May the (work)force be with you

Dealing with workforce issues will be a key part of establishing a successful public services mutual. Graham Burns highlights the main considerations.

The creation of a mutual from an existing public sector business unit will usually involve the reorganisation of the workforce and in many cases, employees transferring into the employment of a new organisation. However, this is not always the case: if the service is completely new or if it is proposed to use secondment as a short-term alternative, or the ‘retention of employment’ model in the NHS. In most service contracts, workforce costs account for 65% or more of contract costs, and therefore where a transfer of employees is likely, it is essential to assemble quality information on the likely payroll costs and to follow the correct procedures to avoid costly claims.

The rules affecting workforce transfers are derived from three main sources; statutory obligations, contained in legislation such as the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”); mandatory guidance for public sector employers, such as the Cabinet Office Code of Practice on Workforce Matters in Public Sector Service Contracts, or the CLG Code of Practice relating to Local Authority Service Contracts published in 2003 (‘the Codes’); and good practice built up over time in the market.

TUPE

The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) provide some basic protections where a transfer of employees is contemplated:

• Transferring employees keep their original terms and conditions (with some limited exceptions) with no break in their continuity of service. Any rights, issues or claims they had against their original employer are inherited by the new employer.
• All workers likely to be affected by a transfer (not just those who actually transfer) have a right to be informed and consulted about the proposed new arrangements by their employer. Failure to properly inform and consult entitles the employees to bring a tribunal claim for a compensatory award.
• There should be no dismissals or detrimental changes to employees’ terms and conditions by reason of the transfer (if there are, employees can automatically claim they have been unfairly dismissed). The exception is if the employer can demonstrate that the changes are for an “economic, technical or organisational reason entailing changes in the workforce”.
• The new employer has a statutory right to ask the outgoing employer to provide accurate minimum information about the workforce and payroll costs (employee liability information). Failure to provide this information may result in a tribunal claim for compensation of at least £500 per employee affected.

The Regulations clarify that TUPE applies, not just on the disposal of a business, but also where a service is outsourced, changes hands or is brought back in-house, (a “service provision change”).

In practical terms, TUPE passes to the new service provider all existing liabilities in relation to the workforce. Therefore new providers need to be clear what they are taking on. The parties will use the contract to allocate the risks associated with workforce and payroll costs. The service provider will seek warranties (i.e. formal promises backed up by a financial remedy) on the state of the workforce and the associated costs, and each party will seek indemnities (i.e. a right to receive recompense) in respect of costs and liabilities which it believes it cannot control. The basic rule is the outgoing employer is responsible for all costs and risks arising before the date of transfer, and the new employer from that date onwards.

Codes of Practice

The two Codes on workforce matters – one applicable to central Government and the NHS, and the other to local authority contracts – set the benchmark for appropriate protection for employees. The Guidance issued under Section 101 of the Local Government Act 2003 requires authorities to protect the terms and conditions of employees during a contracting exercise and to have regard to relevant guidance issued by the Secretary of State. Compliance with the Code is monitored by the Audit Commission. The main planks of the guidance are:

• Public sector employers should ensure the principles of TUPE apply in their contract, even if in strict legal terms they do not.
• Employers must make appropriate arrangements to ensure that pension rights are protected – either by facilitating continued membership of a final salary public sector scheme – or by requiring the new employer to provide a broadly comparable pension scheme (see further below).
• The public authority is required to ensure in the contract that, when recruiting new staff, the new employer offers these new recruits terms and conditions which are “overall, no less favourable” than those enjoyed by the employees who originally transferred under TUPE and alongside whom the new recruits are working, performing duties of a similar nature. The new employer is required to consult with trades unions before offering terms to these new joiners.
• These new joiners must be offered fair and reasonable pension benefits: this can be a final salary scheme, or a money purchase or stakeholder pension scheme with at least 6% employer matched contribution rate.

The purpose of the third and fourth strands was to prevent the emergence of a two tier workforce, unfortunately, what constitutes “overall no less favourable” is unclear and open to interpretation. Furthermore, there may be difficulty in deciding whether someone is working alongside and performing similar duties to a transferee.

