed by deadlines specified? What is the interrelationship between the vendor s business process transformation responsibilities and the Vendor s human resource service responsibilities? Are they cross-terminable? Will Vendor be responsible for any new implementations? If so, what are each party s responsibilities? 6

What are the consequences if the reengineering is not successful or performed by deadlines specified? Which party will be responsible for purchase/license of third-party methodologies/technologies (if applicable)? 13. Integration How will the methodologies/technologies introduced by Vendor be integrated with other methodologies/technologies used by Customer? Have other Customer business areas been contacted for input (e.g., information systems, human resources)? 14. Transfer of Employees (see also Employee Transfer Checklist ) Determine whether any or all Customer employees will be offered employment by, or transitioned to, Vendor or a Vendor subcontractor. Identify group of retained employees. Review Customer s severance/redundancy policy, if any, to determine whether a transition to Vendor may invoke severance obligations. Are there any claims with respect to any of the transitioned employees? Compare Customer and Vendor benefits. Are any adjustments necessary? Does Vendor require any special screening of employees (e.g., drug testing)? Will Vendor require transitioned employees to sign an employment agreement? Develop an employee communication plan. Determine whether any stay bonuses/incentives are necessary. 15. Project Staff Identify management structure of Vendor as well as Customer in connection with the provision/ receipt of services. Are there any limitations/restrictions with respect to reassignment/replacement of key Vendor personnel? Are there any limitations/restrictions with respect to churning of employees? How will Customer complaints regarding Vendor personnel be handled? Are there any special clearances of Vendor personnel necessary? Are there any limitations/restrictions with respect to subcontractors? Are there any immigration/visa requirements? 7

16. Retained Assets Identify which assets Vendor will manage and, of those assets, which assets Vendor will have financial responsibility for. Identify which assets Customer will continue to manage and, of those assets, whether Vendor will have any financial responsibility. How will the parties act in the event it is not clear where a problem originates from (e.g., root cause analysis)? Agreements to be reviewed Identify any third-party agreements/relationships that may be impacted by the outsourcing, including: Employment agreements Consulting agreements Maintenance agreements Subcontracting relationships Other service agreements Methodology/technology licenses Equipment/asset leases Real estate leases/subleases Are there any restrictions with respect to third-party management/access or assignment to a third party? What are the terms relating to termination/renewal? What are the pricing terms and will they be impacted by the transaction? Develop a strategy for notifying third parties, if applicable. 17. Third-Party Consents Are any third-party consents necessary in connection with the commencement of the transaction? If so, which party is responsible for obtaining such consents and how will financial responsibility be allocated? How will third-party consents be obtained upon the expiration/ termination of the transaction (in order to transition agreements/assets back to Customer or Customer s designee)? How will financial responsibility be allocated? 18. Performance Standards Identify those services that will have performance standards (e.g., paycheck delivery, customer service). How will Vendor s performance be measured? Will existing performance standards be used, or will performance standards be established on a going-forward basis? 8

Identify any permitted downtime and testing. How will failures to meet performance standards be handled (e.g., liquidated damages or termination)? Will there be any procedures for assessing/determining causes of failures to meet performance standards (e.g., root cause analysis)? What performance standards will apply during transition/implementation? 19. Customer Satisfaction Will Vendor be responsible for any type of customer satisfaction reporting? Determine pool of employees surveyed (e g., management, end users). How will the results of such surveys be used (e.g., as basis for performance standard)? 20. Benchmarking Determine whether the agreement will include any benchmarking procedures (e.g., benchmarking of services or prices). Develop benchmarking procedures (e.g., scope of benchmark, group against which services/prices will be benchmarked). How will benchmarking results be reviewed and how will changes, if applicable, be implemented? 21. Compliance Issues Identify any compliance issues arising from law, rule or regulation. Add data protection provisions, including business associate agreements. Determine which party is responsible for ensuring compliance. Allocate costs of compliance due to changes in laws, rules, or regulations after commencement. Identify any license/permits required to be obtained by Customer and/or Vendor. Consult with legal, regulatory, tax and audit departments. 22. Customer Responsibilities Identify Customer s responsibilities (e.g., provision of supplies, computers, parking). Will Customer be providing any space/facilities to house Vendor s employees? What are the terms of Vendor s use (e.g., sublease)? 9

