Practical Law

PLC Public Sector reports:

Edward Davey, Minister for Employment Relations, Consumer and Postal Affairs, has confirmed  that, following Francis Maude’s statement that the government is minded to abolish the Code of Practice on Workforce Matters in public sector service contracts, the government has sought the views of interested parties with a view to taking such a step.

What does this mean for public authorities? Can they take action now?

What does the code require?

The main provisions of the Code require public sector bodies who are outsourcing services to impose contractual obligations on their suppliers. In short, where the outsourcing involves a transfer of public sector employees under TUPE, the new supplier employer must offer new employees:

• Terms and conditions of employment which are fair and reasonable, and overall no less favourable than those of the former public sector staff who have transferred and alongside whom they are now working.
• Pension provision under which the employer must match employee contributions up to 6%. Although this is significantly less generous than the pension entitlement of the former public sector staff (who must have the right to access benefits which are broadly comparable to their existing public sector scheme), it is far better than many private pension schemes.

A barrier to bidding for public sector contracts?

The aim of the code was to avoid a situation where the supplier hires new joiners on less generous terms than those of the former public sector employees and thereby creates a “two-tier workforce”. But given that pension rights are not aligned, it is moot whether this has been achieved. However, the government’s main concern is that the application of the Code has caused an increase in the costs of public sector outsourcing, as the costs of compliance are built into the contract price paid by the public sector as well as acting as a barrier to some, particularly smaller, and third sector organisations bidding for public sector contracts.

Although the code may put some organisations off, a far bigger barrier to bidding for contracts under which public sector staff transfer is contained in the Fair Deal guidance to central government and NHS bodies, and for local government, in the Best Value Authorities Staff Transfers (Pensions) Direction 2007. These codes require suppliers to offer transferring staff access to a pension scheme which provides the same, or better, benefits than the scheme of which they were previously a member. Compliance with this obligation can mean the private sector employer paying contribution rates of 40% or more, or even (where the supplier becomes an admitted body to the LGPS and is responsible for meeting any deficit on exit) leaving them with enormous pension liabilities at the end of the contract. For more information, see our practice note on outsourcing and public sector pension schemes.

However, there is no suggestion that these pension requirements, will be removed in future. That said, suppliers are increasingly wary of taking on pensions liabilities and public bodies should consider whether they can manage pensions risk more effectively to ensure their contracts deliver best value. For more information on managing pensions risk in outsourcings from local government, see  our practice note on managing pensions risk in local authority outsourcing.

Status of the Code: Do public bodies have to wait for the Code to be abolished?

Although the Code applies to most public sector bodies (academies are excluded) and many public bodies adopt the Code as best practice, the Code is non-statutory and therefore it is open to public sector bodies to ignore it. However, the requirement to comply is contained in many public sector standard contracts, including SOPC4 for PFI projects. Given that the costs associated with compliance will be passed back to the public body through the contract price, public bodies currently outsourcing services may decide to pre-empt the government’s decision by removing the requirement to comply with the Code from their contracts. Before doing so, they should consider the impact on any internal policies or locally agreed or collective agreements with their unions.

What about existing contracts?

The eventual abolition of the Code is unlikely to mean that suppliers can ignore an existing contractual provision requiring their compliance with the Code, though in practice the public sector purchaser may be unlikely to enforce compliance.

But it may not be in the supplier’s interest to ignore the Code if to do so would damage employee relations and its pricing has already factored in the costs of compliance. The public body may therefore wish to actively vary the contract to remove the provision and negotiate any consequential changes to the financial model, possibly through reliance on a change in law provision (providing it covers guidance) or a change protocol.

Although a change of this sort is unlikely to trigger a requirement for a new procurement, if it is made along with other changes to the contract, such as a reduction in the scope of the specification, the public body should consider the benefits of making the changes against the risk of a possible challenge under the Public Contracts Regulations 2006. For more information on varying contracts and the procurement regime, see this ECJ decision.