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“Before the Code is withdrawn, there are vital issues to resolve up front and significant legacy issues: will the Code cease to apply from a specified date, in which case services let under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.”