Is Customer retaining staff necessary to perform the retained responsibilities (e.g., management, definition of requirements, approvals)? 23. Service Locations Where will Vendor be providing the services from? If such locations are not Customer locations, are there any restrictions on where Vendor may provide services from? Are there any rights of Customer to require Vendor to relocate a service location (for tax, security, or other reasons)? Will the service locations be dedicated to Customer or shared facilities? Describe physical security requirements. Are uniforms or other identification required? Does Customer or Vendor have specific codes of conduct? How will breaches of security be handled? Are there any environmental issues? 24. Management Procedures Will the parties develop management procedures to be used in connection with the provision of the services? How will change control be handled? Identify the performance and other reports that Customer currently generates or receives with respect to the services being outsourced. Identify those reports that Customer wishes to receive from Vendor. Establish deadlines for each report. 25. Data Discuss procedures for handling Customer data. Identify any laws/regulations pertaining to data privacy. What are Vendor s access rights? Is employee consent/notice required? How will errors in Customer data be handled? Describe data security requirements at service locations. How will breaches of security be handled? 10

26. Proprietary Rights Establish Vendor s right to use during the term and after expiration/ termination of the agreement Customer proprietary methodologies and technology. Establish Vendor s right to use during the term and after expiration/ termination of the agreement methodologies and technology licensed by Customer from third parties and used in connection with the provision of the services. Establish Customer s right to use during the term and after expiration/termination of the agreement Vendor s proprietary methodologies and technology. Establish Customer s right to use during the term and after expiration/termination of the agreement methodologies and technology licensed by Vendor from third parties and used in connection with the provision of the services. Establish each party s ownership/use rights with respect to work product developed or acquired as part of or in connection with the provision of the services, including: Deliverables Data Scripts Knowledge bases Work product Modification and enhancements to preexisting intellectual property Establish any restrictions governing the use of confidential information. Establish any restrictions governing the use of mentally retained information. Discuss whether noncompetition provisions are appropriate. 27. Audit What are Customer s rights to audit the services and the service locations? How often may Customer exercise any such audit rights? How will the results of any such audit be dealt with? 28. Fees Invoicing Determine the applicable fee structure. How will fees be paid (e.g., in what currency, in what manner, and according to what schedule)? How, when, and to what Customer entity(ies) will invoices be issued? Determine the degree of detail to be included on invoices. Customer should assess actual cost savings, if any. Such analysis should include any new taxes, employee transfer costs, and other expenses resulting from the outsourcing. Other fee provisions: 11

For international deals, is there any currency risk? How will disputed fees/credits be handled? What are the parties obligations to perform in the event of a dispute? How will changes in business volumes be handled? 29. Additional Services How will the provision of additional services be handled? Will Vendor be required to submit a bid? Will there be any rights of first refusal granted to Vendor? 30. Insurance Specify Vendor s insurance requirements, e.g.: Errors and omissions Liability Worker s compensation Umbrella Specify any specific bonding requirements. 31. Termination Consider early termination rights, e.g.: Termination for convenience in whole Partial termination for convenience Termination upon change of control of Vendor Termination upon change of control of Customer Termination for breach Termination for nonpayment Termination for failure to provide critical services Termination for failure to meet the performance standards Termination for substantial changes in business Termination upon the occurrence of a regulatory event Cross-termination with other agreements Determine whether and in what instances termination fees are applicable. If so, establish formula for determining applicable termination fees. 12

