Outsourcing labour

When a company outsources labour, is this corporate greed? Or corporate survival?

What is ‘Outsourcing’

Outsourcing, also known as contracting out, is a practice used by some companies to reduce costs by transferring work to third party contract suppliers rather than completing it with employees. It is regarded as an effective cost-saving strategy when used properly. It is where a business process (payroll processing, claims processing), operational processes, and/or non-core functions (facility management, distribution, security, safety) are contracted to another party.

Labour photo 3

Outsourcing results in cost savings from lower labour costs, taxes, insurance premiums and reductions in the cost of production. Outsourcing can also be a way for a company to avoid government regulations or mandates, such as those around the environment or safety.

Where a local Jamaican company is also part of a global entity, there are set benchmarks that have to be achieved, whether in waste reduction, reduced water consumption, energy minimisation, safety incidents & breaches, and the all-important and topical official company headcount.

And a lot of global entities use production per employee, exclusive contractor numbers, to determine the benchmark for the ‘right’ headcount based on the size of the business.

This in itself seems a fallacy, as ultimately the management of the company dictates what the contract worker does, regardless of the third-party contract supplier providing the labour and a ‘supervisor’ [creating the illusion that contract workers are being managed externally].

For global public limited companies who have now to report on corporate social responsibility in annual accounts, international standards speak to the numbers of Full Time Equivalents [FTEs]. And as per the standard, apart from regular employees on a company’s payroll, FTE numbers include contractors.

  1. Temporary [including 1-day temps], contractor, sub-contractor, agency, seasonal and migrant workers, drivers, service providers, and vendors or other workers who receive day-to-day supervision by the company.
    • Day-to-day supervision exists when the company supervises both the result of the work and how the work is done. In other words, day-to-day supervision exists where the company directly manages the individual or supervises both the output/product [i.e., the result of the person’s work], and the means, methods, sequences, and processes by which the work is performed [i.e., how the work is done].

What I have learnt over the years is that it is certainly not open to debate that outsourcing/contracting out provides lower labour costs, even when contractors are doing the same jobs/tasks/processes as employees, and without any benefits that accrue to employees.

The Jamaican Context

Labour photos 1

  1. Many contract workers sign an annual agreement and are forced to take a 2-week contract break every year, without pay. This is so the company can claim they are ‘contractors’ and not employees, as per requirements of local Employment legislation. Some of these ‘contractors’ have worked for many years, some for a couple of decades, with the same third-party contract supplier. Should they really be considered a contractor?
  2. For most contractors in Jamaica, there is no vacation leave with pay, no sick leave with pay, no redundancy payments if the firm collapses, no company pension scheme, and very little human resource intervention by the company paying the third-party contract supplier for the labour.
  3. For the most part [there are a few exceptions], each contract worker is expected to file and pay their own statutory deductions as self-employed individuals. There are therefore no company contributions to NHT, NI etc.
    • Of note, there is a massive loss of tax revenue in outsourcing. If the Tax Authority wanted to collect this revenue, then an audit of those third-party contract suppliers [just request a list of contract firms from all major local & global {operating in Jamaica} companies], would show the millions lost over the years.
  4. If a third-party contract supplier loses the contract, there is no legislation to safeguard their contractors by ensuring they transfer to the new company now awarded the contract – in the UK, TUPE [Transfer of Undertakings (Protection of Employment) regulations], exists and is very clear on the process to be followed and the preservation of employees’ and third-party contractors’ terms and conditions when a business or undertaking, or part of one, is transferred to a new employer.
  5. Where meals may be subsidised for employees, most companies do not subsidise meals for their contract staff, or ensure in contract agreements that the contracted firm does so [though contracted office staff may be an exception to this in some cases].
  6. Uniforms and safety equipment [safety shoes etc.] are normally provided to employees; the majority of contractors have to buy their own.
  7. Contract workers are easily terminated due to the absolute lack of interaction/involvement of most company’s Human Resource Departments. All that is required is a verbal communication/email/letter from the responsible company representative managing the contract firm stating they do not need 10/20/30 people the next day or the next week. What happens to the 10/20/30 contract workers selected to stay home? No pay.
  8. Outsourcing can easily create a two-tier system amongst employees and contractors [even those working side by side], with a number of employees regarding their contractor colleagues as inferior, second-class citizens, perpetuating a classist work environment that should have no place in a modern day developing economy.
  9. There are firms who have nearly as many contracted workers as they do employees.
  10. There are some, especially within the single largest grouping/type of contract service, where 99% of the workforce is comprised of contractors.
  11. A lot of the principals of third-party contract suppliers are not respected by their workers. They are perceived as negotiating cheap wage rates to get contracts, paying inadequate wages while enriching themselves from the sweat and labour of others.
  12. Most contract negotiations [especially in large and globally linked companies] are conducted and championed by trained procurement specialists. A part of their role, and sometimes their salary/incentive package, is contingent on negotiating with suppliers so the company pays as little as possible for contracted services/supplies. And though best value does come into the equation, procurement specialists are trained to start with least cost.

Labour photo 2

So back to the questions about outsourcing or contracting out labour.

Is it corporate greed?

Is it corporate survival?




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