Technology & Outsourcing 2022 Comparisons

The key market developments in IT outsourcing include: 

• the continued shift of physical IT assets to cloud environments and software programs to Software as a Service (SaaS) environments; 

• the provision of services and solutions that are supported by AI and robotics; and 
• the digital transformation of traditional business data flows into revenue-generating products and analytical tools; buyers of services continue to focus increasingly on the Internet of Things (IoT) and the transformation of their businesses into digital offerings. 

From a legal perspective, these new technologies and approaches further break up traditional sole-source agreements into a multitude of different agreements, with more providers competing for and providing smaller chunks of services, and more demands being placed on client procurement departments. The legal issues themselves have not changed dramatically, but there are important nuances associated with these technologies and approaches. Intellectual property ownership and data security remain chief among customer concerns and present the most significant risk for providers. Accordingly, those provisions continue to be heavily negotiated. 

For the most part, the “human” element is removed from the robotics and AI delivery model, but there may be personnel issues, nonetheless, as these technologies tend to replace the existing workforce. Accordingly, involvement from the customer’s human resources department early in the process is essential.

COVID-19

COVID-19 and related government shut-down orders have forced most providers to shift to work-from-home models. Customers have had little choice but to accommodate these changes and there has been a scramble to implement appropriate security controls. More than 18 months into the pandemic, new transactions increasingly remove COVID-19 from force majeure clauses, since the risks and work-arounds are well understood, although the Delta variant has caused parties to consider whether “material exacerbations” of COVID-19 should still be addressed as force majeure events. The forced transition to work-from-home has suppliers and customers both thinking about whether the shift – and related cost savings – can or should be made permanent.

The key market developments in BPO include: 

• an increased focus on social media as the primary tool for communicating with customers; 
• the provision of services and solutions that are supported by robotics, AI and smart learning; and 
• swings in emphasis between value/innovation and cost savings, depending on industry-specific conditions and opportunities. 

From a legal perspective, these developments present issues that are unique to the outsourcing market, but not necessarily unique to technology lawyers. As companies increase their presence on, and use of, social media, they open themselves up to potential exposure in a more public and less controlled environment: 

• managers of social media websites may inadvertently post proprietary or confidential information; 
• customer complaints are now more public and companies risk a “piling on” of complaints; and 
• customers may post proprietary, defamatory or harassing information on a company’s social media site; in addition, companies must be aware of the unique terms applicable to each social media platform, as the companies’ rights and obligations vary by platform.

The use of robotics and AI in the BPO market presents similar issues as noted above with respect to IT outsourcing market developments, namely: IP ownership, data security and ownership, and potential human resources issues arising from the displacement of workers due to increased usage of these technologies. As firms lean into outbound communications through social media, compliance with applicable regulatory regimes (eg, the Telephone Consumer Protection Act), and exposure to a robust plaintiffs’ bar become key issues.

The impact of new technology (eg, AI, robotics, blockchain and smart contracts) is most evident in the IT workforce. Low-skilled workers across all industries are being replaced by various forms of technology that are able to perform the same tasks as those workers, and do so more cheaply, without sick days, without raises and without vacations. While low-skilled workers are feeling the brunt of these new technologies (as well as more restrictive immigration policies being used to prevent lower-skilled workers from entering the USA), higher-skilled workers tasked with their development and management (eg, developing platforms for the cryptocurrency market) have greater opportunities.

As various industry leaders contemplate using provider AI offerings to optimise their core competitive advantages, negotiations over IP ownership now involve much higher stakes. Customers are concerned that their leadership positions will be eroded if their highest-value IP is shared and then incorporated into AI engines that are resold to their competitors or, worse, commoditised and distributed to thousands of users. Providers worry that the value of their innovations will be lost to customer-imposed restrictions or endless, complex IP battles.

