Alec Bennett provides a special bulletin on the sudden (if not unexpected) withdrawal of the public sector version of the ‘two-tier code’, plus we detail this year’s annual payment increases and provide an update on employment equalities developments.

In this article...


Goodbye two-tier code; hello Principles of Good Practice

The withdrawal of the public sector version of the two-tier code this month has a major impact on the arrangements for employees working on outsourced public sector contracts.  As we reported last month, the government has been seeking views on abolishing the Code, but has now announced that it is formally withdrawn, without notice.  Please see comments below in relation to Local Authority contracts and the Local Authority version of the Code.

Until Monday 13 December 2010, when the announcement was made, organisations supplying outsourced public services were required by the Code of Practice on Workforce Matters in Public Service Contracts (‘the two-tier code’) to offer employees recruited in to work on the outsourced contract:

  • ‘fair and reasonable’ terms of employment,  which were no less favourable than those of the transferred public sector staff who they are working alongside under the contract; and
  • pension provision under which the employer had to match employee contributions up to 6%.

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The aim of the Code was to prevent a ‘two-tier’ workforce from arising, whereby newly recruited employees were employed on less generous terms than the ex-public sector colleagues working alongside them.

Whilst this may have been seen as a laudable aim, the practical effect for contractors was that it increased the cost of their bid and made it difficult for smaller and / or not for profit organisations to compete.  It also meant that the increased cost of servicing an outsourced contract was passed on to the public purse.

The removal of the Code is in line with the new government’s focus on reducing the legislative burden, and encouraging smaller businesses and charities to enter the public sector market. 

The public sector version of the Code has been replaced by a set of voluntary ‘Principles of Good Employment Practice for Government, Contracting Authorities and Suppliers’.  Those bidding for outsourced public sector contracts will no longer be required offer ‘no less favourable terms’ to new employees compared to the terms of public sector employees working alongside them on outsourced contracts.  A copy of the principles can be found here - Principles of Good Employment Practice for Government, Contracting Authorities and Suppliers.  

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In summary, the principles are as follows.

  1. Government as a good client – workforce practices are to be considered through the procurement process and outcomes based commissioning should be used as much as possible, rather than prescribing how services should be delivered.
  2. Training and skills – contracting organisations should recognise the importance of key skills, such as literacy, numeracy and spoken English (where these skills are relevant).
  3. A commitment to fair and reasonable terms and conditions – using wording which mirrors the requirements under the old Code, this principle requires supplier employers to ensure that where new private sector employees work alongside former public sector employees, that the new entrants should have “fair and reasonable pay, terms and conditions.”
  4. Equality – contracting organisations should ensure that supplier policies and processes are consistent with the Equality Act 2010.
  5. Dispute resolution – suppliers should have regard to good industrial relations practice on dispute resolution, and consider the services of Acas when disputes have not been resolved internally.
  6. Employee engagement – contractors are encouraged to develop effective staff engagement strategies that enable employees to maximise their performance.

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All six principles are entirely voluntary, and there is no penalty for a failure to adhere to them.

That’s the theory, but what practical issues will now need to be considered by those involved in public sector outsourcing - particularly given that there has been no ‘bedding in’ time allowed for this major change?  In general, there are three scenarios in which these changes will bite.

  1. Existing contracts which refer to the old Code and which are still operating or are extended.  These contracts will remain enforceable, despite the withdrawal of the Code.   It may be, however, that there is a variation clause in the contract which may allow the contracting provider to make changes to reflect the withdrawal of the Code going forward.  Even if this is possible, however, there may be union and employee relations issues to consider.
  2. Organisations which are currently involved in, or about to embark on, a procurement process where the old Code would have applied.  In these circumstances, clarification will have to be provided to bidders as to what is now required in their responses, particularly in relation to the replacement voluntary Principles of Good Employment Practice.
  3. Contracts which have been awarded but not yet signed.  In these circumstances, bidders may resurface prior to signing, arguing that they should be reconsidered because the new arrangements may make their bids more competitive.

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The old Code will not apply where contracts which referred to it are re-negotiated (rather than extended) to omit any reference to it; or where new contracts are entered into without reference to the old Code.

The impact of the principles on employment practices in the delivery of contracted out services will be reviewed by the Public Services Forum in January 2012.

Finally, note that the withdrawal of the public sector version of the old Code by the government does not impact on the local authority version of the Code: the 'Code of Practice on Workforce Matters in Local Authority Service Contracts'.  This Code remains in place, and local authorities should continue using it; but only for the time being, as the DCLG has indicated that it would consider the future of the local authority version of the Code, if the general public sector version of the Code were ever withdrawn.  Other areas related to outsourcing which remain unaffected by the withdrawal of the two-tier Code are:

  • the TUPE regulations 
  • the public sector duty to promote equality
  • “Fair Deal” pension arrangements
  • existing employees’ terms and conditions of employment.

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Employment equalities – more change confirmed

The government’s equality strategy has been published and sheds further light on some outstanding matters in relation to employment equalities. 

  • In April 2011, the government will bring into force the positive action in recruitment and promotion provisions in the Equality Act 2010.  This is the provision that allows employers to prefer a candidate with a protected characteristic over another equally well qualified candidate, provided that the employer’s workforce is under-represented by employees with that protected characteristic.
  • The government has now confirmed its approach to gender pay gap reporting: it will use the reporting duties in the revised public sector duty to promote equality to encourage public sector employers with over 150 employees to publish information about their gender pay gap.  The new publication requirements will come into effect in April 2011
  • The right to request flexible working will be extended to all employees, and a consultation will be undertaken. This change is expected to take effect from 6 April 2011.
  • The government’s response to the consultation on the repeal of the default retirement age will be published by the end of the year.


Annual increases

Proposed rates for statutory sick pay and statutory maternity, paternity and adoption pay for 2011 (with effect from 11 April 2011) are:

  • Statutory Maternity, Paternity and Adoption Pay, and Maternity Allowance, will increase from £124.88 to £128.73; and 
  • Statutory Sick Pay will increase from £79.15 to £81.60.

From 1st February 2011, the new maximum compensatory award for unfair dismissal increases from £65,300 to £68,400.

The new maximum payment for a week's pay increases from £380 to £400, also from 1 February 2011.  

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