UK: Outsourcing For Small And Medium Businesses: New Guidance On Data Transfers

Last Updated: 14 July 2006
Article by Bridget Treacy

What is the relevance of the data protection regime to an outsourcing transaction? In an outsourcing transaction, data processing (i.e. the transfer of the data) may take place at several stages: during due diligence; perhaps during contract negotiation; and during the transition or implementation stage.

What are the customer’s duties?

The data controller (i.e. the customer) must satisfy itself that it can legitimately transfer the data to the outsource vendor and that any such transfer will comply with the first data protection principle, that is, fair and lawful processing. This requirement is generally satisfied either by the fair processing conditions of "consent" (not always practical due to considerations of commercial sensitivity or confidentiality) or "legitimate interest" (more frequently used). However, where sensitive personal data are concerned, the Act imposes an additional condition. While the condition most frequently relied upon in this context is consent, it must be freely given, specific and informed and, in these circumstances, is often impractical to obtain.

Where due diligence is performed, there may be a need for the customer to disclose to the outsource supplier a certain amount of personal data, including data relating to the directors, employees, customers and, possibly, other suppliers. As it can be difficult for the customer to satisfy its obligation to provide fair processing information at this time (given the likelihood of commercial sensitivity) it is usual for the data to be anonymised prior to disclosure. Confidentiality undertakings should also be employed, in particular specifying the return or destruction of the personal data in the event that the transaction does not proceed.

Personal data will also be transferred or "processed" during the transition or implementation stages of the contract and probably on an ongoing basis throughout the contract term. Here, the fair processing requirements must also be satisfied.

What are the vendor’s duties?

If the vendor is a mere processor, it will have no obligation to comply with the Act and the controller will seek to flow down into the outsource contract certain of its obligations as controller under the Act. In addition, the seventh data protection principle requires the customer, as controller, to evidence the processing arrangements by a written contract, to require the vendor to process data only in accordance with the customer’s instructions, and to ensure that the processor has in place adequate technical and organisational security measures.

In practice, the majority of outsource vendors seek to characterise their role as that of processor, rather than controller. This effectively limits their data protection compliance obligations to those specified in the contract. It is still common, particularly in outsource deals involving smaller businesses, to see contract terms simply requiring the parties to comply with their relevant obligations under the Act. This lets a processor off with very light compliance responsibilities, given that the Act does not impose any obligations on a mere processor. The better approach is to set out in the contract, in some detail, exactly what is required of the processor, including compliance with security requirements.

Alternatively, it may be the case that the outsource vendor is actually a controller. This will be a question of fact and requires careful analysis of the data processing activities in the context of the specific services to be outsourced.

What other safeguards can be built into the agreement?

It is increasingly common for customers to impose detailed security obligations on outsource vendors. These may cover technical security measures relating to the systems over which data may be transferred, accessed, manipulated and stored, as well as organisational security measures governing access to premises, the prohibition on staff bringing data storage devices on the premises (e.g. mobile phones and memory sticks) and sometimes the requirement to wear special clothing.

In addition to the imposition of detailed security measures, customers should undertake due diligence on aspects of data security before a vendor is selected. Audit rights should then be agreed as part of the outsourcing terms, and exercised by the customer during the contract term.

Dealing with cross-border transfers of personal data outside the EEA

If personal data are to be transferred abroad as part of the outsource transaction, the eighth data protection principle must be satisfied. This prohibits transfers of data outside the EEA unless the importing jurisdiction has "adequate" data protection.

Transfers abroad may include intra-group transfers where the service provider is part of the same group, rather than a true outsource vendor. Recently, much enthusiasm has been expressed for so-called "binding corporate rules for international data transfers" which consist of a system of internal contracts between the subsidiaries of a corporate group. So far, however, only GE has received approval for this process in the UK.

Alternatively, personal data may be transferred to third parties, either:

  1. to an outsource vendor located offshore; or
  2. to a local vendor who subsequently transfers the data to its off-shore operation.

The most commonly-used method of transfer is the model contract clauses, approved by the European Commission and Information Commissioner as a means of ensuring data protection "adequacy".

Conclusion

Although the Information Commissioner’s guidance relates to small to medium businesses, it is also of relevance to larger organisations. However, as it deals only with controller-processor transfers, it should be treated with care. In addition to the Information Commissioner’s recommendations, those contemplating outsourcing transactions may also wish to consider the points set out in our checklist below.

Checklist for prospective outsourcers

  • Identify the flows of data: source and destination
  • Establish the respective roles: controller v processor
  • Ensure the controller’s own processing is compliant
  • Consider whether controller/processor contracts are required to facilitate the transfer
  • Build other contractual safeguards into the outsourcing agreement The document entitled "Outsourcing – a guide for small and medium-sized businesses" can be found on the Information Commissioner’s website at: www.ico.gov.uk. (Click on the heading "Data Protection" in the left-hand column, then on "Good Practice Notes").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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