Pension Rights

Government responded to criticism from unions that outsourcing of services had resulted in a diminution in pension benefits. In the local government context, we have Section 102 of the Local Government Act which empowers the Secretary of State to require local authorities to insert terms into their contracts to ensure that worker’s pension rights are protected during an outsourcing, re-tendering or when the service is brought back in house.

Both Codes require public sector employers to make suitable arrangements in respect of the pension benefits of transferring employees. The basic requirements are set out in a Cabinet Office communication ‘A Fair Deal for Pensions’ reissued in 2004. In simple terms, service providers taking on staff have a choice – either to allow employees to remain in their existing public sector final salary pension scheme (where this is possible through an arrangement described below), or alternatively to provide a new or existing employer’s pension scheme, which offers benefits which are ‘broadly comparable’ to those currently enjoyed. The test of broad comparability is measured by the Government Actuary’s Department. Employers who plan to take a lot of public sector transfers can apply for a ‘GAD passport’ which avoids the need to make an assessment on every transfer. It is also possible to buy an ‘off the shelf’, GAD approved scheme. Either way, the costs and time of arranging suitable pension provision can be very significant and providers will wish to factor this into their business plan, since it can add significantly to their cost base.

In examining comparability, the actuary will look at past service liabilities, i.e. the benefits that employees have accrued before the transfer, often after many years of service and future service benefits – what they can expect to receive for their personal and employer contributions after the transfer. Past service liabilities can be particularly problematic – often because the investment pot may be insufficient to provide the future benefits that employees are entitled to receive when they retire.

Employees have the option, but not the obligation, to transfer their accrued benefits across to a new fund through a ‘bulk transfer’. The actuaries for the old scheme and the new scheme will need to agree the basis for comparison of accrued benefits and new benefits to ensure a ‘no less favourable’ equivalence is provided.

What if there is a shortfall in the available pot of funds? A key commercial issue which must be addressed in the contract negotiations, is who will bear the risk of under-funding of these benefits. Increasingly it is seen offering poor value for money for authorities to seek to push this risk onto service providers – although some organisations have unwittingly accepted this risk – often at serious cost to their finances. This can be the ‘sleeping goliath’ of contract risks and must be analysed carefully and possible ring-fencing protections should be put in place.

Can Employees Remain in a Public Sector Scheme?

If feasible, this may often be the best and least costly option for service providers. For transferring employees this option offers more certainty and comfort that their benefits should remain unaffected. In the local government sphere, it is possible for service providers to become an ‘admission body’ to the Local Government Pension Scheme (LGPS). This entails entering into a formal agreement with the administering local authority for the scheme, (an admission agreement), under which the service provider agrees to pay to the fund on demand, the appropriate contributions for the employees who have transferred.

Drawbacks of this arrangement can be that the service provider has little control over the contributions that the LGPS may demand in future years – he could find himself with increasing payroll costs which have not been budgeted for in the contract, unless appropriate caps are included in the contract. Also, authorities often require a performance bond to protect the LGPS against the service provider becoming insolvent leaving contributions unpaid, which can be expensive. Furthermore, the admission arrangement only covers employees while they remain employed to service the original outsourcing contract - if re-deployed, new arrangements must be put in place.

In NHS transfers, there is no equivalent to an admission arrangement, however, for charitable and not for profit providers, it may be possible to apply for an order under Section 7 of the NHS Superannuation Act 1967, allowing the service provider to become a contributing employer to the NHS Pension Scheme. These orders are discretionary and applications are considered by the NHS Business Services Authority.

In the context of primary care services, certain organisations may qualify to allow employees to remain in the NHS Pension Scheme because they hold a relevant form of primary care contract and their constitution takes the required form.

Conclusion

In response to the issues outlined above, it is important that commissioners and new mutuals alike have a clear strategy for dealing with workforce issues. Transparency of information will be essential to obtain best value for money in creating a new mutual provider. Providers will want to carry out a proper due diligence on the risks involved and seek appropriate protections against unforeseen costs in their contract with the commissioner. Winning the hearts and minds of frontline staff on these emotive issues will be essential.

Graham Burns is a director and solicitor at TPP Law. He can be contacted on 020 7620 0888 or via This email address is being protected from spambots. You need JavaScript enabled to view it.

TPP Law has also produced an article on choosing the right legal structure for a mutual model for delivering public services. It can be read here.