Generally, if a private enterprise wants to outsource work offshore that has no relationship to the provision of goods or services to any state or local governmental entity, state anti-offshore-outsourcing measures currently in place are unlikely to affect you because these measures are predominantly intended to regulate only state government contracting practices. However, certain state proposals are directed squarely at offshore-outsourcing practices in the private sector and seek to impose requirements or restrictions on such activities.
These proposals fall into a number of general categories: (1) requirements that offshore call-center operators disclose their location; (2) restrictions on the transfer or processing of consumer information offshore; (3) various reporting and notice requirements relating to such things as the number of employees an entity has in the United States and abroad, or the number of employees that will be displaced by an entity’s offshore outsourcing; and (4) restrictions on government grants and incentives extended to companies that engage in offshore outsourcing.
Although no bills in the first three categories have yet been enacted into law, California came very close, with three such bills (discussed below) vetoed by Gov. Schwarzenegger this fall. A few states have enacted legislation falling into the fourth category, however, and additional measures of that type (also discussed below) are pending.
Call-Center Regulation
Does your transaction involve the offshore outsourcing of call-center services? California AB 2715 (vetoed Sept. 29, 2004) would have required businesses in California to include in their contracts with all call centers (not just offshore) a provision requiring call operators to disclose their physical location upon the request of a California resident. This appears to be the most popular form of offshore-outsourcing regulation in state legislatures and is sometimes coupled with restrictions on transfer of personal information during offshore customer calls. For example, Illinois HB 6571 is a bill that would not only require foreign call-center operators to disclose their location to customers calling from Illinois, but would also prohibit them from receiving personal information from a customer without first receiving the customer’s affirmative consent.
Restrictions On Data Transfer
Does your transaction involve the processing of customer data offshore? California SB 1451 (vetoed Sept. 30, 2004) would have applied stringent California privacy laws to the offshore processing of consumer medical and financial information pertaining to California residents. Ohio HB 459 would prohibit the transfer of “credit or other financial information of a consumer” in Ohio to an offshore location without the prior written consent of the consumer. Arizona SB 1080 would prohibit health-care providers and institutions from contracting for the offshore transcription of patient medical records.
Reporting Requirements
Where do the entities involved in your offshore transaction currently have employees? California AB 3021 (vetoed on Sept. 30, 2004) would have required California employers to include in their wage and contribution reports the number of employees maintained in California, the United States, and worldwide during each reporting period. A number of other proposals require that employees displaced by any outsourcing contract receive notice before being displaced. For example, Minnesota HB 2440 would require an employer to provide its employee with 90 days’ advance written notice if the employer intends to terminate such employee’s job in Minnesota to shift his or her work offshore.
Restrictions On Government Grants
Do any of the entities involved in your transaction receive grants, loans, or funding for employee training or other types of business incentives from state agencies? A new law in New Jersey, SB 1452, isn’t limited to offshore outsourcing; the law requires state grants for customized employee training to be returned if the jobs for which the training was provided are relocated or outsourced out of state within three years following the end of the term of the grant. Connecticut SB 5660 would disqualify businesses from receiving economic-development grants and loans for seven years if they transfer a certain number of jobs outside of the United States.
Conclusion
Although the various bills directed at private entities would not ban offshore outsourcing directly, they have the potential to impose significant burdens. For example, a company that has outsourced support or customer-service calls to an offshore call center may be faced with satisfying multiple state requirements for the handling of calls from customers located in different states. Similarly, a company that has outsourced the handling of customer data offshore may need to consider individual state requirements, or outright prohibitions, that apply to the processing of that data offshore.
What does this all mean to you? In light of the potential impact of state anti-offshore-outsourcing legislation, parties involved in or contemplating purely private offshore-outsourcing transactions should keep a watchful eye on these types of legislative developments. However, since many of the measures discussed above have been vetoed, have expired, or are due to expire at the end of the 2004 legislative sessions, it doesn’t seem likely that any substantive state anti-offshore-outsourcing measures will be put in place any time in the near future. Furthermore, although a new crop of proposals will likely appear when legislatures reconvene in 2005, prior track records indicate that these proposals will have a tough hill to climb.
