Outsourcing occupational health
Andrew Crawford and Anthony Fincham of lawyers Cameron McKenna look at the legal issues HR departments need to consider when outsourcing occupational health.
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The government has made widening access to OH support a key target in the national OH strategy.
A number of employers currently providing a full range of in-house OH support are looking to outsource the service.
Outsourcing OH raises a number of employment issues for HR departments, including many connected with TUPE and pension rights.
Medical confidentiality also needs to be considered when contracting out sensitive services such as OH.
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This year is a critical one for the government's long-term strategy on occupational health (OH). The strategy, Securing Health Together, aims to reduce ill health caused or made worse by work, and boost the proportion of employers using occupational health (OH) support by 10% by the end of 2003.
A Health and Safety Executive (HSE) survey last year1 found that OH services are most developed in larger companies, particularly in the motor and drug industries, where in-house teams have been built up to provide the full range of OH support. However, some of these organisations are becoming increasingly interested in outsourcing this function to an external OH provider, possibly to save costs but also in a move to improve standards. Barely a month seems to go by without news of a high-profile employer signing up with an external OH service to provide employee medical support.
A recent study2 by the Work Foundation found that, of 15 key personnel responsibilities, OH is the most likely to be contracted out - slightly more than half of the organisations surveyed stated that employee medical support is bought in from an external provider. Just over one-third of employers in the HSE research used external agencies to provide OH, and in three-quarters of cases this OH support is obtained from agencies in the private sector. This finding is supported by interviews held as part of the research, where the providers chosen during an outsourcing exercise were mostly from the private sector.
Why are we outsourcing?
Careful advance planning is vital when considering outsourcing any in-house function involving professional staff, such as OH, if disruption to the existing service is to be avoided. For example, before embarking on an outsourcing it is important for both the future customer of the OH service (the current employer of OH staff) and potential bidders to clarify the objectives of the outsourcing. These might include:
maintaining the status quo;
improving standards;
changing the method of the provision of services;
saving costs; and
reducing headcount.
Clarifying the purpose of outsourcing OH will reduce the risk that potential bidders for the contract get a confused message.
It is also essential at an early stage of discussions on outsourcing for the customer of the future external OH service to identify who, within its organisation, will be responsible for "managing" or "owning" the contract. The amount of support he or she will have from colleagues during the negotiations of the outsourcing must then be assessed.
Transferring staff
If staff are being transferred to the new external supplier, they will need to be identified in the relevant business unit at an early stage of negotiations. Particular care will be needed to ensure that seconded staff and relevant employees in other divisions of the company are included in this identification process. For example, employees in the IT division who are wholly devoted to maintaining staff medical records are likely to be included in this group.
Having identified the employees, it is necessary to ascertain whether the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) apply to the outsourcing. TUPE will usually apply when:
a service is outsourced, or where there is a change of service provider; and
there is a transfer of a business, or a distinct part of a business, which retains its identity in the hands of the transferee (the external OH provider).
In labour-intensive operations, where the true essence of the business lies largely in the skills of the workforce, a prime consideration will be whether the employees actually transfer. This creates a "chicken and egg" legal situation. The Court of Appeal has twice considered cases where a transaction has been structured so that the employees are not permitted to transfer, in an attempt to avoid TUPE applying. In these circumstances TUPE was held to apply.
Other relevant factors are the extent to which premises, office equipment, computer programmes, intellectual property generally, the benefit of contracts and goodwill pass to the external OH provider.
If the activity being outsourced contains the necessary elements of a business, and can be separated from the other activities of the outsourcing company, it is likely to form a discrete part of the business so that TUPE is likely to apply. When TUPE applies to a transfer of a business (or part of a business), those employed in the business will transfer automatically to the supplier on the same terms and conditions of employment. The dismissal of an employee for a reason connected with the transfer is automatically unfair under the unfair dismissal legislation unless it can be shown that it is for an economic, technical or organisational reason entailing changes in the workforce.
Assume TUPE applies
As a general proposition, HR departments should assume that TUPE applies in the outsourcing of an OH service. Taking the approach that employment protection does not apply is likely to be controversial and harmful to employee relations, particularly where trade unions are recognised, and might well be subject to legal challenge.
Both the potential customer of the newly provided external OH service and its provider will also need to consider:
whether the key staff involved in managing the contract automatically transfer to the service provider. If so, steps need to be taken for the new external service provider, the outsourcing customer and the relevant staff to agree that the key staff will be retained by the outsourcing company;
whether there are any part-time OH staff who also work in a different capacity elsewhere for the same employer; and
whether the external OH supplier or service provider have existing specialists which mean that not all of the outsourcing company's staff will be required by the service provider.
Pension issues
The pension rights of transferring staff also need to be considered early in the outsourcing process. Although occupational pension schemes are excluded from TUPE, the preservation of enhanced redundancy rights connected to pension entitlements, for example, will need to be reviewed. Many occupational pension schemes provide early retirement benefits that can be paid on redundancy after a particular age, but before the normal retirement age.
In the Beckmann case in June 2002, the European Court of Justice held that the pensions element of a redundancy package did transfer under the Acquired Rights Directive (the original EC Directive that TUPE implemented). In the light of this decision it will be necessary for both parties in any outsourcing to identify that part of the pension "pot" which relates to the benefits payable before retirement when agreeing funds to transfer.
In order to avoid last-minute pension fund negotiations before transferring OH services, it is advisable for the existing employer of OH staff to impose a condition on potential bidders to provide broadly comparable benefits to employees in future. The employer may also want to negotiate the option for transferring OH staff to transfer into the external provider's pension scheme. In this case, discussions will also need to take place on the amount of funds to be transferred to the external provider's scheme to cover accrued rights of transferring staff.
