Contractors who are thinking of growing their facilities management arms should be conscious of the risks concealed in a simple outsourcing deal

the Outsourcing of Facility Management activities has been embraced by the construction sector. Many companies have moved from the stock exchange’s construction sector to a service company listing. However, FM outsourcing is not without risks. Outsourcing now has to deal with a plethora of legal rules and obligations, and these bring dangers for both parties: the companies doing the outsourced activity or those seeking to divest themselves of non-core activities. For example, consider the effect that legislation has on employee transfers, pension funds and deficits.

This summer British Airways provided us with a vivid illustration of how an outsourcing contract can go wrong. BA had outsourced its in-flight catering to an external business, Gate Gourmet. It seems that the terms of the outsourcing contract were such that Gate Gourmet was struggling to make a profit. It then allegedly sacked 670 staff after they illegally walked out in protest at restructuring plans.

This in turn triggered more unofficial action by baggage handlers employed by BA, which caused the disruption that we are familiar with.

One of the key risk areas in outsourcing is the position and rights of employees. Often the outsourcing of an FM function will involve the transfer of employees from the business that used to do the work in-house to the FM service provider. On one level this provides a set of employees familiar with the work to be done; on the other it creates a group of employees with employment rights and remedies, which could include the right to claim unfair dismissal, redundancy and discrimination. This is because the transfer of employees from the procuring company to the FM provider may be subject to the Transfer of Undertakings (Protection of Employment) Regulations 1981, or TUPE for short.

New legislation affects not only employment rights but also rights in respect of pensions.

And from April, outsourcing employers will be obliged to provide a minimum level of pension benefits to eligible employees who have transferred. This is a cost to take in to account on an FM bid that will involve TUPE staff transfer. In addition the provisions of the Pensions Act 2004 mean that employers transferring assets can no longer do an “asset sale” rather than a “share sale” to avoid dealing with pension deficits.

The risks are not just for the FM provider. The business outsourcing is also at risk under TUPE

Now there are revised TUPE regulations in the offing. These were intended to come in to force next month but have been delayed until spring. The aim of these rules will be to widen their scope to include outsourced maintenance services, cleaning and so on. The delay to the timetable has arisen because serious issues have arisen over proposed exceptions, such as outsourcing for a single specific event and the procurement of goods and professional services. The uncertainty of whether the regulations will or will not apply to a particular contract creates substantial business risk.

And the risks are not just for the service provider. The business outsourcing the FM function is also at risk under TUPE. For example, if the business takes the function back in-house, the old employees may need to be employed again. This can affect the viability of outsourcing the function in the first place.

The position may also become complicated if the outsourced FM provider becomes insolvent or is wound up. Such provisions can also restrict the room for manoeuvre by the procuring party at the end of the term of the FM agreement – it may not want to re-employ large numbers of staff but if it does not do so it might risk industrial action.

The provisions continue to be debated but the regulations are bound to affect the FM marketplace. There are risks in FM outsourcing for both the procuring and providing party, which need to be considered in order to avoid a Gate Gourmet-type scenario. The FM service-providing business should expect more rather than less legislation in the near future.