A tripartite agreement is a legal agreement or contract between three individuals or parties. These agreements can be a useful tool when setting up a tripartite employment relationship to grow your international workforce.
In this article, we explain everything you need to know about tri-party agreements, including:
- the precise meaning of ‘tripartite agreement’;
- when your company should consider using one;
- the risks of not using these agreements;
- key terms to include in a tripartite agreement.
Please note, this article provides general information. You must seek professional advice to determine whether a tripartite agreement is the right choice for you.
What is a tripartite agreement?
Consider a regular contract or agreement: One person agrees with someone else, to do something in return for an item of value (called ‘consideration’, in contract law). One of the most common forms of agreement is an employment agreement or contract. But sometimes, you may need to arrange an agreement between three different people or ‘parties’. This is where a tripartite – literally ‘tri party’ – agreement, can prove useful.
An example of a tripartite agreement is ‘novation’. In novation, rights and obligations under the original contract are transferred from the original party, to a new third party. All parties must consent to novation.
When should you consider a tripartite agreement?
Listed below are two common cases where tripartite agreements have proven useful:
- Intra-group transfers. It is common for large companies to have branches in different countries which are set up as separate legal entities (e.g., subsidiaries). What if an employee seeks to transfer from country A to country B, within the same multi-national? This sometimes occurs as part of a permanent switch; at other times, it is a temporary ‘secondment’. The original employer in country A, the new employer in country B, and the employee him or herself, can all commit to a tripartite agreement to determine how the new employment relationship would work. Note, a tripartite agreement may not be the most appropriate legal option for all intra-group transfers;
- There can be major benefits to outsourcing a particular service or function, such as payroll: especially when outsourcing a function globally. In these cases, a tripartite agreement can be useful for setting out the rights and obligations of each party.
What are the risks of not having a tripartite agreement?
It is possible to carry out an intra-group transfer, or to outsource, without a tripartite agreement. There can be some risks involved in this option, however. Two examples of how this could go wrong include:
- Confusion over employer role. In most countries, employers have an extensive range of obligations, such as providing annual leave, providing a safe and healthy workplace, and paying minimum wage. If there is no tripartite agreement in place, it can become unclear who has employer obligations. In a 2014 New Zealand Employment Court case, Judge Inglis faced a situation where “difficulties are compounded having regard to the tripartite relationship at issue here”. In that case, the employee was employed as a prison literacy tutor by the company ‘WDL’. The employee had an agreement with WDL. And WDL, in turn, had an agreement with the Department of Corrections (the agency that actually runs the prisons). But there was no agreement between the three distinct parties. The employee was terminated as a result of a Department of Corrections investigation. This raised the question, was this a fair dismissal given that the employer didn’t themselves investigate? A tri-partite agreement would have clarified the obligations of each party.
- Severance obligations. In some countries, outsourcing a function from one company to another (from a ‘customer’, to a ‘service provider’), can mean incurring severance obligations for employees in the customer’s company. This can sometimes be avoided by a tripartite agreement that transfers the employee to the service provider (with that employee’s consent’). For an in-depth analysis of how this operates in different countries, see the 2018 Global Outsourcing Employment Handbook.
What should you include in a workforce tripartite agreement?
Usually, in a workforce tripartite agreement, all parties agree that the original employment relationship (with company x) will be switched to a new employer (company y). At the same time, the original employment contract is terminated, without severance or other benefits that usually accrue on termination.
When framing a tripartite agreement, important matters to consider include:
- the continuation of ‘length of service’, where this is relevant for employee benefits;
- a continuation of other key terms in the original contract, with the new employer;
- any terms in the original contract which specify how consent to transferring rights, or obligations under the contract, is to be obtained;
- a formal release from liability for both parties with respect to the original agreement that has now been terminated;
- an indemnification clause to ensure that each party will pay damages to the other, if any arise due to an alleged breach of the original contract.
When operating across international borders, a tripartite agreement should also identify which laws are to govern the contract. An English case, Chunilal v Merrill Lynch  EWHC 1467 (Comm), concerned the intra-group transfer of a Merrill Lynch employee. The employee alleged that, under English law, an implied term of his contract had been breached through a ‘perverse’ reduction of his bonus payment. As the tripartite agreement did not specify which country’s laws applied (not to mention the fact that the employee agreed to the contract in New York, and actually worked and lived in Hong Kong), his case failed.
If you are thinking about expanding your global workforce, you must ensure that you pick the right legal and compliance structures to suit your business. In some cases, it may make sense to incorporate a company in a foreign country. In other cases, it makes sense to hire a Professional Employer Organization (PEO). When outsourcing, seconding or, transferring employees overseas, it is worth considering whether a tripartite agreement needs to be part of your business solution.