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Cuts to public sector spending - the cost to the Third Sector

13 May 2011 #Employment

The impact of the recession, a rise in the demand for services combined with a reduction in public and corporate income has undoubtedly created a challenging environment for charities and voluntary groups. The knock-on effect on jobs in the third sector, which rely on public sector contracts, is yet to be seen.
Despite claims that the UK is emerging from the recession, the latest Charity Forecast Survey published by the National Council for Voluntary Organisations (NCVO) published on 30 March 2011 revealed that confidence of voluntary sector leaders has fallen to its lowest level since 2008.  Over half of these organisations (55%) are planning to reduce employee numbers due to concerns over future funding.  This figure has doubled since the previous survey undertaken in December 2010.  35% of respondents said that they had plans to decrease the services that they offer (an increase from 19% in December) and 97% stated that they expect economic conditions within the charities sector to worsen over the next twelve months.
The NCVO`s Chief Executive, Sir Stuart Etherington, said "This latest survey shows how the looming tide of cuts is weighing heavily on everyone`s minds.  The Budget brought with it some welcome sweeteners for the sector, but more needs to be done to ensure that voluntary and community organisations have the support they need to continue providing vital services".  
Despite the gloomy economic outlook, surprisingly almost half of those surveyed (48%) plan to expand their services.  There is also a higher expectation among charity leaders with regards to collaboration between smaller and medium sized charities, whose principal activity is the delivery of public services and who are primarily funded from contract income.
Unfortunately, there is no clear picture on the extent of private sector reliance, in general, on public sector contracts and the number of jobs at risk down the supply chain.  This issue is "the big unknown" and the impact on jobs is likely to be more significant than anyone is able yet to calculate.   It is clear that the third sector has an above average risk as, in many instances the third sector may have less protection against the impact of cuts on employment.
Pressures on public spending are very likely to result in councils reviewing the services that they contract out to other organisations.  Many of these organisations, such as those in the third sector (providing housing, transport, education and training services etc), are heavily dependent on income from contracts delivered for their local authority and the effect on these organisations if they lose a contract may be severe (particularly if this is its major source of income).  It is therefore important, that organisations in the third sector, consider the human and financial implications of this happening and plan ahead in order to minimise the possible consequences.
Skills - Third Sector Chief Executive Julie Wilkes commented recently "Charities have been holding their breath on staff cuts in the last quarter, waiting to hear if their contracts with government will be renewed.  The next two quarters will be the real test of the state of the sector as they include the end of the financial year."
If cuts in spending are envisaged, there are a number of options that are available to a public sector organisation in relation to the future of a contract including (but not limited to):
  1. A decision not to renew the contract with the existing service provider and to close the services down; or
  2. A decision not to renew the contract with the existing service provider, but to continue the services with a different service provider; or
  3. A decision not to renew the contract, but to continue only part of the service with either the existing or a new provider; or
  4. (If permitted by the contract) a decision to remove part of the services without ending the contract, resulting in an adjustment to the level of service provided (and thus causing job losses).
It is never too soon for a third sector organisation, which is worried about risks of this sort, to act quickly and to establish ways to try and limit its financial exposure if contracts are ended or reduced.  In particular, if an organisation is made aware that it may lose all or part of a contract, it is important for it to ascertain from an early stage whether it is dealing with a redundancy situation, a TUPE transfer, or both, to ensure that the organisation complies with its legal obligations and minimises its financial risk.
Points to consider if TUPE does apply
  • The obligation to provide employee liability information - TUPE requires the outgoing service provider to provide the incoming provider with certain information about the transferring employees not less than 14 days before the relevant transfer takes place, and provides a remedy for the incoming service provider in the event of the outgoing provider`s non-compliance; and
  • The obligation to inform and/or consult - Both the outgoing and incoming service providers have an obligation to inform and (if appropriate) consult with recognised trade unions or elected employee representatives (if there is no recognised union) in relation to any of their own employees who may be affected by the transfer or any measures taken in connection with it.   A failure to comply with these obligations exposes the parties to up to 13 week`s uncapped pay per affected employee (a "protective award"), for which both the outgoing and incoming providers may, in certain circumstances, be held to be jointly and severally liable.
Points to consider if redundancies are anticipated
  • Obligation to collectively consult - Employers are obliged to collectively consult where they "propose to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less".  The Tribunal may make a protective award to individuals for a failure to comply with this obligation.
  • The terms of the commercial contract - It will be important for an organisation to check the terms of the contract to establish which party will bear the costs associated with the redundancies.
If funding options are being explored, it is often the case that an organisation will not know what will happen with the contract until very late in the day.  In this case, it will be important for an organisation to undertake a dual TUPE and redundancy information and consultation process to minimise the risk of successful protective award claims being brought by employees.
In addition to the above, very careful attention must be paid to any terms contained within the contract as to the arrangements upon termination.  It is important to ensure that any such terms are complied with, so as to safeguard any rights to indemnity or reimbursement that may exist.
Who will bear the cost?
When entering into public service contracts, many organisations will have assumed that TUPE would apply at the end of the contract and as such, may not have negotiated specific terms dealing with non-TUPE situations or the shutting down of a particular service.
Consequently, organisations may find themselves in a position where they are not protected against redundancy costs if TUPE does not apply.  Costs may be significant if an organisation has inherited a number of public sector employees when they first took on the contract, many of whom might have generous redundancy entitlements (including enhanced redundancy/pension rights).
Government consultation re voluntary sector funding
Eric Pickles, Secretary of State for Communities and Local Government has urged local authorities to behave reasonably when managing on decreased budgets.  As part of its approach, the department has published draft guidance for consultation [], which proposes that local authorities should not disproportionately cut funding to charities and voluntary groups.  Furthermore, the guidance suggests that councils should talk to organisations at an early stage about how services need to change, and councils that are planning to reduce or end funding for voluntary sector groups should give three months` notice if the funding cut "will materially threaten the viability of the organisation or the service it provides."
Consultation will close on 13 June 2011.  Sir Stuart Etherington views the guidance as "a welcome step forward" and states "In the current climate, it is more important than ever that local authorities and community organisations work together effectively, to ensure the best possible outcomes for individuals and communities".
Clarkslegal, specialist Employment lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Employment matter please contact Clarkslegal's employment team by email at by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
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