The Government’s new attempt at preventing a ‘two-tier workforce’ in public sector outsourced services – what impact will it have for FM providers in this space?

The incoming Employment Rights Bill contains many and various things but one area of particular interest to FM providers who provide services to central and local Government will be the new regime surrounding the ‘two-tier workforce’.

The concept will be familiar to some because there has been a previous incarnation of it which applied between 2005 and 2010. However this time around it will be given a statutory footing whereas previously it was provided for only within a Code of Practice.

What will the new regime require?

The Employment Rights Bill will introduce a mechanism into the Procurement Act 2023 for further regulations to be passed and a Code of Practice to be issued regarding the terms and conditions of employment of public sector employees who transfer to a third party service provider and those they work alongside. This will apply to “public contracts” (as defined in the Procurement Act 2023) that involve the supply of services that are or have been previously performed by the authority (or are frameworks for the future award of such contracts). 

In its simplest terms, there will be power for regulations to be introduced which will require the above outsourcing contracts to include provisions which will ensure that:-

• Transferring authority staff will be treated no less favourably than they were as authority employees; and
• Other employees “of a specified description” will be treated no less favourably than the transferring authority staff. It is anticipated that the description of those other employees will be those provider employees who are working on the particular outsourced contract, but it is unclear whether it would be limited only to those who are recruited after the authority staff have transferred in or also existing employees who are moved onto the contract.

What will be its impact?

The Government believes that this change will kickstart economic growth. It is concerned that the fact of having employees performing the same tasks but being treated differently by their employer in relation to their terms and conditions can lead to low morale which may in turn lead to a high turnover and reduction in the quality of service delivery. 

From our own experience, we haven’t had clients approaching us about a decline in employee morale or increase in staff turnover since the previous anti two-tier workforce regime was withdrawn in 2010. The practical reality is that any employer may have employees performing the same tasks but on different terms and conditions.

Indeed, a difference in terms and conditions between employees performing the same tasks is exactly what the TUPE Regulations can create. TUPE case-law prevents an employer from harmonising the terms and conditions of transferring staff to be in line with the employer’s own employees, but in the public sector outsourcing environment there will be now a form of obligation to harmonise the terms and conditions of the provider’s own employees to be in line with authority staff who have transferred in.

FM providers are unlikely to be persuaded that the Government’s concerns need tackling, or at least that they need tackling in this way. They will be materially concerned about how this will increase the costs of delivering these types of contracts and contracting authorities are likely to be materially concerned about increased tender prices and/or a loss of interested tendering parties. For local Government contracting authorities this could be a particularly acute problem because their budgets are already stretched.

Those increased costs will materialise through:-

• An inability to change the terms and conditions of transferring authority staff even in circumstances where the TUPE Regulations would have permitted the provider to do so. The new obligation to ensure that transferring authority staff are treated no less favourably than they would have been as authority employees arguably cuts across what the TUPE Regulations would otherwise have permitted.
• Any term or condition of a direct recruit which needs to be improved so that it is no less favourable than applies to the authority transferred staff.
• The previous regime allowed for the ‘no less favourable’ test to be applied on a package rather than term-by-term basis but there is no clarity yet on whether that same approach will be applied under the new regime.
• The generally more expensive nature of Government pension schemes.

Under the previous anti-two tier regime, pensions were treated differently in that they were allowed to be less favourable for the provider’s directly recruited staff as long as they met a minimum standard. There is no such carve-out for pensions in the new Procurement Act provisions.

We have seen some online commentary that the new regime would also require the provider to improve the terms and conditions of the authority transferred staff if they were less favourable than directly recruited employees. This would go beyond the previous anti two-tier regime, and the current draft of the Employment Rights Bill does not in fact go that far.

What should FM providers be doing?

The Government recently published an implementation road-map for the Employment Rights Bill which shows the anti two-tier workforce provisions taking effect in October 2026. That does not necessarily mean that the new regime would actually also come into effect in October 2026; there could be a time gap between the Government’s ability to introduce the supporting regulations and code of practice, and its action to do so.

However regardless of when the new regime is introduced (and there is nothing to suggest that the Government is only going to halfway on this i.e. amend the Procurement Act but not then implement the underlying regulations), FM providers are going to have to re-assess how they should price for future public sector service contracts. The cost of delivery will be more expensive. The way the new legislation is drafted means that the new rules could be introduced in respect of a public sector services contract which has already been outsourced, as and when it comes up for its next retender after the legislation comes into effect. Some FM providers may decide to refocus their activities away from public sector contracts. The reality is that the quality of service delivery may be diminished from the fact that a service needs to be scaled back if the price cannot be increased.

This article is part of our Legally FM article series, to read more from this series please click here.