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

24 September 2010 #Employment

Since the election, there has been a considerable increase in media and political interest in the involvement of the Third Sector in public service provision.  The impact of the recession, a rise in the demand for services and a reduction in public and corporate income has created a challenging environment for charities and voluntary groups.  Despite claims that the UK is emerging from the recession, cuts to public spending mean that we are probably just entering the most painful phase of uncertainty and job reductions.     

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.  As part of this, 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. 
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 that is worried about risks of this sort to act quickly and to establish ways in which it can try to limit its likely 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 to minimise its financial risk.

Points to consider if TUPE does apply

  • The obligation to provide employee liability information - TUPE requires the transferor to provide the transferee with certain information about the transferring employees not less than 14 days before the relevant transfer takes place, and provides a remedy for the transferee in the event of the transferor`s non-compliance; and
  • The obligation to inform and/or consult - Both the transferor and transferee 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 transferor and transferee 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 in order to minimise the risk of 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).

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.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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