Public Services Management: Not-so-tender trap of TUPE: Liza Donaldson reports on problems with the Acquired Rights Directive and public service contracts

CONCERN over an EC Directive has reached a critical level among public sector employees, trade unions and private organisations engaged in competitive tendering, market testing or outsourcing.

Confusion is rife over the Acquired Rights Directive, implemented in 1981 as the Transfer of Undertakings (Protection of Employment) regulations, or TUPE. The worry centres on the circumstances in which TUPE applies to public service contracts. If it does apply, as it is increasingly seen to, it means at its simplest, that employees transfer with the operation on the same terms and conditions. Any changes, or redundancies because of the transfer, are treated as unfair dismissals.

Private contractors who in the past cut staffing levels, pay or conditions, relative to public sector, to win contracts and boost profits are stymied under TUPE. Liability for any future redundancies falls to contractors. Recent cases of TUPE have also loaded extra costs on to contractors for providing pensions on a par with the mainly index-linked public sector pensions.

As the havoc caused by TUPE spreads, winning contractors have been hit. Some, being warned at the last minute that TUPE did apply, have had to pull out as a result. Ealing Council's leisure centres contract won by DC Leisure, and The Home Office's prison transport services won by Beck and Pollitzer, were two notorious and costly examples.

Contracting and market testing has been suspended by some departments, while the full implications of TUPE were taken on board. The confusion - exacerbated by the lack of a clear line from Government, a host of conflicting legal opinions, and a growing list of court cases brought largely by the unions - has spread to the private sector.

Amanda McIntyre of the Confederation of British Industry points out: 'The angle that has been missed is that the current uncertainty is not just constraining competitive tendering or market testing, it is also constraining private sector companies' freedom to push work out to tender - especially non-core business.'

Among contractors, Sports and Leisure Management Group's view is typical. Mike Wardle, director, whose company is currently fighting a TUPE industrial tribunal case, says that things are so bad that 'if we were to take our solicitor's advice, we would not compete anywhere at the moment. But you cannot do that in business. You have to take your chance and do things'.

The Cleaning and Support Services Association is the sharpest contractor critic of the confusion, which has lasted for well over a year, since it became clearer TUPE could apply to contracts for public services won by the private sector. John Hall, Director General of the CSSA, says that public sector tendering bodies were now of the opinion that 'TUPE may or may not apply. You sort it out yourself.'

Mr Hall is particularly scathing about the fact that TUPE requires union recognition from the highly organised public sector to be carried over into private contractor businesses. He says: 'I call it the Lazarus syndrome. For a number of years the public sector unions had been dead and buried.'

The CSSA, which uses the right-wing pressure group Aims of Industry as its lobbyist, has pledged to fight TUPE all the way by bringing pressure from its 170 members to bear on the Government. It fears TUPE favours the 'big boy' contractors who can bear the extra costs, penalising smaller companies and predicts that without Government action, competitive tendering and market testing will grind to a halt.

In January, a bullish William Waldegrave dismissed claims of TUPE being an obstacle as 'nonsense'. By March he had softened his line. He told a packed conference on market testing that TUPE had not 'as far as I know' hindered market testing, and that he was 'very much aware of the concerns of public service employees and the unions', and of 'the concerns which you, the private sector, may have'.

The intervening month had seen advice from both the Attorney General and the Lord Advocate spelling out the supremacy of the European Directive over its interpretation in British law's TUPE, which was 'construed as narrowly as possible' for 'policy reasons'. TUPE only applied to 'commercial ventures' - a restriction that will be swept away as of this September.

The leaked document warns of retrospective claims as a result of the restriction - not present in the European directive - by individuals or unions, against government departments, councils and health authorities. It adds there is a risk of damages being awarded against the Government under the Francovich case principle (which established the right of an individual to take action against the state) and counsels that 'such a claim is one that would need to be taken seriously'.

The official Whitehall line is that TUPE applies in many cases. The reality is that it applies in most. This is demonstrated in the first results for the current round of market testing of nearly pounds 1.5bn worth of work, where the majority of the 50 per cent of contracts which have been won by the private sector apply TUPE.

In local government the situation is similar and in the health industry, TUPE applies 'in very many situations in the NHS' according to Roger Scofield, head of the policy unit at the NHS management executive. Indeed Mr Scofield jokes he helped found the 'Live with TUPE Club'.

A number of contractors are independently taking the same line. Simon Cox, managing director of ISS Mediclean, explains how his company has taken on a five-year contract worth pounds 2.4m a year for cleaning, catering and portering at Redbridge Health Care Trust, using TUPE. He has inherited 160 staff from the trust and believes that fact that the company has taken a positive line and got stuck in, gives it a competitive edge.

He says: 'You cannot get away from the fact that contract prices will go up as a result of TUPE - but not as much as feared.' He points out that public bodies are saved redundancy costs - a factor offsetting the slight price rise. Union recognition was not a problem, since the company had always recognised unions. Mr Cox concludes: 'I think that contractors are going to have to live with TUPE.'

Charles Cox, executive director for the public sector at Hoskyns Group, shares a similar view. His company has just won the first major IT contract in the market testing programme for Operations West MoD data centre at Devizes, using TUPE.

Mr Cox said 100 staff had transferred under the five-year contract. Those who wish to, may in time take on company terms and conditions. He says: 'TUPE is actually in our interests as a service supplier, because it gives us the best chance of retaining key skills we are dependent on.'

He believes white-collar IT work relies on retaining and motivating staff with the same or better conditions they enjoyed before transfer. Contracting in this area was different to blue-collar work like building where employers had their pick of builders 'off the street'. Savings were being achieved by such things as economies of scale, and more effective use of technology.

But Mr Cox, like the moderate Clause 26 contractor group, feels that TUPE does not mean the Government can duck management issues such as overstaffing. White collar numbers have remained fairly steady across central and local government and health - unlike those for blue collar workers. Staff, he argues, cannot be redeployed or transferred out for ever and technological changes mean the public sector has an aging skill set and excess capacity.

He says: 'They (the Government) are going to have to bite the bullet sometime. It could be messy and painful if they do not face up to it.'

(Photograph omitted)