Private Sector

Despite state and federal lawmakers’ efforts to pass sweeping legislation to regulate offshore outsourcing, there is no overarching federal framework in the USA that specifically restricts outsourcing in the private sector. As discussed in 2.2 Industry-Specific Restrictions, certain regulated industries, such as the financial services, energy, insurance and healthcare industries, are subject to federal and state regulatory frameworks that extend to the regulated entities’ third-party vendor relationships, including outsourcing arrangements. In most cases, regulated entities that outsource operational responsibility of regulated functions to third-party vendors continue to be primarily responsible for their regulatory compliance obligations (even if a regulatory failure was ultimately caused by the third-party vendor).

Public Sector

Public contracts are highly regulated at the federal, state and local levels. In addition to explicit restrictions on the performance of certain government functions by non-government employees, the highly complex public contract framework, which imposes onerous review and approval procedures on government outsourcing initiatives, often has the practical effect of restricting large outsourcing arrangements in the public sector. Public contracts are often subject to scrutiny by elected officials, watch-dog organisations, consumer groups and media, which can complicate and delay negotiations.

Offshore Restrictions

In addition, offshore outsourcing may be limited or restricted under certain government-sponsored programmes. For example, the Main Street Lending Program, a federal programme established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which offers loans to small and medium-sized businesses affected by the COVID-19 pandemic, restricts recipients from outsourcing or offshoring jobs during the entire term of the loan and for two years after repayment. 

Financial Services

In the USA, various state and federal regulators oversee financial institutions through a system of functional regulations. Financial regulators have issued a wide range of interpretive guidance regarding outsourcing to third parties. For decades, prudential regulators have charged banks with establishing and maintaining risk management practices – designed to ensure the safety and soundness of their activities and protect consumers – that are commensurate with the level of risk involved. The application of these practices extends not only to the bank’s own activities, but those of any third party engaged by the bank, including outsourcing providers. The Consumer Financial Protection Bureau (CFPB) imposes third-party risk management guidance embodying similar principles on certain non-banks in the consumer financial markets, including credit unions, mortgage originators and servers, and private lenders that fall under the CFPB’s supervision. 

On 13 July 2021, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) jointly issued proposed guidance on the management of risks associated with third-party relationships. The proposed guidance reflects the prudential regulators’ increased focus on banking organisations’ use and reliance on third parties and outsourcing arrangements to perform business functions, deliver support services, and provide new products and services to its customers. If adopted, the inter-agency guidance, which is largely based on the OCC’s existing guidance, would replace and harmonise the Federal Reserve’s “Guidance on Managing Outsourcing Risk”, issued in 2013; the OCC’s “Third-Party Relationships: Risk Management Guidance”, issued in 2013 and supplemented with FAQs in 2020; and the FDIC’s “Guidance for Managing Third-Party Risk”, issued in 2008. 

The proposed guidance provides a multi-disciplinary framework and objectives for each stage of the third-party risk management life cycle, namely:

• planning – examination of risks and development of a plan to manage the relationship and related risks, particularly when critical activities are involved; 
• due diligence and third-party selection – performing due diligence on third parties, including the party’s ability to perform and comply with applicable laws before selecting and entering into relationships; 
• contract negotiation – clearly specifying the rights and responsibilities of each party to the contract, seeking additional contract provisions when appropriate, understanding the consequences of any resulting limitations, and engaging legal counsel for significant contracts; 
• oversight and accountability – overseeing management of and implementing strategies and policies to address third-party risks, establishing responsibility and accountability for such risks;
• ongoing monitoring – performing ongoing monitoring after the third-party relationship is established in a manner commensurate with the level of risk and complexity of the third-party relationship; and 
• termination – ending third-party relationships in an efficient matter, including consideration of appropriate transition services. 

Similar to the existing guidance of these regulators, when circumstances warrant, the agencies may use their authority to “pursue corrective measures, including enforcement actions” against banks that fail to properly manage risks associated with their third-party relationships. The comment period for the proposed rules closed on 18 October 2021 but, as of 1 September 2022, the agencies have yet to issue a final rule. 

