Introduction

One often associates the term “outsourcing” with the IT or telecommunications industry. But in practice, outsourcing occurs in a broad range of sectors, including the schools sector.

In essence, "outsourcing" involves subcontracting to a third party the operation of a service or function which would otherwise have been fulfilled in-house; the rationale being that the specialist contractor can provide a higher standard, more cost-effective service than might have been achieved if the service had been fulfilled in-house.  Other benefits of outsourcing include flexibility (often clients want the ability to increase, reduce or alter the scope of a service, at relatively short notice) and a reduction in the amount of time and resources spent on non-core activities (for example, in the case of a school which decides to outsource its catering function, the schools’ management no longer needs to spend time recruiting, training or managing catering staff, or source supplies and equipment, say). 

Examples of operations or functions which schools might decide to outsource include:

·                     catering services;

·                     cleaning and waste management services;

·                     other "facilities management" services such as mechanical and electrical works, day-to-day maintenance and repair of premises, pest control, etc;

·                     security services;

·                     landscape gardening services;

·                     IT support services;

·                     payroll administration; and

·                     alumni membership scheme/fundraising services.

While there are obvious benefits to outsourcing, the fact that the service or function is being provided by a third party contractor means that, from a legal perspective, a different approach is required to where such service or function is fulfilled in-house.  This note aims to set out an outline of the key legal issues to consider where services are being outsourced, and set out briefly how any legal issues which arise on an outsourcing of services can be covered in the contract with the service provider.

The outsourcing contract

When a school outsources a service or function, it will want to cover certain key risks. These will include:  the risk of poor performance by the contractor; unforeseen fees or charges; property damage; potential liability to staff, pupils and visitors to the school site arising out of an act or omission of the contractor and employment liabilities (both in terms of incumbent staff affected by the transfer of services and staff employed by the contractor). In addition, the school will want to set out clearly how the outsourcing will work in practice (including any transition phase at the start of the process and day-to-day management). To cover such issues, a school should ensure that a robust contract is put in place with the contractor who is being engaged.

The key points to cover in the outsourcing contract are set out below.  

There is no set rule as to whose responsibility it is to prepare the contract. More sophisticated contractors do sometimes have their own contractual documentation (although such contracts are usually slanted heavily in the contractor’s favour – so should be treated with a degree of caution) but more often than not the onus is on the school to prepare the contract.

Where services are put out to tender by a school, it is good practice to include a draft of the contract in the tender pack which is sent to potential contractors. This puts the contractor on notice of the school’s proposed terms and helps to flush out any queries relating to the contract terms at an early stage.

Key points to cover in the outsourcing contract:

1.  Standard of service

It is important that the outsourcing contract describes the services clearly, sets out the minimum levels of service which are acceptable and provides the school with remedies and/or a right to terminate in the event that such standards are not met.  Otherwise, a school may find itself tied into a long-term contract with an underperforming contractor.    To cover the risk of poor performance, the contract should contain:

·                 a clear description of the services. This is normally achieved in a service schedule or specification which is annexed to the contract.  Producing the service schedule will often be a joint effort, shared between the school and the contractor (depending, that is, on how prescriptive the school wishes to be);  

·                 service levels, setting out the standards to which the services must be provided and KPIs, the key performance indicators in assessing whether the standards have been met;

·                 termination rights; to apply in the event that core service levels are not met; and perhaps also

·                 service credits; ie a refund mechanism which will apply if certain services are not supplied in accordance with the required service levels (to apply without prejudice to the school’s rights to terminate the contract). 

2.  Liability and insurance

Given that, in most instances of outsourcing by schools, the contractor is likely to be working on or around school property - in most cases fulfilling a function for which parents and pupils will regard the school as being primarily responsible - it is vital to ensure that the contract provides the school with protection in the event that the acts or omissions of the contractor cause loss or damage to property, or injury to persons at the school site (be they staff, pupils or visitors).

Such risks are normally covered by requiring the contractor to indemnify (ie protect and reimburse) the school in respect of any costs, claims or losses arising as a result of the act or omission of the contractor.    When taking an indemnity, one needs to bear in mind the ability of the contractor to meet the costs of any claim made (the indemnity only being as valuable as the party granting it).  To avoid the risks of a contractor having insufficient resources to meet a claim, the contract should oblige the contractor to take out and maintain suitable insurance (in respect of both public liability and employer’s liability, and such other risks as may be relevant in the circumstances) to cover any such risks.

Any limitations or exclusions of liability requested by the contractor should be scrutinised carefully – particularly where the contractor is seeking to limit or exclude liability for damage to property or for injury to persons (although, of course, any attempt by the contractor to limit its liability for death or personal injury caused by its negligence will be unenforceable).

