Understanding International Laws Governing Outsourcing

Hiring service providers seems simple. You only need to contact them through their official sites, negotiate your terms, and sign a contract. Afterward, you brief them on the project and share data.

However, did you know that these straightforward business process outsourcing (BPO) workflows hide complex legal policies and procedures that every party must comply with?

If you want to avoid hefty violation penalties, improve your brand’s reputation, and outshine competitors, you have come to the right page. Through this article, we help you understand global outsourcing regulations.

The current state of global outsourcing

Outsourcing arrangements involve entrusting front- and back-office tasks to third-party companies. This practice allows small, medium-sized, and large companies to focus on cost-effectively improving their products and services.

Because of its advantages, Grand View Research’s statistics reveal that the global BPO market reached $280.6 billion in 2023. The organization expects the sector to expand at a compound annual growth rate (CAGR) of 9.4% by 2030.

Industry growth drivers

The need to save operating expenses and accelerate core competencies to keep pace with the changing business landscape drives the BPO industry’s growth. The benefit of accessing worldwide resources and meeting evolving industry demands also contributes to the market’s expansion.

These factors have pushed the adoption of cloud computing and artificial intelligence (AI) to boost business efficiency. These tools help reduce costs, accelerate time-to-market, and enhance quality control processes. 

Factors restricting market expansion

Grand View Research warns that data security and intellectual property issues can potentially restrain BPO’s growth during the forecast period. The urge to cut costs leads providers to operate in countries without established global outsourcing regulations.

As a result, providers often worry about the services they offer and how to handle clients’ confidential data. They seem reluctant to provide support because even a tiny error can permanently harm both parties’ market positions.

An introduction to global outsourcing regulations

After knowing BPO’s current status, it is crucial to understand the policies and procedures surrounding this practice. These insights help you avoid the high cost of violations.

Such data also informs your development and execution of strategies to prevent system downtime while working with your potential BPO partner. It helps align the contractor’s work and compliance strategies with yours.

Explore the different global outsourcing regulations covering common BPO hubs below.

U.S. federal and state laws on outsourcing

The U.S. federal government does not have specific laws for BPO transactions. However, the country has state laws regulating local companies’ activities. These rules can apply to the terms of an outsourcing agreement and the client’s industry. Below are some federal regulations applicable to BPO:

• The Health Insurance Portability and Accountability Act of 1996 (HIPAA) sets strict medical data protection and privacy standards. The law directs healthcare BPO firms and clients to sign business associate agreements (BAAs) to safeguard protected health information (PHI).
• The Worker Adjustment and Retraining Notification Act of 1988 (WARN) requires businesses to alert employees of layoffs through advanced written notice. Although not industry-specific, the law mandates BPO organizations to comply with a 60-day notice requirement when implementing critical workforce changes.
• The Gramm-Leach-Bliley Act of 1999 (GLBA) strengthens financial data privacy and security. The GLBA demands that financial institutions sign BPO agreements. These contracts should include provisions requiring the provider to obey the law’s data collection and usage transparency policies.
• The Health Information Technology (IT) for Economic and Clinical Health Act of 2009 (HITECH) lists data breach notification requirements. BPO firms must quickly report electronic PHI compromises to the Department of Health and Human Services (HHS) and victims.
• The Telephone Consumer Protection Act of 1991 handles automated calling and telemarketing. This regulation instructs BPO providers to seek customer permission before conducting outbound calls. They must follow the National Do-Not-Call Registry protocols.

BPO legal frameworks in the Philippines

The Philippine government’s BPO legal frameworks favor other global outsourcing regulations. The administration recognizes and supports the industry’s value due to its economic benefits.

