Infotech and the Law: Offshoring backlash here to stay ? at least for now

Eliza Nagle

Offshoring has repeatedly made headlines and presents significant issues for many services businesses that hold federal, state and local contracts. In recent years, a wave of proposed federal and state legislation has been aimed at addressing the use of offshoring by U.S. businesses.

Offshoring is the practice of performing service contracts outside of the United States. It is a political hot potato, receiving much attention at all levels of government and from the press.

The offshoring debate largely concerns its impact on domestic workers, and fear that white-collar jobs in the United States will be lost to workers in other countries.

The threat of identity theft and homeland security issues have emerged as significant concerns for businesses that perform contracts that give them access to sensitive personal, medical or financial information.

To many, the debate has a familiar ring, sounding much like the debate that has swirled around statutory preferences given to domestic goods by the Buy American Act. Conceptually, anti-offshoring legislation is similar to the Buy American Act. Instead of providing protection to U.S.-made products, anti-offshoring legislation is viewed as providing protection to the U.S. white-collar worker.

Although there is still much disagreement in government and industry as to whether offshoring has a significant impact on U.S. workers, over the past few years, Congress and state legislatures have joined the debate by proposing legislation that would curtail offshoring. The legislation introduced in Congress and at the state level has taken on different forms.

For instance, certain proposed legislation would prohibit governmental agencies from awarding a contract to a company that does any of the work outside the United States. Other legislation would require that contracts be done by U.S. citizens or legal visa holders, or that would require reporting of employee terminations caused by offshoring. Other legislation would address privacy concerns.

To date, anti-offshoring legislation has been rather unsuccessful for a variety of reasons. One is a concern that offshoring legislation at the state level could violate the Commerce Clause of the Constitution, which grants Congress the exclusive authority to regulate foreign nations. Another reason is fear that the legislation might have an adverse impact on international treaties.

The attention on offshoring practices and how they are used in government contracts has not diminished over the years. In 2004, about 200 offshoring bills were introduced in the states. In 2005, similar bills were reintroduced in Congress and several states.

A handful of states have enacted anti-offshoring legislation. New Jersey prohibits state contract work from being done outside the United States, and North Dakota provides a preference for in-state contractors. Several other states have commissioned studies of offshoring and its impact.

Contractors performing services for government agencies at the federal and state level can expect continued, even increased, attention on offshoring. The intersection of privacy concerns, U.S. jobs and government contracts makes this area particularly thorny and ripe for continued debate. Because of the political implications of offshoring, it is an area through which contractors must step carefully.

As the results of the studies on offshoring are released, contractors may expect a flurry of action by the government in response. Because of the many and varied forms that anti-offshoring legislation can take, businesses performing services contracts need to be aware of enacted and pending legislation or executive orders that may have an impact on their ability to bid for, win and perform contracts.

Eliza Nagle is an associate in the Government Contracts practice of DLA Piper Rudnick Gray Cary US LLP in Washington. Her e-mail address is eliza.nagle@dlapiper.com.

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