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The Compliance Conundrum

The advent of Sarbanes-Oxley was just the tip of the iceberg. HRO service provides can help your company sort out the ever-growing complexities of compliance.

by Peggy Cope

"What we got here…is failure to communicate.” Movie lovers will recognize this quote from “Cool Hand Luke.” What you might not spot so readily is the bearing this concept has on one of the pressing issues of outsourcing today: compliance.

Compliance and governance issues are a nagging worry in the back of many executive minds, and both an excuse and a tool in the world of outsourcing, according to Iris Goldfein, vice president of global product development for ExcellerateHRO.

“Compliance is one of many reasons people outsource,” said Goldfein, who uses recruiting as one example of this. Whether a company has grown by acquisition or has decentralized, it is not unusual to find its officers worrying that they might not even know if they are compliant. “They use outsourcing to standardize and to centralize processes,” said Goldfein.

As companies continue to expand, whether domestically or overseas, compliance is going to be a red-button issue affecting recruiting, taxation, absence management, payroll, and a veritable flotilla of other HR functions.

“Compliance is a reflection of the regulatory environment in every country that relates to its own citizens and the international trade and services that it is trying to promote on behalf of its own service providers,” said William B. Bierce, a principal of law firm Bierce & Kenerson, which specializes in outsourcing representation for buyers and providers. “It behooves governments to promote clear protections and high standards so you get best practices worldwide.”

Indeed, it behooves multinational corporations to get a grip on what those protections and standards are so they don’t run afoul of them.

That’s where communication enters the picture and becomes part of the challenge. According to Bierce, “The contracts mandate that an enterprise service provider comply with the applicable laws, and the provider says it will do everything necessary, but there’s a gap as to which laws will be allocated to whom.”

To bridge the gap, he suggested, “You need, at the onset of a project, to designate a liaison. You need a periodic clients’ discussion with compliance officers, and you need to have a clear agreement on the scope of compliance responsibilities from the beginning. RFPs are egregiously vague about what is agreed to be the provider’s responsibility and what remains the customers’ responsibility.”

The solution to the compliance conundrum, according to Bierce, is the adoption of business process management where there is visibility into the design of the outsourcing process and integration of insourcing and outsourcing for a holistic overview by enterprise customers, and, hopefully, with the service provider. In short: more communication.

“There’s no rocket science here,” said Akiba Stern, a principal at legal firm Morgan, Lewis & Bockius LLP. “It’s about doggedness, diligence, dotting the I’s and crossing the T’s. Know your obligations, make sure the partner you select is known for not taking shortcuts, and document it in a contract. Different industries have different histories of taking on some of these obligations and risks. There’s no magic bullet other than doing your homework, being diligent, being thorough, and being prescriptive in your contract, while making room for the law. How will you pay for anything that goes wrong, and who will pay for it?”

Most providers agree that they are required to do a certain amount under law, according to Stern. When it comes to liability-shifting issues, though, a company can try to find out how much a potential provider is willing to take on. In many cases, a service provider will be willing to take on some risk—but they are likely to charge a risk premium.

And when choosing a provider, make sure it has coverage in the areas where you have people. If you have employees in Sri Lanka, Estonia, and Egypt, you will need a provider that has people on the ground keeping tabs on all the relevant regulations, whether it’s payroll or retirement benefits. And if something goes wrong, you need to know to what extent your provider will be responsible for any penalties and what it will cost you to make that part of the service they provide.

Asking the tough questions up front is key, according to Goldfein, who cites the complexity of recruiting on a global basis. “If you are doing an extensive amount of recruiting, you’re interviewing, setting up interviews, but ultimately the hiring manager and maybe other staff will talk to the recruits. Certainly you can’t control it if someone asks inappropriate questions. You can’t do it if it gets to be global, or if people from more than one continent are asking questions with different value sets. That kind of intimate relationship makes compliance questions very complicated, as well as a significant liability.”

Another area that is prone to compliance entanglements is payment and the classification of exempt and non-exempt employees. “Mistakes get made in classification. If that happens, and someone works over 40 hours and doesn’t get paid overtime, serious penalties can be ascribed for that,” said Goldfein. “It’s another kind of compliance, and outsourcers do it for many employers because they are cognizant of the rules, and hopefully will help you do better with those rules.”

When you set out to select an HRO provider that will cover you on the compliance front, she advised, “Look for an outsourcer with a track record of doing it well and wisely with little or no litigation. They should understand the metrics, have a clear understanding as to where the outsourcers’ responsibility, authority, and acceptance of risk begin and end. You need to get all this very clearly outlined in the contract.”

It’s not an easy area to get a firm grip on, particularly given its shifting nature. And finding a vendor with the capability to handle compliance can be difficult. Sourcing firms that specialize in helping companies match up with the right outsourcer are a growing, important sub-industry, said Goldfein. In addition, “large companies can rattle off the outsourcing organizations that handle companies of their size and complexity,” she said. “But finding the match is an art, for whatever is most important to you.”

Given that the time from making the choice to outsource to the go-live date can be a two- to three-year period, compliance is an ongoing and continuously changing issue.

“HRO is a very complicated little animal, a young industry, with different models shaking out,” said Goldfien. “We are probably the first of the second-generation offerings in a young market. In some respects, the mistakes were made by early adopters that we learned from, and we made the investment to come into the market with an offering that cures a lot of the ills of the trailblazers. There are many different levels of maturity among the vendors, and very different models. In addition to compliance, organizations have to sort through what is the best match for them.”

Tags: Contributors, Engaged Workforce, Learning, Multi-process HR, Sourcing

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