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Public-sector finance: Paul Gosling on a muddle over employee rights

Government ambitions of creating a strong market in the contracting- out of public services have largely foundered on the European Union's Acquired Rights Directive, which has prevented contractors cutting employees' pay to win work. Attempts by Britain to curtail these rights are being fiercely resisted by wealthy European partners, worried at competition from poorer regions.

The directive was approved in 1977, but it is still unclear precisely which employee rights, in addition to pay, are protected under it. It took some years before it was recognised as covering public contracts, having been devised as a safeguard for private-sector employees whose businesses were taken over.

The situation has been complicated by the Government's failure to implement properly the directive when the Transfer of Undertakings (Protection of Employment) - Tupe - regulations were approved in 1981. It has now been accepted, largely through cases decided by the European Court of Justice, that organisations which take over undertakings must use existing staff, and abide by redundancy, holiday and sick-pay arrangements already agreed.

A year ago, under intense pressure from the Government, the European Commission brought forward proposals for amendments to the directive to remove public contracts from its scope. These are being strongly resisted by Sweden, Finland, Austria and Denmark.

It is difficult to see how the alterations can be approved when they are unacceptable to so many member states, making the likely outcome that the directive will continue to apply to public contracts. Ironically, this would be well-received by much of the private sector in Britain, which wants, more than anything, continuity of regulations.

Cliff Davis-Coleman, co-ordinator of the Public Contractors Association, which has members across the EU, says: "Our views are that the amendment would complicate matters further. It would cause more cases to go to law, and more run-ins with the trade unions. At the moment contractors have learnt to work with Tupe, even though they don't like it."

The PCA is worried that further confusion could disrupt the forthcoming white-collar contracting-out in local government, with some tenderers assuming the directive applies, others that it does not. Similar problems would arise when existing blue-collar contracts came up for renewal.

This desire for clarity has been further frustrated by last month's approval in Britain of new transfer-of-undertakings regulations that attempt to correct errors made 14 years ago, by requiring employers to consult with elected representatives about a potential transfer. But the regulations have been criticised for failing to define who is an elected representative, or how they should be elected, making further referrals to law likely.

While the stream of cases to the European Court of Justice flows on, opinion continues to be divided in the UK. The Local Government Management Board advises that the directive often applies to contracted-out services and, where it does, tenderers can legitimately be asked to ensure that pension arrangements for transferred staff are broadly comparable. But this is contradicted by the Audit Commissioner's former solicitor Tony Childs, who is still legal adviser to most district auditors. Councils are in an impossible position - caught between conflicting advice, and facing the prospect of challenges from district auditors.