Encouraged by the government’s approval of staff mutuals and spin-out companies, many local authorities have seized the initiative and supported groups of staff and members of their communities to take over the running of a former council service.
The Local Government Association has published some examples of these projects, as well as guidance, providing a brief snap shot of the range and complexity of issues local authority lawyers are advising on in this area.
The vision behind the project
The often-cited benefits of employee-owned or run spin-out organisations providing public services include: greater staff engagement and motivation when faced with making the service work as a business; service user involvement in the new entity; and freedom from the bureaucracy that impedes innovation in many large organisations. This freedom enables the new entity to make decisions, such as to recruit staff and to source support services, more quickly. In addition, the new entity is unlikely to be subject to the procurement rules.
However, it is a long road to transform from an in-house local authority department to a fully-fledged commercial undertaking. In succeeding in that journey, the local authority lawyer will be key.
Keeping all the balls in the air: challenges and how to manage them
The role of the local authority lawyer in a spin-out project is anything but easy. For example:
- Who is the client for the legal work? Is it the local authority or the yet to be formed entity? In many situations, their interests will conflict and the local authority lawyer will advise both the authority, in its role as supporter of the project and future commissioner of services to be provided by the entity, and the individuals who will become the new entity’s directors. It is important to ensure that all risks are properly aired and understood by the key stakeholders to enable informed decisions to be taken, and that those decisions are appropriately recorded.
- How does the local authority lawyer ensure they receive appropriate instructions and manage conflicts of interest? Many, if not all, of the individuals who have the requisite knowledge of the service will become employees of the new entity. There may be very few people who can make impartial and informed judgments about the authority’s relationship with the new entity, such as the specification for the service and the contract terms. In those circumstances, the local authority must identify those individuals who will fulfil the client-side function and ensure they are able to take decisions in the authority’s interests.
- How is a TUPE transfer effected when the employees themselves will constitute the transferee and may determine their roles in the new entity? This can make consultation difficult, not least when the plans for the new entity and how it will be structured and deliver services changes as its business case is developed. However, as such projects rely on the commitment and engagement of the affected staff, the arrangements should be reconciled to the TUPE process without too much difficulty.
- How does the local authority lawyer ensure the duty of best value is satisfied when faced with a contract with an entity with no track record, no or limited resources, and which may not even be constituted? Although the in-house team may provide an excellent service, altogether different skills are required when running that services as a business. In this respect, it is important that the authority’s decision makers are appropriately advised on the commercial and procurement risks they may be taking by (a) supporting the establishment of the new entity; (b) contracting with a start-up; and (c) (if there is no procurement for a private sector partner) directly awarding it a contract, so that they can balance these against the benefits accruing to service users and rate payers from the new arrangements.
- How does the authority ensure the staff are supported to establish the entity as well as participate in a procurement process? In these circumstances, employee engagement will be key as a failure to secure the contract may result in a transfer to another employer rather than to a business in which they will have a stake.
In addition, procurement processes are costly and resource intensive at a time when the authority is likely to be committing resources to supporting the spin-out project as a whole. The role of the lawyer and procurement specialists will be key in designing a process that is lean and effective and enables bids from start ups.
At a certain point in a spin-out project, such tensions may become irreconcilable. If the authority has been receiving external legal support, it can help for those lawyers to assume the role of adviser to the new entity, enabling the local authority lawyer to focus on the needs of the authority. For this to work, both sets of advisers must be clear who is advising whom at the various stages of the project. At the end of the day, the likelihood is that the project is only capable of success if the authority supports it. Traditional, adversarial attitudes to the buyer/ provider role will be unhelpful. Instead, the lawyers will be enablers while at the same time ensuring risks are transparent and managed.
Abbie Rumbold, partner at Bates Wells Braithwaite LLP, who has advised on a number of spin-outs, comments:
“the transactions that work best are those where lawyers on both sides are clear about the current commercial drivers for the project and the shared long term benefits of the project and have an agreed approach to where risks associated with the services will lie.”
Those involved in forming a spin-out or staff mutual may find the following Practical Law resources of interest:
- Practice note, Mutualising public services.
- Legal update, New podcast: Staff mutuals.
- Checklist, Key legal considerations when establishing an employee-owned entity to deliver public services.
- Practice note, Registration and regulation of mutuals.