UK’s public sector outsourcing reforms force rethink of bids and workforce models

The government has now set out in its Employment Rights roadmap that new rules to prevent two tier workforces in public sector outsourcing will take effect from October 2026. The reforms are intended to introduce a new “no less favourable treatment” requirement through regulations, and for employers bidding for public sector work that has real commercial implications. It means looking much more closely at workforce terms at the outset and thinking about how those will be managed not just at transfer but throughout the contract. We’ll ask an employment lawyer what that means in practice.

For employers tendering for public sector contracts, the key issue is how these new requirements feed into pricing and workforce planning. Bidders will need to understand the terms of the existing workforce delivering the service and assess how those compare with their own employees, identifying any gaps and how those will be addressed.

That has clear cost implications, particularly in areas such as pensions, where public sector provision may be more generous. These are not issues that can be left until after a contract is awarded, they need to be factored in at bid stage.

The reforms also point to a more active compliance environment. Contracting authorities will be required to take all reasonable steps to ensure suppliers meet these requirements, which could mean greater scrutiny of workforce arrangements throughout the life of the contract, including how those obligations are applied across any subcontracting arrangements.

And there are wider workforce implications too. Where employees move between contracts, or work alongside colleagues on different terms, employers may need to manage expectations and address potential issues around pay, fairness and consistency across the organisation.

So, there is quite a lot for employers to be thinking about now, particularly where contracts are already out to tender. Earlier I caught up with employment law expert Gillian Harrington, who joined me by phone from Aberdeen to discuss it. I began by asking her where the biggest commercial risks are likely to arise.

Gillian Harrington: “I think this does present really big commercial risks that contractors and companies who tender for local authority contracts should be thinking about now, particularly if they are bidding for work because they will need to have an indication of what sort of terms the local authority’s employees are currently on, or those of current incumbents. They will need to have a look at what their employees are currently on, if they're maybe going to use their own employees to partially staff the contract, and they're going to have to have a look at what any differences arising there are, and what gaps there are. I think one huge issue might be in relation to pensions because local authorities do have generous pension schemes and so contractors will need to think about how are we going to be able to replicate that? At the moment we don't have the regulations in place to give us further details as to whether there might be potential exemptions for pensions such as we have in TUPE but it is something that contractors are going to have to be thinking about when they are bidding for work because, as I said, although the contract terms will be applying from October onwards this is going to be affecting contracts that are out for tender at the moment so companies really need to be aware of this.”

Joe Glavina: “The new regime requires contracting authorities to take ‘all reasonable steps’ to ensure suppliers comply. How much greater scrutiny might suppliers face?”

Gillian Harrington: “The requirement on contracting authorities extends well beyond the original steps to put in place a provision in the contract, so authorities will have an ongoing obligation to take all reasonable steps to monitor the compliance of that. So essentially, what that will mean is that the local authorities may need to do, perhaps, spot check audits to make sure that the workers who transferred from them will have the same, or no less favourable, terms than the contractor’s workforce who may be working on the same contract. So it's going to be really important for employers and contractors to monitor any changes in the workforce, any of their workers who've gone on to work on that contract where there have been, for example, previous local authority employees on that, and making sure that there is management buy-in to that and that managers are aware that they're going to have to continue to monitor that as well. It's also really important that companies who are contracting from local authorities are considering their supply chain too because the obligation doesn't just stop at the first outsourcing – that will continue to subcontractors as well. So companies who are outsourcing, or subcontracting, services to other providers need to make sure that there are appropriate contractual provisions in the subsequent agreements, making sure that their subcontractors have in place provisions to make sure that their own employees are going to have no less favourable terms than the transferring employees under TUPE.”

Joe Glavina: “If workers on a public sector contract receive enhanced protections, could that create pressure from colleagues elsewhere in the organisation?”

Gillian Harrington: “I think one big issue that this does pose, potentially, is equal pay issues and also I suppose employee relations issues also. There may be situations where a worker is moved from one part of the business into a contract where ex-local-authority employees are on and they, as a result of that, are entitled to higher benefits, so what happens once that contract ends? If that employee potentially moves to another part of the business they're going to have higher terms than some of the other employees of that same company who are doing the same job and that could potentially create equal pay issues which organisations do really need to be mindful of. Although there might potentially be a material factor defence at one point that won't last forever, so it is something that organisations will need to think about in terms of moving their staff around. So for example, if they needed to put in someone for a short term duration on to a contract which had been outsourced by local authority, they might want to make that pay and benefits increase, if there is one, for a temporary basis, and making that contractual, so that once they go back to their other area within the business that will then be reduced. But it is something that companies are going to have to be thinking about, and how are they going to manage other employees expectations and manage any workplace issues and relations and where one employee sees that someone is doing exactly the same job as they are getting paid more or have better protections. So I think it's something that employers should really be engaging on now and thinking with unions as to how we're going to deal with that going forward in order to try and resolve these issues before they actually become apparent.”

So, while the detail of these reforms is still to come, the practical impact is already clear. Employers bidding for public sector work will need to factor in workforce parity at the outset, understand the cost implications and be ready to manage compliance on an ongoing basis. There may also be wider implications across the workforce, including potential equal pay and employee relations issues. If you would like help preparing for these changes, or reviewing your approach to public sector tenders, please do contact Gillian – her details are there on the screen for you.