United States: A Legislative Status Report on Outsourcing

U.S. lawmakers’ attempts to impose federal limitations on outsourcing, including limits on a contractor’s ability to offshore outsourced contractual obligations in a U.S. government procurement, appear to have stalled. While still a hot topic in Congress, the United States’ commitment to free trade, as well as its various international treaty obligations, serves as a formidable bulwark to any attempt to restrict outsourcing. Individual states have also sought to impose limits on outsourcing, but these efforts remain controversial and may yet turn out to be unconstitutional because of their intrusion on the federal foreign affairs power. Therefore, since a federal response remains the most realistic answer to the off-shoring phenomenon, this article briefly summarizes the national legislative situation regarding the status of outsourcing.

There are few current federal legislative and regulatory limitations on federal contract work abroad and other outsourcing activities. This is in large measure because legislative attempts to restrict outsourcing often conflict with other U.S. international trade commitments. For example, the World Trade Organization ("WTO") Government Procurement Agreement ("GPA") generally prohibits participating countries from discriminating among or between foreign suppliers’ goods or services as they relate to government procurement. The participation of the United States in numerous multilateral and bilateral trade agreements and other international treaties also represents a significant check on legislative attempts to restrict outsourcing.

The primary restraints on outsourcing in the United States are imposed through privacy legislation. Under Gramm-Leach-Bliley ("GLB"), for example, a financial institution may not, directly or through an affiliate, disclose to an unaffiliated party any nonpublic personal information unless notice is provided to the consumer. See 15 U.S.C. § 6802(a). The privacy rule under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), subject to certain exceptions, further calls for the disclosure of so-called "protected health information" only if the individual who is the subject of the information authorizes the release in writing. See 45 C.F.R. § 164.502(a). Unlike the EU Member States and other individual countries, however, the United States has no national privacy legislation relating to the use and disclosure of personal information. Therefore, while GLB and HIPAA place individual restrictions on outsourcing personal information in their respective sectors, there are no broader limitations on the outsourcing of U.S. personal information.

The only other legislative restriction on outsourcing was the Thomas-Voinovich Amendment (the "Amendment"), which was attached to the Consolidation Appropriations Act of 2004, P.L 108-199, 118 Stat. 362(e)(2004). The Amendment stated that "any activity or function of an executive agency that is converted to contractor performance under Office of Management and Budget Circular A-76 may not be performed by the contractor at a location outside the United States except to the extent that such activity or function was previously performed by Federal Government employees outside the United States." The Amendment, however, only applied to job competitions conducted using 2004 appropriations. Senator Dodd’s proposed legislation discussed below (the United States Workers Protection Act of 2005) represents an attempt to make the Amendment permanent.

Several pieces of legislation currently pending before the U.S. Congress would impose new restrictions on outsourcing. As discussed below, one piece of proposed legislation would expand GLB and require that notice be provided to U.S. citizens prior to the transfer of any personally identifiable information abroad. Another bill would impose more draconian U.S. government funding restrictions on companies that outsourced their jobs overseas. Despite Congress’ expressed concern regarding outsourcing, however, there has been no discernible action on these bills since their introduction in Congress. Furthermore, in many instances, these bills would have to be reconciled with other U.S. international trade commitments before they could be implemented into law. Therefore, no restrictions regarding outsourcing are anticipated on the national legislative front in the near future.

The following represents a brief summary of the outsourcing legislation currently before Congress.

1. The Commission on American Jobs. In H.R. 828, Representative Waters proposed that the Secretary of Commerce establish a Commission on American Jobs (the "Commission"). Among its designated responsibilities, the Commission would collect data on outsourcing by "companies of interest," including the number of jobs outsourced, the dates that they were transferred offshore, and the location of the outsourced jobs. A "company of interest" includes any corporation or legal entity organized under the laws of the United States. The Commission also would propose possible measures to prevent outsourcing.

2. Federal Funding Prohibition. On February 15, 2005, Representative Waters further proposed legislation (H.R. 829) that would prohibit a federal agency from awarding a grant or contract, making a loan guarantee, or providing any other funding to a "company of interest" that has outsourced any jobs during the previous five years. A "company of interest" that fell under the above category could receive federal funding if it agreed to create new jobs equal to 50 percent of the jobs that it outsourced over the previous five years. The "company of interest" would have 18 months from the time of receiving the federal funds in which to create these new jobs.

3. The United States Workers Protection Act of 2005. On June 7, 2005, Senator Dodd reintroduced his bill on limitations on offshore performance of contracts. Representative DeLauro introduced the same legislation in the House of Representatives on July 22, 2005. Specifically, S.1185 and H.R. 3406 propose that an activity or function of an executive agency that is subsequently contracted out to a private contractor may not be performed outside the United States except to the extent that such activity was previously performed by federal government employees outside the United States.

4. Safeguarding Americans From Exporting Identification Data Act (the "SAFE-ID Act"). The SAFE-ID Act also represents a holdover from the previous session of Congress. Senator Clinton reintroduced the Senate bill (S.810) on April 14, 2005. The bill prohibits a business enterprise from disclosing personally identifiable information regarding U.S. residents to any branch, affiliate, subcontractor, or unaffiliated third party located in a foreign country unless: (1) the business enterprise provides notice of privacy protections and complies with safeguards described in specified federal laws (GLB and HIPAA); (2) the consumer is given the opportunity to object prior to such disclosure; and (3) the consumer is given an explanation of how to exercise the nondisclosure option. The SAFE-ID Act makes a business enterprise that knowingly and directly transfers personally identifiable information to foreign entities liable to persons suffering damages because of the misuse of that information. It also authorizes injured parties to file civil actions for violations of the information transmission provisions of the SAFE-ID Act.

Representative Markey introduced the House version of the SAFE-ID Act (H.R. 1653) on April 14, 2005. The House SAFE-ID Act differs from the Senate bill in that it allows for the transfer of personally identifiable information to any affiliate or subcontractor located in a country with adequate privacy protection, provided that prior notice has been given to a U.S. citizen that such information may be transferred to such a third party. If a country does not possess adequate privacy protection, then the U.S. citizen must provide his consent before any personally identifiable information is transferred. The SAFE-ID Act would be overseen by the Federal Trade Commission ("FTC"), which would certify those countries with adequate privacy protections.

The political backlash against outsourcing has not, to date, resulted in significant legislative restrictions. Moreover, even if one of the above bills was adopted, the existing international trade commitments of the United States would make it extremely difficult to enforce such a law. While the legislative situation needs to be monitored, it appears unlikely that Congress will be able to derail the outsourcing phenomenon any time soon.