An announcement this morning by Cabinet Office Minister, Francis Maude, confirms that the Two-Tier Code is indeed to go with immediate effect, although those dealing with existing contracts or tenders which have reached an advanced stage would be prudent to obtain clarity on what precisely “immediate” means.

The Code applied to public sector outsourcing contracts has been the subject of regular criticism and review; although, in recent years, successive governments have resisted further improvements to it or adoption of a European Convention which might achieve a greater degree of pan EU uniformity in its application. In a bid to reduce outsourcing costs and regenerate growth in public services, the Government has determined, after a period of consultation that it should be withdrawn.

Mark Hammerton, partner at international law firm Eversheds comments: “There is no doubt that today’s announcement represents for some a controversial move by the Government. Although a number of Trade unions have in the past expressed concern as to the way in which the Code has operated in practice, highlighting, for example, poor enforcement and incomplete application, the Code was nonetheless viewed as a vital means of preserving pay and benefits in the face of competitive tendering and an inevitable push to drive down costs. The aim of the Code was to protect the terms and conditions of workers in the event of a contracting out of public services.

Whilst ex public sector staff who actually transferred are protected by the mandatory provisions of the Transfer of Undertakings (Protection of Employment) Regulations (TUPE), under the Code new staff hired to work alongside ex public sector colleagues were to be hired on terms “no less favourable overall” (excluding pensions). But this came at a price; considerable bureaucracy, costs and reduced flexibility and opportunity for employers from the large scale providers to social enterprise. It seems that the working group charged by the Government with reviewing the Code and whether it strikes an appropriate balance of interests has concluded that it does not and that the Code should now be removed.

“The Code, which was by way of guidance in nature (but which was almost always incorporated into commercial contracts), will now be replaced by six principles of “good employment” practice. Matters will once more be reviewed in January 2012 but in the meantime the Government hopes that, by the Code’s removal, more private or voluntary service providers will become involved in the provision of public services, boosting opportunity and diversity and helping to realise the Big Society ideals in the coming years. Contractors will now be able to decide the terms and conditions they offer to new recruits. Many of the larger providers will, given their hard fought reputation as good employers and providers of quality services, not be keen to win the so called “race to the bottom” feared by unions.

“The fact withdrawal is immediate, on the face of it, avoids some of the inevitable difficulties of a phased introduction but, in the short term at least, is likely to disadvantage organisations, which currently hold a contract negotiated under the Code and which may tie them to a certain level of pay and benefits when it comes to a renewal. Any changes the removal of the Code will bring about are therefore likely to be long term, not immediate.

“The six “principles of Good Employment Practice” are set out in a Cabinet Office statement. They include an undertaking from Government to: consider the workforce practices of the supplier in the context of procurement as well as staff skills and access to training, encourage fair and reasonable pay and conditions for new workers, ensure contracting organisations have regard to their duties under Equality Act 2010 and that they engage in good industrial relations practice and dispute resolution and to encourage contractors to develop effective staff engagement strategies. As with the Code, these principles are voluntary but it remains to be seen how keenly they will be enforced. There are some interesting procurement/ public sector considerations regarding the extent to which such “HR” aspects may be taken into account.

“It is not the case that the rights of affected employees are left entirely unprotected in the absence of the Code. Employees and unions will clearly be concerned that its removal will result in reductions in pay for those parts of the public sector and its service providers which benefited from it but, for existing employees affected by outsourcing, as a minimum, TUPE will continue to require preservation of pay and conditions in such situations. Similarly, the very many current contracts which provide for additional protection, over and above that offered by TUPE, are also likely to perpetuate this enhanced protection for considerable time to come, at least until those individual contracts have lapsed. Pensions is another area where considerable and often costly protection is afforded to public sector employees and will continue, subject to a separate review of public sector pensions generally.”