Healthcare

Within the healthcare industry, outsourcing is impacted by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), which seek to ensure the privacy and security of protected health information (PHI). HIPAA and HITECH, and their implementing regulations, impose significant and onerous obligations on “covered entities” (ie, health plans, health clearing houses and healthcare providers that transmit any health information in electronic form in connection with a covered transaction) and their “business associates” (ie, vendors of covered entities with access to PHI that perform certain functions on behalf of such covered entities), including compliance with HIPAA’s Privacy and Security Rules. When entering into outsourcing arrangements with business associates, covered entities are required to enter into written agreements (in the form of a business associate agreement) that protect the use and security of PHI. Under HITECH, business associates may be subject to direct civil and criminal penalties imposed by regulators and state authorities for failing to protect PHI in accordance with HIPAA’s Security Rule. 

In addition to the federal HIPAA and HITECH, many states have enacted state healthcare laws governing the use of patient medical information. While the federal HIPAA pre-empts any state law that provides less protection for PHI, state laws that are more protective will survive federal pre-emption. 

Insurance

The insurance and reinsurance industry has continued to outsource a variety of functions and implement emerging technologies, which are designed to decrease costs and improve the efficiency of outsourced insurance functions. Outsourced functions often include insurance and reinsurance accounting services, actuarial analytics, underwriting analysis, insurance policy and endorsement drafting and processing, claims reporting and handling, business process management, insurance software development, data entry and customer service. Companies in the insurance space – whether policyholders, captive insurers, insurers, agents, brokers, intermediaries, or others – looking to outsource insurance functions in the USA face unique challenges because, unlike many other industries, insurance in the USA is primarily regulated at the state level. As a result, there is a patchwork of rules that may vary from state to state and may affect insurance outsourcing operations.   

Energy

In the energy and utility sector, regulated entities must comply with the Critical Infrastructure Protection (CIP) Reliability Standards, which are mandatory proactive cybersecurity requirements issued and enforced by the North American Electric Reliability Corporation (NERC) and its subsidiary regional entities, and overseen and backstopped by the Federal Energy Regulatory Commission (FERC). The CIP standards are designed to protect and secure cyber-assets associated with critical assets that support the Bulk Electric System (ie, North America’s power grid). All owners, operators and users of the bulk power system (which may include both public and investor-owned utilities, generation and transmission co-operatives, and non-utility owners and operators of electric power generation) and transmission facilities, are required to comply with the CIP standards. 

A CIP compliance issue may arise in the context of outsourcing when a regulated entity outsources its IT infrastructure or business processes involving access to critical cyber-assets (eg, monitoring and maintenance functions). Regulated entities may run into challenges when choosing foreign outsourcing providers, even if the outsourcing agreement contains robust contractual obligations around compliance with the CIP standards. 

Failure to comply with the CIP standards may result in fines and penalties of up to USD1 million per violation per day.

As a general matter, the USA does not have a comprehensive federal data protection law. Rather, there are many sources of privacy and data security laws at the state, federal and local levels. In the USA, there are no specific legal or regulatory restrictions on cross-border data transfers. It is worth noting, however, that there are privacy and data security laws that might apply to the processing of certain data. 

Federal Requirements

At the federal level, the different privacy and data security requirements tend to be sectoral in nature and apply to different industry sectors or particular data-processing activities. For example, Title V of the Gramm-Leach-Bliley Act (GLBA) requires financial institutions to ensure the security and confidentiality of the non-public personal information they collect and maintain. As part of its implementation of the GLBA, the Federal Trade Commission (FTC) issued the Safeguards Rule, which states that financial institutions must implement reasonable administrative, technical and physical safeguards to protect the security, confidentiality and integrity of non-public personal information. 