3.  Prices and fees

The contract should include a clear and comprehensive pricing mechanism setting out what the contractor will be paid for providing the services, what costs and disbursements the contractor will be able to recharge to the school (if any).   Depending on the nature of the agreement, one might also include an agreed procedure for variation of the charges, if the school agrees that the fees may be varied. 

Often, with longer term contracts, it might be beneficial for the school to push for the inclusion of a benchmarking mechanism, under which the contractor’s charges are market tested, on an annual basis, say, so as to ensure that the school is not paying above market rate.    Conversely, the contractor may request the right to vary its charges on a periodic basis in line with a given index (such as RPI or CPI).  The school will need to consider whether it is appropriate to accept this or whether to push for fixed charges.

4.  Employment issues

A number of staff-related issues may arise.   The contractor will be responsible for its staff and the school will want a degree of certainty from the contractor that they are suitable to carry out the work.  In particular, the school will want the comfort of knowing the staff members have been CRB checked.   The school is likely to want some degree of control over who is providing the services and may want to include a provision to enable it to require the contractor to stop using a particular member of staff.   This will need to be built into the contract.

Another important employment issue is that the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") may apply where a school outsources a service or function or makes a "service provision change" involving either (a) an initial transfer (e.g. from the school to an external contractor); (b) a subsequent transfer (e.g. from the first external contractor to a different external contractor); and (c) the bringing back in-house (e.g. from an external contractor back to the school).     Broadly, TUPE imposes various obligations on the parties in relation to staff affected by the transfer, has the effect of automatically transferring the contracts of employment of staff employed in the provision of the transferring service to the new service provider, and affords the same staff protection against dismissal provided they have one year's service.  

We do not propose to discuss the TUPE regime in any detail here (for further guidance please see our note on TUPE at www.farrer.co.uk (under "Home/Practice areas/Employment/Our Briefings" or contact our Employment Team), other than to say that the contract can be a useful way of confirming each party's responsibilities.  The contract will normally include warranties in relation to, for example, existing terms of employment, employee consultation and the provision of information, and will provide general employment warranties in relation to potential TUPE liabilities.   For example, a fairly robust contractual approach is to require the contractor to reallocate staff upon the termination or expiry of the term, and/or to indemnify the school and any successor service provider (which is important, because liability may fall to the successor service provider, and the school) against any costs arising in relation to the termination of any transferring employees’ contracts of employment upon transfer.

One would normally expect the outsourcing contract to cover a range of other risks and liabilities relating to the contractor’s staff.    The contract would normally confirm the contractor’s responsibility for staff competency, behaviour and compensation (plus any tax or National Insurance due) and provide the school with a degree of protection in respect of any claims brought by such staff members.

5. Other Provisions:

• Logistics of transition, in the event that the services are being transferred from an in-house department or another contractor (note:  TUPE issues will need to be considered).

• Term of the contract, and termination rights.  The school will need to consider the optimum period for the outsourcing, and whether or not to include a break clause permitting one or either of the parties to terminate the contract early.

• Exit management and cooperation on termination.   It is prudent to include an obligation requiring the contractor to cooperate upon the termination or expiry of the contract, so as to ensure a smooth transfer of the services to a successor service provider and/or the school.   Other relevant consequences of termination should also be covered (e.g. what happens to the equipment used by the contractor, or how the site should be reinstated upon the contractor’s departure).

• School’s responsibilities.   The contract should set out what, if anything, will be required of the school in order to enable the contractor to provide the services (for example, access to the school's premises, the provision of electricity, gas, water, etc). 

• Equipment.   The contract should specify who is responsible for supplying the equipment required in order to provide the services, plus any other specific terms relating to the supply of equipment (in relation to ownership, suitability, maintenance, replacements, risk, etc).

• Contract management and dispute resolution.   How will the relationship between the school and contractor be managed, from day to day?   Often, outsourcing contracts prescribe a management and reporting structure, as between school and contractor, providing, say, for the appointment of a "contract manager" and a minimum frequency for reporting meetings.

• Force majeure and disaster recovery.    The contract should ideally include a term prescribing what will happen in the event of the performance of the services being prevented or delayed due to some unforeseen event (for example, a fire at the school).   Consider, too, including an obligation on the contractor to draw up and (if necessary) implement a disaster recovery plan, to ensure continuation of the services in the event of such an event.

• Boilerplate.   The contract should also cover issues such as confidentiality, data protection, ability of the sub-contractor to sub-contract or assign the contract, etc.

This note is meant as a brief, non-exhaustive, overview of the issues to consider when a school outsources one of its functions or services. If you would like specific advice on any of the issues discussed in this note, or require assistance in relation to a particular contract, please contact Serena Hedley-Dent (shd@farrer.co.uk) or David Copping (djc@farrer.co.uk) in our IP & Commercial Team.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co, Summer 2008