LAW CLINIC: Body blow for outsourcing

LAW CLINIC: Body blow for outsourcing

Outsourcing of services by both corporate and government entities has grown strongly over the last few years, and nowhere more strongly than in the IT sector. Outsourcing may be favoured because it results in a better level of service delivery, frees up funds which would otherwise be tied up in plant, or because an outside service provider can perform the work more cheaply.

Workplace Relations Act

A recent decision of the federal court has cast a long shadow over outsourcing arrangements that are entered into for the purpose of reducing labour costs. If the work which is sought to be outsourced is currently performed by employees who are entitled to the benefits of industrial agreements, the decision to outsource might breach the Workplace Relations Act (the "Act"). Worse still, the employer might find itself defending legal action from both the former employees and the outsourcing provider.

The decision

In Australian Municipal, Administrative, Clerical and Services Union v Greater Dandenong City Council, Justice Madgwick was called upon to consider whether the council had breached section 298K of the Act. That section provides that an employer must not dismiss an employee, or alter the position of an employee to the employee's prejudice, if one of the reasons for so doing is a "prohibited reason". The relevant prohibited reason alleged to exist in this case was that the employees of the council were "entitled to the benefit of an industrial instrument or an order of an industrial body".

"Industrial instrument" includes awards, enterprise agreements and individual workplace agreements, whether registered with the federal system or by a state industrial commission.

In this case, the council had called for tenders for providing health and community care services. It received two responses: one from its own staff, and one from an external tenderer ("Silver Circle"). The evidence showed that Silver Circle was able to substantially undercut the "in-house" bid on price because the award which applied to Silver Circle's employees was less favourable to its employees than was the enterprise bargaining agreement which bound the council. Silver Circle was awarded the tender, and the council's employees were made redundant.

One of the council's arguments was that they had not made the "in-house" employees redundant because they were entitled to award conditions; rather they had simply considered overall costs. However, Justice Madgwick found that the notion of "entitlement to the benefit of an industrial instrument" must include the quantum of such a benefit. Accordingly, because one of the reasons for the non-selection of the "in-house" bid was price, and because the price was determined by the entitlements of the council employees under the enterprise bargaining agreement which bound the council, then one of the reasons for the non-selection of the bid was a prohibited reason.

It should be noted that section 298K of the Act is infringed where one of the reasons for the conduct is a prohibited reason, even if that reason is not a dominant or major reason.

The implications

This decision means that where any employer:n Currently engages employees who are employed subject to an industrial instrument, andn Makes a decision to outsource the work performed by those employees, andn Is influenced in making that decision by the fact that it will be cheaper to outsource the work than to continue to have it performed by the current employees, then the employer is likely to be in breach of section 298K. The orders which can be made include the reinstatement of employees, and orders requiring the payment of "compensation of such amount as the Court thinks appropriate". One of the matters of greatest concern arising out of Justice Madgwick's decision is his finding that the fact that the council had now entered into a contract with Silver Circle did not operate as a bar to the reinstatement of the employees. If the employees are reinstated, Silver Circle may well have an action against the council for breach of contract.

The implications of this case will widen as more employees within the IT sector gain the benefit of industrial instruments. It is notable that the Australian Services Union, which has enjoyed recent wins in introducing collective agreements in the call centre sector, has foreshadowed that the IT sector is the next area of campaign action.

What you can do about it

If you are a provider of outsourced services (like Silver Circle) you need to ensure that the contract for providing those services gives you adequate protection in the event that your client is forced to re-engage its employees, thereby breaching the contract. If you engage outsourcing providers, you will need to ensure that decisions to outsource are based only upon factors such as quality of service and delivery, and cost savings in areas other than labour costs. Timely and specialist legal advice at the commencement of employment, contracting or outsourcing arrangements can save a great deal of time and money down the track.

With thanks to Angus Macinnis, solicitor, Barker Gosling. The material contained in this article is no more than general comment. Readers should not act on the basis of this material without professional advice relating to their particular circumstance.

Mark Addison is IT Parner at Barker, Gosling, Lawyers. Reach him at

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