Another key example is the HIPAA, which was enacted to help ensure the privacy and security of PHI, as discussed in 2.2 Industry-Specific Restrictions. Industry standards are also relevant, although they do not have the force of law. For example, the Payment Card Industry Association’s Data Security Standard (PCI DSS) specifies requirements for relationships between companies and their vendors that process credit cardholder data.

State Requirements

In addition to federal requirements, a number of states have enacted laws that require organisations that maintain personal information about state residents to adhere to general information security requirements. For example, California’s information security law requires businesses that own or license personal information about California residents to implement and maintain reasonable security procedures and practices to protect the information from unauthorised access, destruction, use, modification, or disclosure. Additionally, information security laws in Massachusetts and Nevada impose more prescriptive requirements on organisations with respect to the processing of personal information. 

All 50 states, plus Washington, DC, Guam, Puerto Rico and the Virgin Islands have adopted various legislation requiring notice to data subjects of certain security breaches involving personally identifiable information. Companies that have outsourced data-processing tasks to vendors remain responsible for security breaches by those vendors. As a result, outsourcing contracts usually address these issues in some detail, including extensive security requirements, reporting and audit obligations, and carefully constructed limitations of liability and indemnities. Customers seek to allocate these risks to providers, arguing that they control and secure the IT and other infrastructure that is attacked, and that risk and liability should follow that control. 

Providers attempt to avoid liability for security breaches not caused by their breach of contract and to strictly limit their financial liability for those resulting from their fault. As providers have insisted on limiting their liability, many customers have sought their own insurance coverage for these risks.

The California Consumer Privacy Act of 2018 (CCPA) requires covered businesses to provide a number of rights to California consumers with respect to accessing, deleting, and opting out of the sale of personal information. As discussed below, the CCPA offers reduced compliance obligations to businesses that share personal information pursuant to a written contract containing certain prescriptive language. The California Privacy Rights Act of 2020 (CPRA), which amends the CCPA and comes into effect on 1 January 2023, specifies new consumer rights relating to the correction of personal information and opting out of sharing for cross-context behavioural advertising and other uses of personal information. The CPRA also includes requirements for different types of contracting parties, including “service providers” and “contractors”.

In addition, Virginia’s Consumer Data Protection Act (VCDPA), Colorado’s Privacy Act (CPA), Utah’s Consumer Privacy Act (UCPA), and Connecticut’s Data Privacy Act (CTDPA) all come into effect in 2023. These laws provide rights to residents of their respective states, including, among others, as to access, deletion, and opting out of sale and targeted advertising relating to personal information. These laws all require contracts between “controllers” and “processors”, which must include certain provisions. Under these laws, a controller is the party that determines the purpose and means of processing the personal information, and a processor is the party that processes the personal information on behalf of the controller. Notably, the CPRA, CPA, UCPA and CTDPA also include requirements when sharing de-identified data.

Companies in the USA also self-impose limits on the collection, use and sharing of personal information through representations made in privacy policies. Companies are held accountable to these representations through state and federal consumer protection laws.

Typically, outsourcing agreements take the form of a master agreement and accompanying statements of work, all of which are heavily negotiated. The master agreement provides an overall structure that should include provisions that are sufficiently detailed to cover a range of services, from long-term IT outsourcing (ITO) services to one-off consulting projects. It usually includes a basic service-level methodology, security and data protection provisions, as well as legal terms of general applications, such as compliance with laws, limitations of liability, indemnities, and dispute resolution. The statements of work include detailed statements of services, specific service-level commitments, pricing methodologies and any other terms that are unique to the services.

Agreements Covering Multiple Jurisdictions

Where multiple jurisdictions are involved, the master agreement typically provides a framework for local country agreements to be entered into between local affiliates, which may take into account payment using local currencies (including associated allocation of currency risk), unique intellectual property or labour provisions, specific compliance issues involving local laws, and any country-specific enforcement requirements. Also, because the markets tend to reward software revenues with higher share price multiples than services revenues, providers continue to shift revenue from services-only agreements to services agreements coupled with separately priced and separately negotiated software licences.