32. Exit Rights Determine each party s ongoing rights after expiration/termination with respect to proprietary and third-party methodologies, technology, equipment, facilities, subcontracting arrangements, and third-party service agreements. Determine which party will be responsible for transfer/assignment fees imposed by third parties. If Customer has right to purchase certain Vendor assets used to provide the services, how will the purchase price be determined? 33. Termination Assistance Determine the types of assistance Vendor and/or its subcontractors will provide Customer upon expiration/termination. Determine duration of Vendor s termination assistance obligations. How will termination assistance be paid for (e.g., fee schedule, time schedule for payment)? 34. Liability Provisions Assess liability exposure, particularly with respect to: Overpayment Underpayment Duplicate payments Third-party claims Incorrect payment of claims Determine any liquidated damages to be imposed upon Vendor (e.g., for failure to meet performance standards, for failure to meet implementation schedules). What are each party s indemnification obligations (e.g., for claims of infringement, employee claims)? Determine the representations and warranties to be made by each party. 35. Dispute Resolution How will disputes be handled? Will the agreement include an escalation procedure? Will unresolved disputes be handled through arbitration or litigation? 13

36. Business Recovery What are Vendor s business recovery responsibilities? What are Customer s existing business recovery plan? Will Customer s plans be terminated? Specify response times for delivery of business recovery services. Describe escalation procedures. 37. Assignment Specify each party s right to assign its rights/obligations under the agreement in whole or in part. Will there be any special assignment rights in the event of a merger / acquisition / divestiture? May either party assign to an affiliate / related entity? 38. Solicitation of Employees Will there be any limitations/restrictions on Customer s or Vendor s right to solicit and/or hire the other party s employees? When will such limitations/restrictions apply (e.g., during the term, after expiration/termination)? Will there be any exceptions for blind solicitations (e.g., newspaper advertisements)? 39. Miscellaneous Provisions Notices: How will notices be given (e.g., by hand, by facsimile)? To whom (e.g., to business manager and/or counsel)? Publicity: Limitations/restrictions on each party s ability to make public statements regarding the other party and/or the transaction. Governing Law: Determine which state/country law will govern the transaction (or if international transaction with multiple documents, determine which law will govern each part of the transaction). Venue: Will there be a requirement that any action be brought in a particular venue? Import/Export: Provide any limitations/restrictions on the export/ import of data and/or technology. 14

Interpretation of Documents: How will the transaction documents be interpreted in the event of a dispute (e.g., the main agreement will take precedence over the exhibits/schedules, change orders will take precedence over earlier dated documents)? Counterparts: Specify whether the various transaction documents may be executed in counterparts. Relationship of the Parties: Specify that Vendor is an independent contractor to Customer and that the provision of services does not constitute any type of partnership or joint venture (unless that is expressly the intent). Severability: Specify that if any provision is held to be invalid, the remaining provisions shall remain in full force and effect. Waivers: Specify that any delay or omission does not constitute a waiver of rights and that any waiver should not be construed to be a waiver of a subsequent breach/covenant. Entire Agreement: Specify that the transaction documents constitute the entire agreement between the parties. Amendments: Specify how the transaction documents may be amended (e.g., by writing signed by both parties). Survival: Specify which provisions of the agreement will survive termination and/or expiration of the agreement. Third Party Beneficiaries: Expressly state that there will not be any third-party beneficiaries under the transaction documents or, if there will be third-party beneficiaries, identify such beneficiaries. Covenant of Further Assurances: Expressly state that each party will execute any documents or perform any actions necessary to effectuate the purposes of the agreement. 15

Outsourcing Brokers e-mail: hello@quorumcapital.com www.quorumcapital.com v. 1.1/ 12 / 2014 In association with Member of National Outsourcing Association Copyright 2007 QUORUM CAPITAL and/or its affiliates. All rights reserved. Published in the EU. This document is provided for information purposes only, and the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission. QUORUM CAPITAL, QC are registered trademarks of QUORUM CAPITAL. Other names may be trademarks of their respective owners. Vantage Point PO 360 and Creating Excel Mindsets are trademarks or registered trademarks of MONITOR Nexus Group. V3-14 QRM Diligence Pack