Hence, the country enacts the following laws to support local BPO companies and foreign companies:

• The Department of Information and Communications Technology (DICT) Act of 2016 expands the country’s ICT industry, including the BPO sector. The law also sets standards to streamline international business partnerships.
• The Data Privacy Act of 2012 tracks confidential data collection, use, and disclosure by public and private organizations, including BPO providers. It requires companies to obtain authorization from individuals before performing those processes and charges fines for non-compliance.
• The Special Economic Zone Act establishes special economic zones in the region to encourage foreign investments and boost economic development. Enterprises operating within these areas receive tax incentives and exemptions.
• The Telecommuting Act encourages private employers to offer employees work-from-home (WFH) arrangements. It emphasizes work-life balance, addresses traffic congestion, and enhances productivity.
• Article 86 of the Philippine Labor Code requires BPO firms to implement a 10% night shift differential of employees’ regular daily wages. This mandate demands employers to add the rate if workers take shifts between 10:00 p.m. and 6:00 a.m.
• The Foreign Investments Act of 1991 allows multinational corporations to establish BPO hubs in the country. The law directs foreign investors to register their new branches with the appropriate government agencies, such as the Philippine Economic Zone Authority (PEZA), and adhere to the regulations above. 
• The Omnibus Investment Code of 1987 provides incentives, including tax holidays and duty-free capital equipment importation. These benefits attract foreign companies to set up or expand their BPO operations in the country.

In addition to these laws, the Philippine administration has rolled out initiatives to support the local BPO industry. The government aims to expand the market’s economic contribution, especially since its revenue could reach $0.70 billion in 2024. 

Below are some projects the admin launched to broaden the nation’s outsourcing sector:

• Conduct and enhance BPO career development and training programs. For example, the Technical Education and Skills Development Authority (TESDA) partners with BPO associations and companies to host workshops and training sessions.
• Establish BPO centers of excellence (CoEs) nationwide. This effort helps prolong the industry’s growth by offering incentives to providers and clients. Davao City, Metro Cebu, and Metro Manila are some examples of CoEs. 
• Implement the Next Wave Cities Program. The initiative forms BPO hotspots in rural areas. It provides virtual jobs for provincial applicants and workers. The project also helps BPO companies lower their operating expenses.
• Provide financial support. The DICT funds BPO and tech startups to produce their products and services. The benefits include access to critical resources, networking opportunities, and mentorship programs.
• Modernize nationwide broadband infrastructure. The Philippine government executes efforts to upgrade the country’s internet speed and connectivity. These initiatives include accelerating the licensing process, building a national broadband network, and installing free public Wi-Fi.

Outsourcing policies in India

India has no centralized global outsourcing regulations similar to those of the countries mentioned above. However, its government has practices based on the nature of outsourcing services, whether they are back office, finance, IT, or telecommunications functions.

Here are some national laws applicable to offshore BPO in the country:

• The General Financial Rules and the Delegation of Financial Powers Rule, established in 1963 and 1978, emphasize transparency and accountability in financial transactions between public-sector organizations and BPO firms. These rules set standards for financial management and government contracting.
• The Indian Contract Act of 1872 establishes a comprehensive framework for drafting, implementing, and enforcing BPO contracts. It clarifies the rights, obligations, and remedies for parties involved in contractual relationships.
• The Specific Relief Act of 1963 governs the resolutions available for BPO contract breaches and other civil wrongs. Its provisions influence risk management strategies and measures to comply with global outsourcing regulations.
• The Foreign Exchange Management Act of 1999 oversees international transactions, investments, and external commercial borrowings. Indian companies engaged in outsourcing must obtain the necessary approvals, maintain records, and adhere to prescribed limits for foreign exchange activities.
• The Income Tax Act of 1961 provides guidelines for tax planning and structuring associated with BPO contracts. The law mandates providers to consider tax implications, incentives, and regulatory requirements when developing service pricing models.
• The Policy on Foreign Direct Investment (FDI) imposes specific conditions regarding BPO, such as minimum capitalization requirements and performance metrics. Compliance results in incentives.
• The Code of Civil Procedure (CPC) of 1908 indirectly affects BPO in India. The CPC establishes a framework for initiating legal proceedings related to outsourcing contracts. It backs up contractual rights through civil courts in the country.

