In the video game sector it is often necessary to draw on specialised knowledge from various fields (e.g. for graphic design projects). In such cases, it is increasingly common to cooperate with external experts by outsourcing certain processes. This form of cooperation carries many advantages, but if the conditions are not carefully framed it can create serious risks for the game development company.
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
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, attorney-at-law, Employment practice, Wardyński & Partners