Offshoring: Ways to Reduce Your Risks When Congress, States Threaten Restrictions

The focus, at all levels of government, on economic recovery and job growth has spurred proposed state and federal legislation that takes aim at offshore outsourcing.

For example, four proposals pending in Congress would define new rules for how companies use outsourcers. Three focus on offshore call centers, while a fourth would discourage offshoring by ending various tax benefits received by companies doing business overseas. Meanwhile, state lawmakers have proposed prohibiting companies that send business out of state or offshore from receiving government contracts and other financial benefits.

While none of the bills seem likely to become law soon, CIOs considering outsourcing business operations such as call centers should anticipate the affect that this type of legislation could have on the costs of outsourcing and include provisions in their outsourcing agreements to address the potential impact.

Congress Takes Aim

Congressional legislation includes the “American Jobs and Closing Tax Loopholes Act,” which addresses outsourcing generally. The legislation is part of a larger bill sponsored by Rep. Charles Rangel (D-N.Y.). The provision is designed to keep jobs in the United States by eliminating various tax benefits received by companies doing business overseas, including companies that outsource. If it becomes law, the provision would generate an estimated $14.5 billion in foreign tax revenue over 10 years.

While Rangel’s bill passed the House in May, the Senate revamped the measure—setting aside all but one of its provisions to enact an extension to unemployment benefits in July. Matthew Beck, communications director and policy adviser to the House Ways and Means Committee, says, however, that advocates for changing the foreign tax rules plan to revive the issue.

The remaining bills, which address call centers, are under review by various congressional committees. They include:

• Call Center Consumer’s Right to Know Act (H.R. 3621): This bill would require call center employees who receive or initiate a call to disclose their physical location to customers. The measure is meant to ensure that consumers know with whom they are sharing their personal information and in what country that person is located. Theoretically, the bill would encourage customers to place pressure on companies who have offshore call centers to change their approach to outsourcing or risk losing business.
• Notify Americans Before Outsourcing Personal Information Act (H.R. 427): This bill goes further to ensure that U.S. citizens know where their personal information is going—and in the process make outsourcing less attractive. The measure would prohibit a business from sending any U.S citizen’s personally identifiable information to an affiliate or subcontractor in another country without first notifying the individual.

  If this bill becomes law, compliance would create logistical challenges for companies. Not only would a company have to take additional steps to notify individuals about how their information is handled, it would also need to set up a duplicate onshore infrastructure to handle the data of any customers that object to sending their information overseas.

• TARP Reform and Accountability Act (H.R. 384): If your company getting federal bailout money, a provision in this measure (which has passed the House and is pending in the Senate) would prohibit you from outsourcing new customer service or call-center jobs to foreign companies.

In addition, in June, Sen. Charles Schumer (D-N.Y.) said he was considering introducing a bill that would impose a 25-cent tax on each of the roughly 1.6 billion calls made annually from the United States to offshore call centers. The legislation would also require companies to inform U.S. customers that a call is being transferred outside of the United States and to which country the call is being routed. The per-call tax would be assessed on the company transferring the call.

Schumer reasons that by making outsourcing cost-prohibitive and by requiring companies to inform consumers that calls are being sent overseas, this legislation will make outsourcing call centers offshore less attractive to U.S. companies and reduce the number of jobs sent overseas.

Protecting Local Jobs

Pending legislation in three states would require companies that want to receive state benefits—such as government contracts—to keep jobs either in those particular states or within the United States.

A bill in New York, the State Financial Incentive Protection Act, (NY A4250) would prevent state financial incentives from going to companies that outsource jobs outside the state. The bill broadly defines financial incentives as “any agreement or understanding” between the state and a business that provides for awards, grants, loans, tax benefits or other financial assistance.

A similar bill in the New Jersey legislature (NJ A3516) would prohibit businesses that outsource jobs overseas from receiving state contracts or grants and prevent the state from investing funds in such businesses. In Pennsylvania, meanwhile, the proposed “Agency Contract Prohibition” bill (PA H440) would mandate that government contracts for services include a provision requiring that all work be performed within the United States. It would essentially prohibit Pennsylvania government agencies from awarding contracts to bidders who outsource jobs or functions offshore.

How to Make Offshoring Agreements Legislation-Proof

It’s difficult to predict when, or if, legislation that would change the outsourcing value proposition will become law. But you can protect your company’s interests through the terms of your contracts with offshore outsourcers.

For example, consider adding the following terms to your call center services agreements:

• Include a provision that lets you end the agreement if any new laws or regulations increase your company’s costs by more than a specified percentage. Ensure that you’re not subject to the same fees you’d pay if you ended the contract for other reasons, and that you can exercise this provision before any new laws or regulations take effect.
• Negotiate a right to terminate your agreement if regulatory or legal changes create conditions that adversely affect your ability to continue with it—including harm to your company’s reputation.
• Prohibit suppliers from relocating U.S.-based call centers without your approval. If you do agree to move a call center offshore, ensure you define who pays any taxes arising from such a move and how any future taxes will be allocated. Consider specifying that any increased taxes resulting from relocating a call center without your approval will be your supplier’s responsibility.
• Define responsibility for taxes generally. Stipulate that any excise taxes on calls originating in the United States that are sent abroad are either paid by the supplier or shared equally between the parties.
• Reduce your tax exposure. If you have call centers abroad, ensure that “first line” call handling occurs within the United States. For example, a U.S. call center or an automated voice-response system can reduce the number of calls you need to send offshore and decrease the associated tax burden. You can also reduce customer calls by providing assistance through Internet-based customer-care options, such as chat or an online knowledge base.

Michael Overly is a partner and Julie Kim is an associate in Foley & Lardner’s Los Angeles office, and Matt Karlyn is a senior counsel in Foley & Lardner’s Boston office.