What is outsourcing?

The regulations
in Poland contain no definition of outsourcing, but the concept is
understood to mean long-term commissioning of an outside contractor to
perform certain organisational functions, allowing the outsourcing
company to focus on its core business.

It is most common to
outsource entire processes (full outsourcing), but outsourcing may also
involve only a certain segment of a function (selective outsourcing).

Outsourcing brings many benefits…

For
businesses in the video gaming sector, cooperation on the basis of
outsourcing can provide a range of advantages. First and foremost, it
allows the company to entrust performance of certain areas to another
entity, so that the company can focus on the fundamental aims of its
business.

Outsourcing often allows for a reduction of costs, as
the outsourcer uses the contracted services only to the extent, and more
importantly only for the time, it needs. This reduces costs of salary,
social insurance, holiday, training, and maintaining workstations.

The
outsourcer can also choose from among various suppliers, allowing it to
negotiate a better price as well as access to specialists in various
fields. Outsourcing enables the use of services of experts with great
experience and professionalism when it would be too expensive and
irrational to hire them full-time. The possibility of partially shifting
the responsibility for performance of services is also significant.

…but also substantial risks

Improperly framed rules for performing outsourced services can carry major risks.

First
and foremost there is a risk of a finding that the outsourcing
contractor is in reality an employee. This can occur in instances where
the contractor performs services under the same rules and conditions as
employees. Under Art. 22 §1¹ of the Labour Code, regardless
of the label assigned to the contract by the parties, hiring under the
conditions set forth in the Labour Code is deemed to be hiring on the
basis of an employment relationship. Thus if a person performs his or
her duties (work):

• For a given entity
• Under that entity’s direction
• At a place and time set by that entity
• For pay, and
• Personally,

there
is a high risk that this relationship is one of employment, even if the
parties have concluded an outsourcing cooperation agreement. The
contractor could then apply to the court for a ruling that in reality
the contract between the parties is not a cooperation agreement but an
employment contract. A labour inspector may also assert such a claim.

A
finding that the parties are bound by an employment relationship
generates significant consequences for the outsourcing company deemed to
be an employer. The contractor working to this point on an outsourcing
basis can pursue all rights they would have enjoyed if the parties had
acknowledged from the start that they were in an employment
relationship. In particular, a contractor found to be an employee can
demand:

• Overtime pay (Labour Code Art. 1511)
• Cash equivalent for unused holiday (Labour Code Art. 171)
• Bonuses and other additional benefits to which employees of the given employer are entitled.

It
should also be pointed out that the Social Insurance Institution (ZUS)
is empowered to establish through a decision issued as a result of an
inspection that work performed by a given person is in reality performed
on the basis of an employment relationship and not an outsourcing
agreement, if this has an impact on obligations to pay social insurance
or health insurance contributions. If ZUS finds that because work was in
reality performed on the basis of an employment relationship rather
than outsourcing, social insurance contributions were underpaid, the
employer will be forced to pay the difference, plus interest. The same
applies to any arrears in personal income tax withholding for the period
when there was deemed to be an employment relationship.

There are
also risks of petty criminal violations. Under Art. 281 §1(1) of the
Labour Code, an unjustified change in the form of employment (for
example, at the time when it is found that an employment relationship
exists with a person providing outsourced services under a cooperation
agreement) is a petty offence against employee rights, for which the
employer or a person acting for the employer can be fined
PLN 1,000–30,000.

Outsourcing also carries a risk of disclosure of
confidential information. Cooperating with an outside firm often
requires the sharing of data constituting trade secrets. This
information might then be exploited by the contractor for its own
business ends, passed on to another company, or accidentally released.

Another
risk arises out of the possibility that a contractor might be working
simultaneously for more than one client from the game development
sector, including competitors. In extreme instances, the fruits of work
for one client might be exploited in work for another client.

How can the risks associated with outsourcing be minimised?

The
existence of these risks should not discourage game developers from
using outsourcing, but they should adequately protect their interests.

• Limiting the risk of finding of an employment relationship

To
limit the risk that persons working on an outsourcing basis will be
reclassified as employees, it is essential to avoid actions that would
suggest that they are treated like employees. In particular, the
outsourcer should refrain from issuing instructions on the specific
manner for carrying out a given task. The parties should avoid written
instructions. The best solution is to set certain aims for the
contractor in written form within a given timeframe (e.g. weekly or
monthly). A log of working time of outside contractors should not be
maintained; if necessary, it is better to stick to a record of hours of
services performed on each day.

It is recommended, if possible, to
allow contractors to perform their services at any location of their
choosing. This does not mean, however, that the outsourcer cannot
provide working space, but if so, it is preferable that such space not
be provided free of charge. Separate procedures should be introduced for
the company’s employees and for persons working under cooperation
agreements. Even if the substance of these documents is similar, they
should be separate documents using separate terminology (e.g. referring
to “employees” in one and “service providers” in the other).

Outsourcing
contractors should not enjoy the same benefits as employees, and the
contracts with them should not use wording typical for employment
relationships (e.g. job duties, annual leave, or official instructions).
It is also risky to award “days off” to contractors, when they are not
required to perform services but retain a right to be paid, as this is a
solution typical for an employment relationship.

It should be
stressed that the existence of one of these questionable elements does
not necessarily mean that an outsourcing agreement is in reality an
employment contract. However, a combination of such elements greatly
increases this risk.

• Limiting the risk of disclosure of confidential information

To
minimise the potential leaking of trade secrets, appropriate procedures
protecting the flow of such data should first be introduced.
Transmitting password-protected files is now standard. The market offers
increasingly advanced methods for protection against unauthorised
access.

In the outsourcing agreement, the parties should clearly
address the contractor’s liability for release of confidential data. It
is worthwhile to include the possibility of imposing contractual
penalties in such situations. This approach makes it easier to hold the
other party liable, as in such situations the contractor will generally
have to demonstrate that it was not at fault in the disclosure of data.

• Limiting the risk of competition by the contractor

If
there is a serious risk that an outside contractor’s cooperation with a
competitor could harm the outsourcing company, it is worth considering
specifying in the contract a period when work for competitors is
prohibited. But to ensure that the ban is effective, the scope and area
must be clearly defined. Specific entities regarded as competitors may
even be named. It should be borne in mind, however, that inclusion of
such a ban may have an impact on the fee. Sometimes contractors will
demand additional compensation for including a noncompetition clause,
but it is not necessary to pay separate consideration for the ban. In
this case as well, it is worth including a right to assess contractual
penalties.

***

Cooperation on an outsourcing
basis brings a number of benefits, but to minimise the potential risks
(in particular connected with a finding that the outsourcing is a hidden
form of work under an employment contract), it is essential to
precisely define the rules under which the external contractor will
perform the outsourced services.

Dr Marcin Wujczyk