Multi-sourcing

While highly consolidated “mega” deals (ie, a single contract with a single vendor who provides the full suite of IT services to the customer) are still frequently negotiated, multi-sourcing remains the primary contracting model for most customers. Under a multi-sourcing model, customers engage multiple vendors (through individual contracts) to collectively provide the full suite of IT services desired by the customer. The multi-sourcing model permits customers to mix and match “best of” technologies provided by unrelated vendors in order to achieve a more optimal IT environment. This model is not without problems, however, as successfully integrating products offered by different vendors can be a challenge and more cooks in the kitchen can result in finger-pointing if there is an issue.

Shared Service and Global Business Services (GBS) Models

Research also indicates that customers have generally increased their investments in various shared services and GBS models. This trend reflects broader trends in the outsourcing and IT services market, including a collective desire for increased automation (including robotic process automation), standardisation of tools and processes, scalability, and the management of data as a strategic asset. By centralising services in a shared service centre and increasing the variety of those services by centralising into GBS models, customers may more easily adopt and implement these solutions at an enterprise level, rather than on a business-unit-by-business-unit basis. The adoption of hybrid shared services models (ie, those involving a third-party business processor) also continue to increase. 

This particular trend is due to customers realising that there are certain areas of expertise and technologies that are still better performed by third-party vendors who specialise in those areas. Whether adopting a shared services model or a hybrid, contracts governing the provision of services must focus on accountability, quality of services and outputs. Of course, hybrid models involving third parties involve risks not necessarily present in a purely in-house shared services model, and those risks should be mitigated as they ordinarily would be in a transaction involving a third-party provider. With that being said, the impact of COVID-19 on traditional delivery models has knocked down many of the barriers associated with shared services and GBS models that previously caused customers to be hesitant in their adoption.

Captive Deals

While there has been a small handful of captive deals recently, adoption of captives appears to be on the decline. As with shared services models, the decline in the provision of services through captives appears to reflect broader trends in the outsourcing market, including a focus on value-over-cost savings, a reluctance to invest in owned IT assets, and policies of the current administration that favour retention and use of onshore resources. The inability to manage growth effectively and provide opportunities for employees within the captive model also continues to negatively impact the adoption of those models for customers. Contracts governing the creation and management of captives are far more complex than typical outsourcing arrangements and customers should be made aware of the legal risks and transaction costs associated with the adoption of this model upfront.

Other Approaches

Unique situations are sometimes addressed with alternative structures, such as joint ventures (often in the form of contractual JVs, but sometimes involving equity investments) and “build operate transfer” arrangements. These are much less common in the market and are highly negotiated responses to special commercial circumstances.

Due to COVID-19, companies around the world increased overall investments in remote work technologies and have undergone, or are in the process of undergoing, a complete digital transformation. In the process, many have adopted several of the models discussed in 3.2 Alternative Contract Models for Outsourcing, using each to complement the other. There has been an increase across the board (although less so with captives) of companies returning to outsourced service models complemented by a shared services centre (often using third-party providers) or a GBS model, where on-site employees are no longer necessary or desirable, and where remote delivery is preferred. 

As a result, providers are restructuring their commoditised outsourcing offerings to be delivered “as a service”. In such cases, the delivery and pricing models assume that there is little variation in the services, service levels, and the related risk allocations and contract terms. Accordingly, the service agreements are standardised and the providers are reluctant to negotiate terms. Customers will often hear that the services will be delivered using a “one-to-many” delivery model, which is the provider’s way of indicating that it is unwilling to make certain concessions that may be specific to that particular customer.

Protections for customers in outsourcing agreements come in many forms. The main protections for customers come in the form of indemnification obligations, representations and warranties (eg, performance, malware/disabling code, and services not to be withheld, ie, “no abandonment”), confidentiality and data security obligations, service levels, market currency provisions, disputed charges provisions, additional services provisions, cover services provisions, and detailed service definitions and gap-filler or “sweeps” clauses. 

