There is much rumour that Government will announce plans to withdraw the
so called “Two Tier Code” in public sector outsourcing contracts in
the near future. Whilst seemingly in keeping with the Government austerity
drive and the externalising of public sector services, such a move nonetheless
represents a significant policy change.

The Code was first introduced under Lord Prescott (as he now is) in 2003
to prevent new private sector recruits being hired “on the cheap” in
an outsourcing context thereby under cutting the terms and conditions of ex
public sector workers (whose pay and benefits were preserved) and creating a
“two tier” workforce. Mark Hammerton, partner at International Law
Firm Eversheds comments: “Abandoning
the Code would be likely to lead to a material simplification and cost
reduction for private sector firms and “third sector” service
providers who bid to provide public sector services. However, no-one should
believe this will offer an automatic panacea to contractual disparities and
problems in outsourcing.

“Whilst
the aims of the Code were perhaps laudable, the Code has added to the cost of
bidding for and securing public sector contracts, a cost ultimately picked up
by the public purse. The Code, together with the other aspects of public sector specific
“gold plating” has represented something of a barrier to entry for
smaller, less sophisticated providers lacking the HR and bid infrastructures of
the big outsourcing firms.”

“Before the Code is
withdrawn, there are vital issues to resolve up front and significant legacy
issues: will the Code cease to apply from a specified date, in which case
services let under a contract entered into prior to that date will continue to
be subject to the Code? Or will it continue to apply where a contract has been
procured (via the OJEU procedure) on the basis that the Code will apply? This
must be made clear from the outset to ensure a bidding level playing field and
reduce the risk of procurement law based challenges.

“There are and will
remain significant differences in public sector outsourcing, most notably that
relating to pensions provision. The “Fair Deal” provisions
(effectively requiring on-going defined benefit/final salary pension provision
effectively replicating the public sector arrangements) represent a substantial
cost of public sector outsourcing contracts. The next issue is what degree of
“gold plating” will continue to be required in this context. This is
also something which the Hutton Commission is looking at in the context of the
wider provision of public sector pensions.”

22 July 2010