Recent TUPE developments: transfer of public sector service contracts - the new Code of Practice and its implications

Adam Nash, a trainee solicitor in the Employment & Incentives Department at Lewis Silkin, looks at the Government's Code of Practice on Workforce Matters in Public Sector Service Contracts.

Background

When employees transfer from the public sector to the private sector as the result of a contracting-out exercise, their terms and conditions of employment might be protected under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (the TUPE Regulations). However, even if the TUPE Regulations do not apply, employees may be able to rely on one of two Government Codes of Practice to preserve their public sector terms and conditions.

In March 2003 the Government published a Code of Practice on Workforce Matters in Local Authority Service Contracts. It remains in force and is incorporated into all new and retendered local authority service contracts where former public sector employees transfer to private sector employers.

Code of Practice on Workforce Matters

On 18 March 2005 the Government published a Code of Practice on Workforce Matters in Public Sector Service Contracts. This extends the same principles to the wider public sector, including the NHS.

The Code states that service providers awarded public sector service contracts involving the transfer of staff from public sector organisations must not only preserve the terms and conditions of the transferring staff but also ensure that any new joiners who will work alongside them are offered employment on terms and conditions that are, overall, no less favourable than the terms and conditions of the transferred employees.

The new recruits must also be offered a reasonable pension, through membership of a good quality employer pension scheme or membership of a stakeholder pension scheme with an employer contribution.

The effect of the Code

The Code affects the terms and conditions not only of the transferring staff but also of any new recruits employed to work alongside them. Under the Code the private sector employer must employ staff transferred from the public sector employer on their existing terms and conditions.

New joiners to the public sector organisation who will be working alongside the transferred staff must be offered terms and conditions that are overall no less favourable - this does not mean that they have to be exactly the same - than those of the transferred employees; and they must be offered a reasonable pension.

Organisations needing to comply with the Code

With a limited number of exceptions the Code applies where a public sector organisation transfers employees to a private sector organisation as part of a service contract. It will also generally apply where those staff are later transferred again to a new service provider following a re-tender of the service contract.

The Code does not apply retrospectively to contracts that were entered into prior to 18 March 2005 and does not apply where the Code of Practice on Workforce Matters in Local Service Contracts applies. Other exemptions also apply and include public corporations and trading funds, Independent Sector Treatment Centres, transfers where the Retention of Employment Model for NHS PFI contracts applies, and higher and further education institutions and Academies.

A private sector organisation that sub-contracts out the work, with the result that transferred staff are again transferred - this time to the sub-contractor - will retain responsibility for ensuring that the terms of the Code are observed. This responsibility does not pass to the sub-contractor. Relevant clauses should, therefore, be included in the contract with the sub-contractor.

Compliance

The Code is not legally enforceable. However, it does provide for disputes to be resolved by binding arbitration. If a service provider fails to comply with the Code it is unlikely to be considered for further work by a public sector organisation.

Treatment of employees transferred from public sector organisations

The Code specifies that service providers must demonstrate to public sector organisations their support for the following principles and their willingness to fully implement them:

1. When staff are transferred, the principles of the TUPE Regulations should be applied, even if they do not actually apply in law. In essence the TUPE Regulations say that:

employees must be transferred with full continuity of service;

employees must transferred on the same terms and conditions of employment as they had before the transfer - including trade union recognition but excluding pensions (subject to point 2, below); and

employees' representatives must be consulted first.

2. The terms of the transfer must 'specifically protect the pensions' of the transferring staff and, essentially, they 'should be offered membership of a pension scheme which is broadly comparable with the public service pension scheme that they are leaving'.

Treatment of new joiners to an outsourced workforce

The Code requires that new staff who are recruited to work on a public service contract alongside staff transferred from the public sector organisation must be offered employment 'on fair and reasonable terms and conditions which are, overall, no less favourable than those of transferred employees'. The terms and conditions may differ from the package given to transferred staff, but must have the same overall impact and ultimately, must not 'undermine the integrated nature of the team or the quality of the workforce'.

There must also be consultation with the relevant trade union or employee-elected workforce representatives involving genuine dialogue on the terms and conditions to be offered to such new recruits. The consultation must involve a 'genuine dialogue' but otherwise the way it is carried out is for agreement between the service provider and the representatives concerned.

Pension arrangements for new joiners to an outsourced workforce

Staff transferred to a new service provider following the retender of a public service contract must be offered membership of either a good quality employee pension scheme, ie a contracted-out, final-salary based defined-benefit scheme or a defined-contribution scheme, or a stakeholder pension scheme. In the case of a defined contribution or stakeholder scheme the employer must match employee contributions up to 6%.

Additionally, on a re-tender, the new service provider must offer one of these pension options to any staff who transfer if they had the right to it under the Code prior to the transfer.

Monitoring

Throughout the length of the contract, the public sector organisation can ask the service provider to give it the information necessary to monitor compliance with the Code. This might include the terms and conditions offered to transferred staff and those offered to employees recruited to work on a contract after the transfer.

However, requests for information must be 'restricted to that required for the purpose of monitoring compliance', and must be designed to place the minimum necessary burden on the service provider. There must also be a respect for commercial confidentiality.

Enforcement

If there is a dispute about compliance with the Code, it should be a matter for discussion and resolution between the service provider in question and the relevant trade union or employee-elected representatives.

If this is not successful, or if a public sector organisation itself raises concerns, the Code provides a mechanism for handling the dispute. The public sector organisation can ask the service provider for an explanation. If it is not satisfied with the response, it can ask the service provider to take immediate action to remedy the situation.

If the public sector organisation is still not satisfied it can resort to the Code which also requires public sector service contracts to 'include a provision for resolving disputes about the application of the Code in a fast, efficient and cost-effective way as an alternative to litigation, and which is designed to achieve a resolution to which all the parties are committed.' This Alternative Dispute Resolution mechanism is set out in Annex A of the Code.

What are the Code's shortcomings?

The Code only applies for as long as the contractor retains employees who transferred from the public sector organisation. Once these transferred former public authority staff leave or are dismissed, the Code will no longer apply and the contractor or sub-contractor will be free to hire new staff to work in that contract on lesser terms and conditions.

Summary

If a contract is being awarded by a public authority for the first time, and staff are transferring from it, their terms and conditions and their pensions must be adequately protected, and in any event be no less favourable than they were before.

New recruits must be employed on terms that are overall no less favourable than those given to transferring employees. Membership of a good quality employer pension scheme or stakeholder pension scheme must also be offered, and employee contributions matched up to at least 6%.

Where transferred employees or new recruits are members of a recognised trade union or have elected representatives, these must be consulted on the terms and conditions to be offered.

Contractors must be able to show that they are complying with the Code, eg by keeping a copy of new recruits' terms and conditions.

Once the private sector contractor no longer retains any of the employees that transferred over from the public sector organisation, the Code will no longer apply.

Next week's article will consist of the answers to some frequently asked questions on the TUPE Regulations.

Adam Nash is a trainee solicitor  in the Employment & Incentives Department at Lewis Silkin (adam.nash@lewissilkin.com )

Further information on Lewis Silkin can be accessed at www.lewissilkin.com