Indemnification Obligations

The claims covered by a party’s indemnification obligations are often the subject of intense negotiations. Typical indemnification obligations requested by the customer include IP infringement/misappropriation, personal injury and property damages, violation of law, gross negligence and wilful misconduct, breach of confidentiality and data security, claims by the provider’s personnel, and tax liabilities of the provider. Outsourcing providers may request reciprocal indemnities, although not every indemnity should be reciprocal in light of the asymmetrical relationship. Indemnities typically cover only third-party claims; claims by the customer for the provider’s breach are typically remedied through breach of contract actions. 

Remedies

Remedies for breaches of representations and warranties are typically in the form of defect remediation and damages, but certain representations and warranties, such as services not to be withheld, include additional remedies such as injunctive relief. Remedies for breaches of confidentiality and data security typically take the form of damages, including notification-related costs, and injunctive relief. Remedies for service-level failures typically take the form of financial credits (which are not generally exclusive remedies and can sometimes be “earned back” by the provider) and termination rights. 

Cost-Related Protections and Scope

“Market currency” provisions (eg, benchmarking) typically require the provider to make price concessions based on the results of a benchmarking or other market comparison and could result in no-fee or low-fee termination rights. Disputed charges provisions typically allow the customer to withhold payment for invoicing errors or deficient performance of services. “Additional services” provisions typically require the provider to perform out-of-scope, but related services at a commercially reasonable price. “Cover services” provisions typically require the provider to cover the difference between the provider’s fees and a replacement provider’s fees when the original provider is unable to perform the services due to a disaster or other force majeure event. 

Detailed scope definitions are typically the best defence against misunderstandings as to the work to be done, but “sweeps” clauses are typically included and require the provider to perform all services that are an inherent, necessary or customary part of the services specifically defined in the agreement, as well as all services previously performed by any displaced or transitioned employees.

The customer typically has a myriad of rights to terminate an outsourcing agreement (eg, material breach, persistent breach, convenience, data security breach, extended force majeure events, service level termination events, insolvency of provider, regulatory changes, transition failures, change of control of provider). The provider, on the other hand, usually may terminate only for non-payment of material amounts. 

Customers generally also require robust exit protections. These protections generally take the form of termination assistance, which typically includes continued performance of the services for a period of time in order to allow the customer to transition the services either back in-house or to another provider, as well as other exit activities (eg, knowledge transfer, return of data). Exit protections can also include rights to the provider’s equipment, software, personnel and facilities.

The parties’ liability exposure under an outsourcing agreement is often limited both by type and amount. Agreements typically provide that damages are limited to, among others, actual “direct” damages (ie, no consequential or indirect damages) and an aggregate US dollar amount cap for claims under the agreement. The aggregate liability cap is highly negotiated. Commonly, the limit is defined as a multiple of monthly charges ranging from 12 to 36 months.

Exceptions to the consequential/indirect damages waiver and damages cap are also subject to intense negotiation. Typical exceptions include indemnification claims, gross negligence and wilful misconduct, breaches of confidentiality and breaches of other material terms of the outsourcing agreement, such as services not to be withheld, compliance with the law, and failure to obtain required consents. Although an exception for gross negligence and wilful misconduct is sometimes subject to negotiation, many states do not allow a party to disclaim liability for such conduct as a matter of public policy. Also, due to the enormous potential liability exposure related to data breaches involving personal information, many providers will not agree to unlimited liability for such breaches and, instead, will propose a “super-cap” for such damages that, typically, is a multiple of the general damages cap.

Implied terms, such as warranties for fitness for a particular purpose, merchantability, and non-infringement, are typically disclaimed by the provider and only the express terms in the agreement apply. 

As a general matter, there is no legally required content that must be included in contracts under current US state and federal privacy and data security law. There are, however, more general requirements for businesses to provide oversight of their service providers, which result in the inclusion of certain data privacy and security provisions in vendor contracts. 

