Will it end in tiers?

The two-tier code applying to terms and conditions when public services are outsourced has already been abolished for central government, while the future of its equivalent in local government is uncertain. Emma Satyamurti assesses what will happen next.

In response to the outsourcing of public services and functions, both at central and local levels, the Labour government brought in Codes of Practice for central and local government respectively, designed to secure parity of terms and conditions for new staff recruited into the outsourced venture to work alongside staff transferring from the public sector.

On 13 December 2010 the Cabinet Office announced that the Code of Practice on Workforce Matters in Public Service Contracts governing central government, known as the Two-Tier Workforce Code (TTWC), was to be abolished with immediate effect. Replacing it is a more flexible, voluntary arrangement centering on six Principles of Good Employment Practice. (There are some transitional arrangements to deal with pre-abolition contracts.) The new Principles cover issues such as fairness of terms and conditions, equality, skills and training, and employee engagement.

The government’s stated intention in abolishing the TTWC is to open up the public sector market to small and medium sized enterprises by freeing them from the requirements of matching the terms and conditions of new staff with those of ex-public sector staff. Under the Principles, employers are encouraged to offer “fair and reasonable pay, terms and conditions” to new staff, a much weaker requirement than under the TTWC. In the words of Francis Maude, the Principles are designed to allow employers to set terms and conditions which are “motivating and affordable”.

How is this new regime likely to work in practice? The short answer is that employment practices are likely to drift back to how they were before the Code.

Before the introduction of the Code, there was little to stop businesses and other organisations who had successfully bid for outsourcing contracts offering new recruits worse terms than those enjoyed by transferring public sector employees who were (and remain) legally entitled to retain their existing terms and conditions. Against this background, the purpose of the TTWC was to counter the creation of a hierarchy – or ‘two tiers’ – of employment terms and conditions in circumstances where private and ex-public sector staff were working alongside each other in outsourced enterprises.

Under the Code, which was incorporated into service contracts, employers were required to ensure that the terms and conditions offered to new recruits were “no less favourable overall” than those of their ex-public sector colleagues following an outsourcing. The Code also included more limited protections in relation to pension provision, though employers were not required to provide the same level of benefits to new recruits as to those transferring from the public sector.

By contrast with the strictures of the Code, the Cabinet Office announcement stresses the non-compulsory nature of the new Principles, stating that they should “not act as a barrier to those wishing to contract with central government as these principles are not mandatory, nor will their adoption be part of the formal procurement or decision making process.”

The replacement of the TTWC with arrangements giving considerably greater freedom to employers seems to fit the government’s wider agenda of using competition in the public sector to secure value for money and help bring down the deficit. But could there be a hidden cost? Two-tier workforces are likely to be particularly vulnerable to disputes, low morale, high turnover and lower productivity. For one group of workers within a workforce to be forced to work alongside another group enjoying more favourable terms and conditions is surely a recipe for unhappiness and resentment, as well as raising real questions about equality and fairness.

Many concerns have been expressed about this by trades unions, with UNISON, for example, warning of the danger of “race to the bottom” in pay and conditions as contractors compete to offer the lowest price for contracts.

UNISON has also highlighted the danger that the removal of the protections offered by the Code will be most keenly felt by part-time, low-paid workers, a disproportionate number of whom are women. The government is legally obliged to conduct equality impact assessments to consider how its policies will impact on the sexes and how they will promote equality, but it is unclear whether an impact assessment was undertaken in relation to the decision to abolish the Code.

The consequences of the abolition of TTWC may potentially ripple out beyond the direct impact on workforces. The affected workforces will, after all, be delivering public services. If those workforces are rendered less effective by the divisive effects of a re-emerging two-tier arrangement, we may all ultimately be impoverished by poorer, lower quality services.

The Code relating to local government remains in force for the time being. However, the government has indicated its intention to review the effectiveness of the six principles for central government in January 2012. This may well pave the way for a similar change in the arrangements for local government outsourcing in due course. The government was already planning a consultation exercise on this issue.

Emma Satyamurti is a solicitor in the employment team at Russell Jones & Walker. She can be contacted on 020 7657 1535 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..