Common Legal Issues with Off-Shoring Your Work

RyanD
August 2, 2013

Companies regularly outsource different business processes, such as payroll, insurance claims, accounts payable/receivable, mortgage servicing and even tax return administration, to Foreign Service providers. This gives them the freedom to focus on other important areas of a project in which they have true expertise. Apart from the fact that there may be misuse of data provided to the offshore suppliers, there are many legal implications. Here are a few of them.

Loss of Data Privacy
One of the major considerations of off-shoring is data privacy. There is a possibility of misuse of data by the offshore company’s employees. The outsourcing company has to make security and privacy arrangements to keep customer information confidential.

The company should be aware of the offshore jurisdictional law to the outsourced work. For example, if a Canadian company plans to outsource back-office processing work to an offshore supplier, it has to consider intellectual property laws of both countries. These laws vary from one country to another.

Additionally, one country’s approach to privacy will differ from another’s. When the company is sending its customers’ data abroad, it should consider the requirements of jurisdiction for both countries. There may be conflicts that can create legal lawsuits.

Differing Taxation Laws
Another consideration is taxation laws that vary from country to country. Technology is a major outsourced area. European companies find good work quality in countries such as China, Russia, India, Malaysia and the Philippines, which also provide low-wage workers. In fact, considering software demands, most Fortune 500 companies use offshore outsourcing to save major labor costs.

Before outsourcing work, the parent company must consider the viability of such an option. Apart from data privacy risk and varying intellectual property laws, there are differing taxation laws. The taxation laws in India, for example, are unique and greatly affect off-shoring decisions.

It is essential for the parent company to find out tax implications they’ll have to deal with. This is unavoidable and an important legal consideration. The company should find out what tax provisions would be appropriate in the outsourcing legal contract.

Dispute Settlement
This is another major legal consideration. For example, if an American parent company, which has outsourced work to an Indian service provider, wants to sue its outsourced partner, there would be disputes. Neither company would want to travel extensively to the other country, leading to a major problem. As with all legal cases, the case will be fought where it is filed. Also to be considered is the fact that both countries have different legal systems.

It is essential for the parent company to include reference to the method of dispute settlement while crafting a contract with the offshore company. This can help avoid dispute problems later on.

Differing Governance Rules
Governance rules vary from country to country. The parent company will have to ensure that it includes the legal systems of both countries in the contract. There is simply no universal legal system governing all countries. The outsourcing company will have to ensure that the outsourced company adheres to the legal system of both countries. This is essential for sorting all outsourcing legal issues.

Whether it is performance measurement, data privacy or any other statutory requirement, the business relationship will be more successful only if the contract is designed after due consideration of the legal systems of both countries. This will also prevent any disputes or lawsuits.

Before outsourcing, the parent company should have a clear strategy. It should work out all basic processes and goals and ensure that the offshore company understands it well. All legal issues and the work involved must be clearly spelled out. Often, a company will design a training strategy specifically to bring the outsourced company’s employees up to speed. These trainings may include work specifications and expectations, as well as proper contract administration and risk management. Outsourcing may sound like an ideal strategy, but it can be very complex; understanding the above issues will help ensure off-shoring success.

This article was written together with Robert Tritter, an aspiring lawyer. He writes this on behalf of Hawthorne Global, your number one choice when looking for freight forwarding services when shipping your products internationally. As a company that understands that your work doesn’t just involve processes in the United States, they are sure to help you with your various projects and operations.