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The two-tier code was set up to prevent contractors running outsourced council services from operating different terms and conditions for new staff. Now, the Government is considering scrapping the code. Mark Hammerton looks at the implications. There are unconfirmed rumours afoot that the Government will abolish the so-called two-tier code as part of the austerity drive and ministers' attempt to open up public sector contracting. And while trade unions have been critical of the effectiveness of the code – given allegedly-weak enforcement – they are unlikely to be happy if this layer of protection is withdrawn. As part of the best value guidance, the code was introduced into local government in March 2003. Best value authorities must have regard to the code when letting service contracts. In 2005, it was extended to much of the remainder of the public sector. The code protects new starters who ‘work alongside' ex-council staff in performing service contracts for the local authority. The code built on the protection applicable to all employees under TUPE, but which protects only those employees who are transferred or, in respect of consultation obligations, those existing employees who are affected by the outsourcing. Trade unions complained of a two-tier workforce developing, with ex-council staff retaining their local authority terms and conditions while newly-hired employees were recruited ‘on the cheap'. In an effort to prevent these two tiers developing, councils were required to have regard to the code when letting service contracts – whether for the first time or on a re-tender. The code required the council to ensure that, contractually, the contractor employed new recruits on terms and conditions which, taken overall, were no less favourable than those of ex-council staff. The comparison did not include pensions. Rather, new recruits could access a pension scheme – for example, a stakeholder plan – where employer contributions matched theirs up to 6% of salary. In respect of pensions, therefore, the obligation applicable to new recruits was significantly less generous than that to transferring council staff under the terms of the fair deal/pensions direction, but still more generous than those in the private sector. If the code is withdrawn, the Government should be crystal clear about the effective date of the change. Rather than a vague statement that the code no longer applies, it must be clear to which contracts/procurements the withdrawal applies. Councils and contractors will need to know whether the cut-off point is the date of the contract being awarded, the date of the OJEU notice, the date of the contract itself, or some other date. Given the cost, duration and complexity of some procurements, and the realistic risk of procurement challenge risk both on the basis of a lack of transparency and equal treatment – from bidders who have effectively been eliminated earlier on in a process – and/or through making material changes to contracts after award, abolition based on the date of the OJEU notice seems preferable. On the face of it, the removal of a layer of complexity to public sector contracts should make them more accessible to smaller-scale providers and, in line with the so-called Big Society agenda, voluntary/third sector players. However, there still remains significant complexity in respect of local government outsourcing/tendering which continue to act as barriers. In context, removal of the code is perhaps a minor part of the overall considerations which a council will have in mind. The benefits of third sector involvement have to be weighed against more robust factors, such as price, security of provider and efficiency. The factors often collude, but this will not always be the case. An ongoing complexity is the pensions direction/fair deal provisions in respect of transferring employees, which add considerably to the cost and complexity of public sector contracting. The overall review of the provision of public sector pensions will consider this, but it seems unlikely that we will move anytime soon to a situation where councils only need to have regard to the basic TUPE provisions regarding pensions. It would be a bold and controversial move, likely to be met with some resistance by unions, if the Government withdraws the pensions direction and fair deal. Clear transitional provisions are also needed. It would be an unfair and unequal market were the incumbent provider obliged to provide code compliance, while new providers or bidders were not. A further issue arises in situations where councils, despite the abolition of the code, may wish to have regard to the objectives behind the code or so-called TUPE-plus matters. There is certainly an argument to say that these would amount to unlawful, ‘non-commercial' considerations which should not be taken into account. While it is an overstatement to say that we are back in the ‘bad old days' of compulsory competitive tendering, the withdrawal of the code would be one step along the way to removing the so-called ‘gold plating' of public sector contracting. Transferring employees would continue to enjoy special protection, but new joiners would lose that status, and contractors would have flexibility to engage staff on different terms. Any councils currently engaged in procurements or which let contracts in the future should seek more detailed advice on the implications of the removal of the code and its timing. For example, we are already seeing draft contracts containing wording that the service-provider will have to comply with the code only to the extent that it remains in force. Mark Hammerton is a partner at Eversheds

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WHITEHALL

Will the two-tier code be scrapped?

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