Global outsourcing regulations in Mexico

The Mexican government nearly banned BPO when it enacted a new outsourcing law in 2021. Initially proposed in November 2020, the prohibition aimed to support the country’s formal economy and safeguard labor rights.

However, the public and private sectors opposed the idea of an outright ban, saying it would significantly obstruct the economy and cost jobs. U.S. companies also expressed concerns about the restriction’s negative consequences for nearshoring factories.

Three years later, Mexico’s global outsourcing regulations allow subcontracting for services not associated with a company’s principal business activity. The legislation requires BPO firms to deliver only specialized services and prevents clients from depending solely on subcontractors.

The administration mandates these specialized service providers and clients to adhere to the enumerated laws:

• The Federal Labor Law demands employers give Mexican workers their legally entitled statutory rights and benefits. These benefits include maternity and paternity leave, weekly rest days, Sunday bonuses, and severance payments.
• The Social Security Law establishes the framework to protect the economic well-being of workers and their beneficiaries. The law details the rights, obligations, contributions, and benefits related to social security coverage, including healthcare.
• The National Institute for Employees Housing Fund (INFONAVIT) Law facilitates access to affordable housing for workers in the formal sector. The institute offers workers housing loans and financing options and implements housing programs to foster homeownership.
• The Income Tax Law (ISR) outlines progressive tax rates for individuals based on income levels. It requires individuals and businesses to file tax returns, report income, and make tax payments.
• The Value Added Tax Law (IVA) applies to the sale, lease, importation, and provision of goods and services within Mexico. The government imposes IVA on the value added at each stage of production, distribution, and consumption.

Besides these local rules, BPO providers must comply with all general Specialized Service Provider or Specialized Work Registration (REPSE) rules outlined in Article 15 of the country’s labor law. These global outsourcing regulations demand the following:

• Maintain a valid REPSE.
• Sign a comprehensive service agreement.
• Identify all BPO employees with a photograph, name, badge, or identity code.
• Submit quarterly reports to the Mexican Social Security Institute (IMSS) and INFONAVIT.

GDPR on international outsourcing

The General Data Protection Regulation (GDPR) is one of the most crucial global outsourcing regulations service providers must observe, primarily when serving European Union (EU) citizens. The law implements stringent standards to protect personal data and privacy.

The law replaces the EU Data Protection Directive of 1995. It prioritizes transparency and broader privacy rights for data subjects. Below are the common GDPR rules:

• Appoint a data protection officer (DPO) to oversee GDPR compliance.
• Emphasize fairness and transparency when processing confidential information. 
• Specify explicit and legitimate purposes for data collection and usage.
• Obtain valid permission to collect and handle relevant consumer details.
• Maintain accurate and up-to-date customer data. 
• Establish data retention policies and timelines.
• Grant data subjects the right to access and alter their personal information.
• Adopt “Privacy by Design and Default” practices, which require companies to apply data and privacy security procedures when producing products, services, and systems.
• Execute data breach detection, response, and notification procedures.
• Ensure the recipient country has robust security measures when performing international data sharing.

Violating these policies costs billions of dollars for incident response, threat mitigation, and settlement. For example, the Irish Data Protection Commission charged Meta $1.3 billion in fines in May 2023 due to non-compliance with the GDPR.

According to the watchdog, the social media and tech giant continuously transferred European users’ sensitive data to the United States. The company did the process even without robust data protection measures. 

The bottom line

BPO is vital to cost-efficient operations and increased productivity. It enables your team to concentrate on enhancing products and services without worrying too much about front- and back-office tasks. It lets you deliver high-quality offerings faster and more effectively.

However, before reaping such benefits, you must know what legal repercussions await when working with a BPO company. The above discussion on direct and indirect global outsourcing regulations can help prevent considerable funds from being spent on lawsuits and fines.

Let’s connect if you need more clarification about this topic. With a vast pool of related articles, Unity Communications is ready to give you insights into the legal world of international outsourcing. Besides, the certified provider houses scalable human and tech resources if you require front- and back-office support at competitive pricing.