Keeping staff informed
Another consequence of TUPE is that the existing employer has an obligation to inform and consult with transferring staff. If it fails to do so, any affected employee may obtain what is known as a protective award of up to 13 weeks' pay, and, unlike redundancy and unfair dismissal compensation, there is no statutory limit on the amount of pay for the purposes of this calculation.
Consultation must take place with "appropriate representatives" from the trade unions where they are recognised or, in other cases, representatives elected by the workforce. The employer has an obligation to afford a reasonable opportunity to elect representatives. The employer must consult with the recognised trade unions where they exist, regardless of how many of the affected employees belong to those unions - which will often not be known to the employer in any event.
A potential difficulty during this consultation is maintaining business confidentiality. This is not addressed in the TUPE Regulations. In practice, an employer may be willing and able to impart information to employee representatives on a confidential basis - for example, the identity of the potential external OH provider. However, there are two potential difficulties with this approach. On the one hand, there can be no guarantee that the representatives will not breach the confidence and, if they do, there is no obvious recourse for the employer. But on the other, an employee of the in-house OH department left in the dark about the identity of the potential external provider during discussions may argue that the employer has failed to consult properly.
Although the TUPE Regulations envisage that full information about the transfer will be given to staff at the outset of consultation, in practice, it is common for further information to be made available in the course of the consultation process. The new external OH supplier has to give information to the existing employer about its plans for the transferred employees. This information must then be fed into the consultation process. A recent employment tribunal case3 suggests that liability for a failure to consult during a business transfer does pass to the new employer.
Information must be supplied far enough in advance of a relevant transfer to enable proper consultation to take place. A generally accepted consultation period is four weeks, but it may be wise to build in up to three months for consultation in the outsourcing timetable.
Data protection and disclosure
Employers should ensure that the data protection rules are taken into account before disclosing information on employees to any potential external provider of OH services during the outsourcing negotiations. In practice, this will mean ensuring that individual employees are not identified. This may involve deleting the age and gender columns of any staffing data, banding salaries rather than giving individual pay rates, and generalising job descriptions in the materials made available to all bidders.
It will also be important to make sure there is no careless disclosure of information that could breach confidentiality rules as the result of fraternisation at a junior level in the two organisations during the bidder's investigation of the OH business. In addition, the company that is considering outsourcing the OH service may wish to establish rules on the use of ex-staff by potential bidders on site visits, to avoid breaches of confidentiality.
Medical records
The following points need to be taken into account if employee medical records are being transferred to the external supplier:
Will the new supplier be a "data processor" of personal data? If so, the seventh Data Protection Principle set out in the Data Protection Act 1998 must be taken into account: "Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data."
In practice this will mean that, where there is to be processing of personal data by a supplier, the customer must take care when choosing a supplier to ensure that the supplier can implement appropriate confidential procedures. The contract to provide OH services must impose on the supplier an obligation equivalent to that imposed on a data controller (the customer) by the seventh Data Protection Principle.
Has consent been obtained for the transfer of patient records? Medical records are "sensitive personal data" for the purposes of the Data Protection Act and most external suppliers of OH services will want to ensure that the patient has given his or her explicit consent to the processing of the personal data.
There is an exemption to this general consent requirement. Consent is not likely to be required if "the processing is necessary for medical purposes and is undertaken by a health professional, or a person who in the circumstances owes a duty of confidentiality which is equivalent to that which would arise if that person were a health professional". "Medical purposes" includes the purposes of preventative medicine, medical diagnosis, medical research, the provision of care and treatment and the management of healthcare services.
However, external OH suppliers may prefer not to rely on this exemption, as some of their staff may not come within the lengthy definition of "health professional", or owe a similar duty of confidentiality to a health professional.
Existing line managers and HR managers, as customers of the new external OH service, may wish to use information for HR purposes - for example, to help manage attendance. However, there may be risks in doing so without the employee's written consent.
As negotiations progress, the HR departments of both the potential customer and supplier of the outsourced OH service need to ensure they are given sufficient time to review and comment on any amendments to the service contract. HR professionals must be given the opportunity to review and point out to the project leader any commercial and practical implications of significant changes to the contract as it progresses down the legal route, particularly if these relate to staffing.
Table 1: Why do employers not provide OH support?
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Barrier |
% of companies1 |
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No relevant hazards |
44% |
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Lack of resources(time/staff) |
36% |
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Never really thought about it |
33% |
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Cost |
32% |
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More important priorities (eg safety) |
31% |
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Lack of knowledge of what to do |
25% |
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No answer |
6% |
1Companies were able to tick more than one reason.
Source: Survey of use of occupational health support,
HSE, 2002.
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A new service providing small and medium-size enterprises (SMEs) in Scotland with occupational health and safety advice was launched recently. Safe and Healthy Working is designed to offer free guidance and support through a telephone advice line (0800 019 2211), professional advisers who can do a full health and safety needs assessment if required, and an interactive website (www.safeandhealthyworking.com). SMEs can submit health and safety questions to advisers using the website and receive a response via email or telephone. Access to OH support among SMEs is low - more than 60% have little or no access to OH or safety provision. Research by Safe and Healthy Working also suggests that: three-quarters (78%) of small companies are unaware of any government-sponsored health and safety initiatives;
only 22% of managers in small firms report that employees identify risks and take action to reduce them;
lifting and handling is the most frequently reported hazard in SMEs, followed by slips and trips, fire and vehicles and transport; and
health and safety legal advice is the type of guidance most requested by SMEs.
Source: Safe and Healthy Working. |
1Survey of use of occupational health support, HSE contract research report 445/2002.
2Outsourcing HR: Managing Best Practice 107, The Work Foundation, tel: 0870 165 6700, price £65.
3Alamo Group (Europe) Ltd v Tucker and another [2003] IRLR 266.
