Outsourcing may be 'in,' but it's not always easier
Just as in the fashion industry, new fads come and go in business. Not so long ago virtually everybody felt a need to own shares in the new-technology sector. Many learned the hard way. Although a popular buzzword, outsourcing appears not to be just a passing fad, but a trend that is here to stay. With careful legal and tax planning, outsourcing can provide sound financial benefits for companies.
Outsourcing can allow firms to have their cake and eat it too by reducing human resource costs and using specialists for specific tasks. As simple as it would seem to hire outside professionals to take care of jobs formerly performed in-house, even the most mundane service requires a thorough analysis before being outsourced. For example, many companies turn to professional headhunters to find the right employee. In seeking such assistance, it may not have occurred to you to consider the legal ramifications under Polish law. Although you would be perfectly right not to question a headhunter's ability to locate the right employee for you, you might be surprised to learn that headhunters may not act on behalf of an employee. Seeking employment for an individual is restricted to licensed agencies that provide their services free of charge. Generally speaking, many activities that may be performed by a company internally without any regulatory restrictions may require special permission when outsourced.
Before engaging the services of an outside professional, you should first determine your needs and define the areas of your business in which you need outside assistance. Once you have identified your goals, you should determine the legality of outsourcing the particular service, along with the basic requirements the outside contractor should satisfy. It may not be technically illegal to hire an outside security company that does not possess the requisite license, but its outcome would likely come back to haunt you. You would be lucky if you only lost the services of the security company after an inspection by the relevant authorities. In the worst-case scenario, you could be held liable for any damage the security company caused to your clients' property because you hired a company that was not properly licensed.
One of the most significant restrictions on the ability of a company to outsource a given activity is found in the Act on Personal Data Protection. You, as the personal data administrator for your client, may entrust the processing of data to another entity on the basis of a separate written agreement. However, you will have to inform the person whose data is being outsourced about the party to whom the data is being transferred. Moreover, you would be held liable for any non-compliance by the outside service provider with the statutory provisions on data protection. The service provider would only be liable to you for breaching the terms of the contract, whereas you would be liable to everyone else.
The real minefield involves the outsourcing of specific services by financial institutions, such as banks, insurance companies, investment and pension funds, and brokerage houses. Despite the fact that outsourcing of these services might be perfectly legal for most companies, certain legal limitations apply to financial institutions. In other instances, a company's clients may need to give their consent to outsource a given function.
In addition to the general obligations on the protection of personal data, financial institutions are also subject to additional regulatory confidentiality requirements. Generally speaking, they may not reveal data related to their clients and the financial services provided to them. This obligation to keep certain information confidential is subject to several exemptions. These exemptions are scattered among a number of laws, but they usually permit most financial institutions to outsource the day-to-day performance of certain routine administrative functions to another party. Additionally, financial institutions may outsource the distribution of their products. However, hiring an agent may be subject to additional legal requirements and usually should be done under the supervision of the relevant regulatory authority.
Certain key functions of a financial institution, however, may not be outsourced under law. In particular, a financial institution may not outsource services that directly generate a financial product for distribution to clients, such as accepting deposits to bank accounts.
In summary, the services that you might want to outsource may be divided into three different categories. The first group includes activities that may be performed without the need to obtain regulatory approval, such as advisory services, office services and many human resources services. The second group includes those activities that may be provided after meeting certain regulatory requirements, such as notification to clients and the relevant regulatory authorities and verifying that your service provider has satisfied all necessary licensing requirements. Finally, upon reviewing all the legal aspects of your proposed outsourcing project, you may discover that yet other activities may not be outsourced at all under Polish law.
Once you have a clearer picture of what you may and may not do, you should consult your tax and legal adviser as to the tax ramifications of the planned project.You should always keep in mind that the proposed outsourcing project may not lead to the desired financial and tax advantages. Only after completing a thorough analysis will you be in a position to decide if it makes financial sense and if it is legal.
Finally, you will then be ready to negotiate a comprehensive contract in which your interests are protected vis-a-vis the outside service provider. You should be assertive as to the scope of the provider's responsibility, not only for the timely and accurate provision of services, but also for any potential liability resulting from any damage caused to you or a third party.
This article has been prepared by Lejb Fogelman, the managing partner of Hunton & Williams' Warsaw office, with the assistance of Maciek Zalewski, an associate attorney.