Federal Level

At the federal level, for example, under the FTC’s Safeguards Rule, financial institutions must require relevant service providers to agree contractually to safeguard non-public personal information appropriately. Pursuant to HIPAA’s Privacy Rule, which governs a covered entity’s interactions with third parties (“business associates”) that handle PHI in the course of performing services for the covered entity, the business associates’ obligations with respect to PHI are dictated by contracts with covered entities, known as “business associate agreements” (BAAs). BAAs must impose certain requirements on business associates, such as using appropriate safeguards to prevent use or disclosure of the PHI other than as provided for by the BAA.

State Level

At the state level, certain state laws require businesses that disclose personal information to non-affiliated third parties to require those entities to contractually maintain reasonable security procedures. Regulations in Massachusetts, for example, require that covered businesses contract with service providers in addition to taking reasonable steps to “select and retain third-party service providers that are capable of maintaining appropriate security measures to protect... personal information...” 

Additionally, in order not to be considered a “third party” under the CCPA, a written contract must prohibit the entity receiving the information from selling the personal information or retaining, using or disclosing the personal information for any purpose other than for the purpose of performing the services specified in the contract, or outside of the direct business relationship between the business and the entity receiving the information. The contract also must include a written certification from the entity receiving the information that it understands and will comply with these restrictions. Also, as noted above, Virginia and Colorado’s newly enacted comprehensive data privacy laws, which come into effect in 2023, require contracts between “controllers” and “processors”, and such contracts must include, among other things, obligations relating to the confidentiality and security of personal information. Furthermore, the New York State Department of Financial Services’ cybersecurity regulations require that covered entities develop and implement a third-party service provider policy that addresses minimum cybersecurity practices of vendors, the due diligence processes used to evaluate vendors, and any contractual provisions required in agreements with vendors.

Even where there is no legal requirement to do so, it is common practice for companies in the USA to include privacy and data security terms in vendor contracts that establish the vendor’s responsibility to protect the data it receives and that assign liability as appropriate in the event of a data breach or other privacy or security violation. 

While several of the above contract terms are relevant in cloud-based offerings, the customer’s ability to obtain concessions from a cloud provider on such contract terms is more challenging due to the commodity nature of such offerings. Cloud-based deals are also generally for a shorter term than traditional outsourcing agreements and more narrow in scope, which reduces the need for certain terms, such as market currency, sweeps clauses, etc. 

In the USA, employees are not transferred to the provider as a matter of law. If the parties wish to accomplish such a transfer, they must agree to that as part of the transaction documents, and they must put in place an offer and acceptance process to effectuate the transition. 

If the employees are not transferred as part of the transaction, the employees will remain employed by the original employer who can, in turn, redeploy the employees on other matters or terminate their employment. In the absence of an employment contract stating otherwise, the employees are employed “at will” and, in the absence of a WARN-Act qualifying event (see 5.2 Trade Union or Workers' Council Consultation), can be terminated at any time for any reason, without notice and without severance or redundancy pay.

The Worker Adjustment and Retraining Notification Act (the “WARN Act”) is implicated if the outsourcing transaction involves a “mass lay-off” or a “plant closing” as defined in the WARN Act. In the event of a mass lay-off or plant closing, the employer must provide 60 days’ advance notice prior to termination. Many states in the USA have their own “Mini-WARN Acts”, which must also be accounted for before implementing a termination programme as part of an outsourcing transaction.

Notification to any labour unions will be governed by the terms of any applicable collective bargaining agreements.

If employees are working remotely from a state other than the state where the employer-company has office locations, the company must evaluate the need to comply with the state laws of the states where the employees are working. This includes, but is not limited to, state leave, workers’ compensation, and unemployment compensation laws. The company should also evaluate whether employee presence in those states triggers an obligation to register to do business in those states and whether the employer would be subject to corporate tax obligations in those states due to the presence of employees in the states.