Outsourcing is an agreement between two employers. One of them (the contractor or subcontractor) provides services to the other (the principal or client) at its own expense and risk, with its own workers participating. The contractor or subcontractor exercises leadership, control, and supervision over its workers.
Advantages of outsourcing
The main advantages of outsourcing are:
Costs
An outsourced company can offer lower prices than the company requesting its services would have to pay if it performed them itself. This type of advantage arises for various reasons, such as economies of scale or specialisation in a specific production process (the experience effect).
Product Flexibility
In some cases, the market fluctuates and the demand for a product or service increases. Companies can meet this demand by handling the increased orders themselves or by outsourcing.
Process Flexibility
Outsourcing allows companies to choose from a range of options. Therefore, companies that outsource seek to improve their processes and resources to differentiate themselves and grow by improving their production factors.
Technical or Financial Capacity
Contracted companies often have the opportunity to perform certain types of work that others cannot. This is because they understand the production process or have the necessary resources to carry it out. For example, we see daily that many of the products we consume are produced in…
Legal and Tax Advantages
Companies may be located in places with different legislation that facilitates the growth of specific activities. We see daily, for example, that many of the products we consume are developed in distant states. Brands outsource their production facilities to locations where they obtain tax advantages and, therefore, more complex profit margins.
Disadvantages of Outsourcing
The main disadvantages of outsourcing are:
Risk of choosing a poor service provider: If the service provider is not selected correctly, it can damage the contracting company’s image.
Risk of the provider becoming a competitor of the contractor: The subcontractor may leverage its knowledge of the client to become a competitor.
Cost reduction may be minimal: The expected benefit of outsourcing, considering the costs the company will incur to perform this activity, may not be as high as anticipated.
Job losses: If a department is eliminated from the company to be outsourced, those jobs will be lost unless the subcontractor takes them on.
Characteristics of Outsourcing
The main characteristics of outsourcing are as follows:
- Contracts between two organisations typically last 5 to 10 years.
- They are carried out between two entities: the contracting organisation and the contracting organisation.
- It saves costs and accelerates the organization’s growth.
- It is used to outsource activities that are not part of the organisation’s core business.
- Good communication between both parties is essential.
Who participates in outsourcing?
Several parties are involved in outsourcing a project: the main company, the contractor, and the subcontractor. On the one hand, the main company is the one that contracts the service. For example, some warehouses subcontract another company for facility cleaning.
On the other hand, there is the contractor, which is the company that hires to perform part of a job or provide a service. In the previous example, the contractor is the cleaning company.
Labour Obligations in the Subcontracting of Workers
Subcontracting is subject to a series of regulations governing the actions of the parties involved. Below, we will examine the obligations of the main company and the contractor.
Main Employer
First, the main employer using labour subcontracting must prove that the contractor has paid all its Social Security contributions. In case of non-payment, the main employer must request a negative certificate from the General Directorate of Social Security (TGSS). The contractor, in turn, must pay the debt within 30 days.
If this certificate is not requested, the agreement between both parties may continue. However, in this case, the main employer must be conscious that they will be jointly liable for any unpaid wages or Social Security contributions that the contractor has failed to make.
Article 42.4 of the Labour Law also establishes that the parent company must inform workers’ representatives about:
- The company name, address, and tax identification number (NIF) of the contracted or subcontracted company.
- The duration of the contract or subcontract.
- The location where the work will be carried out, or the service will be provided.
- The number of subcontracted workers who will be hired to carry out the work or provide the service.
- Occupational risk prevention measures.
In this regard, and to facilitate access to this information for workers’ representatives, the parent company must establish a Register containing data on the contracted companies.
Contractor or Subcontractor
The contractor or subcontractor must inform the General Directorate of Social Security about the identity of the main company to which they are providing services. This must be done in writing and before the start of the work or project.
They must also inform the workers’ representatives about the same information mentioned above regarding the main company.
- Name, registered office address, and Tax Identification Number (NIF).
- Duration of the work or service.
- Place of execution.
- Number of workers hired.
- Coordinated risk prevention measures.
Conclusion
Outsourcing is a contract in which one company hires another to carry out an existing plan or activity that is being perform or could be performed within the company, and sometimes involves the transfer of employees and assets from one company to another.