October 2002 The two tier workforce


Dear Colleague

On Tuesday I announced the outcome of the review of the Best Value Regime I set up at the time of Party Conference.

It addresses one of the key concerns of trade unions like UNISON and of the workforce concerning the contracting out of local services. That is that a two-tier workforce could emerge because while TUPE largely looked after transferees no protection was given to new recruits. I enclose details of our proposals to address these concerns.

I am pleased that we have been able to move quickly to respond to an issue that was brought up through the party machinery.

Yours sincerely


Labour has always been clear that where local government services are delivered by private sector contractors, this must not involve the slashing the terms and conditions of the workforce. The use of TUPE secured this generally for transferees. But new hires had no protection. This was of concern to trade unions like UNISON as well as to local authorities and good contractors.

At Party Conference last autumn, Stephen Byers announced a review of the Best Value regime for local authorities aimed at improving the quality of services and dealing with the emergence of ‘two-tier workforces’ and unfair terms and conditions for those employed on local government service contracts.

This review has now concluded. The main points of the package are:

Broadly comparable terms and conditions

The current system allowed some unscrupulous contractors to undermine the quality of a transferred out workforce by gradually replacing them with others on poorer terms and conditions. This undermines the quality of the service provided to the local authority.

In future, local authorities will include a condition in all new contracts which obliges the contractors to offer employment to new staff on fair and reasonable terms and conditions which are, overall, broadly comparable to those of transferred employees while allowing contractors to take account of local labour markets and make an assessment of what is the best overall package to offer in order to secure and retain good staff.

For the first time decent pensions for new joiners

Some contractors also undermine the quality of a transferred workforce by recruiting new staff on inadequate pensions or with no pension provision at all. The measures will prevent this by ensuring contractors offer new recruits working on local authority contracts alongside transferred staff a reasonable level of pension provision. The contractor will be free to choose one of the following options for such staff:

– membership of the local government pension scheme

– membership of a good quality employer pension scheme. This will require employers to match employee contributions up to a maximum of 6 per cent for the employer’s own defined contribution scheme (although either could pay more if they wished), or membership of a contracted out, final salary-based defined benefit pension scheme

– employer contribution to stakeholder pensions matching those of the employee up to a maximum of 6 per cent, although either could pay more if they wished

Consultation rights for unions

To ensure that the necessary flexibility in these measures is not abused, contracts will include a provision for consultation rights for recognised unions on the terms and conditions, including pensions, of new recruits to these contracts. And Best Value guidance will be revised to ensure that contracting out exercises fully involve staff and trade unions.

Enforcement via contracts and Best Value

All the measures for ensuring fair treatment for new joiners will be enforced through the individual contracts between local authorities and contractors. Government will work to ensure these terms are included in all contracts by revising Best Value statutory guidance to support this. Government will also ensure the wider Best Value framework recognises the value of the good employment practices set out above.

Review mechanisms

DTLR will set up a joint monitoring and review of the operation of the package, to ensure that it is delivering fair terms and conditions for new recruits. This review process will include local authorities, contractors and unions.

Tightening TUPE rules for those transferred out of local government

TUPE rules prevent the abuse in public sector contracts which could occur in contracting out. However in local government, staff can lose out on transfer to a contractor as a result of a decision by a local authority not to follow the good practice adopted elsewhere in the public sector on protecting terms and conditions and pensions of transferees.

Central Government and the NHS are required to ensure that staff transferred out of the public sector have their terms and conditions protected on transfer, including pensions. DTLR has recommended a similar approach within local government contracting, but this has not been mandatory. The measures announced in this package will require all local authority contracting out exercises to include the same protection for staff enjoyed by those in central Government