A tale of two halves

Scrapping the two tier workforce code may help the government increase cheaper outsourcing but it could threaten the quality of services
A wedding cake with statuettes of two women is seen during the demonstration in West Hollywood, California
The two tier workforce appeared a happy marriage between private and public sector workers but times are changing. Photograph: Gabriel Buoys/Getty

A move by the government to scrap the informal code giving public sector benefits to thousands of outsourced private sector workers could threaten service quality, an employment expert has warned.

Richard Kenyon, head of employment and pensions at law firm Field Fisher Waterhouse, which advises public sector bodies on employment law issues around outsourcing, said that the move could encourage private employers to compete predominantly on cost not quality.

"A good contractor will achieve savings by having good quality management and systems in place that create economies of scale and efficiency. On the other hand a bad contractor will just offer to do the work at a lower price and then hire in a group of low paid workers to maintain a profit margin. This drives down costs but also potentially service quality and therefore can often be a false economy."

Under European legislation, workers who are transferred to the private sector – in areas such as waste collection, catering or health services – have many of their employment terms and conditions protected. In the voluntary 'two tier workforce' code agreed between unions, employers and the government in 2003, new recruits were offered terms that were "no less favourable" to those of transfered colleagues.

Last week the coalition government said it was "minded" to abolish the code in an attempt to reduce the cost of future outsourcing, which is set to increase following cuts made to public sector spending.

The announcement has led to criticism that individuals doing the same job could end up having different rates of pay and benefits, a move that has drawn opposition from unions such as the TUC. Unions have also argued that removing the code would also leave public sector workers vulnerable to cheaper private workers.

Francis Maude, the cabinet office minister, said that paying new recruits and transferred staff equally "distorts the market when we are trying to encourage new entrants into the outsourced [services] market."

While a fall in share values has knocked some of the largest service suppliers such as Capita and Serco, analyst Caroline de La Soujeole said a "golden age of outsourcing" could see the value of outsourced services nearly double from around £80bn (14%) now to £140bn in five years.

But any new arrangements, Kenyon says, are in danger of distorting the way in which private sector companies are encouraged to compete, handing over services to firms who just hire the cheapest workers.

"Although the two tier workforce code is not without its weaknesses, it has helped to create an environment where private contractors compete more on quality than on who can hire the cheapest workers," says Kenyon.

"Everyone accepts the need to cut costs but the Government should not look at this as an opportunity to provide the same volume of services for less cost, sacrificing worker rights and decent services in order to achieve that objective."

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