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Public Sector Restructuring - Dark clouds and silver linings

05 August 2010 #Employment

The coalition government rose from the ashes of the most controversial general election in recent times to deliver a budget with bite. Although we are officially out of the recession, the key elements of the budget which impact on employers seem far from measures to promote growth and reduce unemployment. The largest ‘employer` in the UK, the public sector, will be the hardest hit:

  • £61 billion inadditional government spending cuts by 2014-2015 
  • 25% average spending reduction for most government departments 
  • Two-year pay freeze for all public sector employees earning over £21,000

"Austerity measures", "fiscal squeeze", "spending reforms" - whatever we label the government`s plans for the public sector, they signal one thing: job cuts. Indeed, some commentators are estimating that there may be as many as 750,000 to 1 million job losses in the public sector by 2015. 

Stretching for solutions

It is inevitable that redundancies will have to be made to achieve the massive cost savings the government has forecast. In addition to cost-cutting, redundancies may have other commercial benefits, such as encouraging efficiency and removing under-performing employees who may have a negative impact on staff morale.

However, reducing head count is not a one-stop-shop solution and there will of course be the upfront costs of termination and redundancy payments. The government is attempting to limit redundancy costs for public sector organisations with the introduction of a new bill setting out a "non-negotiable" redundancy package. This reduces the maximum pay out for most civil servants from three years` salary to one year (voluntary redundancies would attract a maximum payment of 15 months` salary). Unions such as the Public and Commercial Services Union (PCS), have already warned that if this bill is passed, public sector employers will face industrial action when jobs are cut.

There are therefore strong incentives for public sector organisations to critically look at alternatives to redundancy in order to reduce staffing costs.  At a recent conference on the public sector reforms, David MacLeod, a Non-Executive Director of the Department for International Development and former CEO of Dulux, observed that the public sector can learn a lot from the private sector experience during the recession. He noted that many private companies had made it through a difficult two years with fewer job losses than were anticipated by adopting innovative schemes such as pay cuts/freezes, job sharing, short-time working and study/sabbatical breaks.

Employee engagement

Public sector employers will obviously need to carry out meaningful consultation with employees if they are to gain consent to changes to their terms and conditions. In addition to covering the legal requirements of consultation, the wider challenge for public sector managers is to get both employees and unions fully engaged in the process and contributing in a positive way. It will be critical to ensure that all parties understand the rationale for the changes and/or redundancies and how these will assist the organisation`s immediate financial position, as well as its future growth. If there is workforce and union buy-in, it may help morale during the process and encourage the "survivors" to support each other and work more efficiently during the rebuilding phase. A key difficulty in achieving employee engagement is keeping the managers positive when they too could be facing redundancy.

Industrial action "inevitable"

Despite an organisation`s most valiant attempts to engage staff during and after the trauma of job losses and cost-cutting, there is always the risk that staff will flatly reject proposed changes and threaten industrial action. In a recent Cabinet Office survey of over 340,000 civil service employees, 70% of managers felt that industrial action within their organisation was inevitable.

We have already seen an example of the extent to which unions are prepared to resist public sector reforms. The PCS brought judicial review proceedings in the High Court in relation to the Labour government`s amendments to the Civil Service Compensation Scheme. The amendments reduced pension benefits for some civil servants in the event of redundancy, compulsory early retirement or dismissal due to reorganisation and were accepted by five of the six unions whose members were affected. PCS members did not however accept these amendments and they were successful in having the changes quashed. 

Since the government announced its plan to dismantle national pay bargaining for the 1.4 million NHS workers, it is fairly safe to say that industrial action by NHS unions is inevitable. The government`s rationale is that allowing individual hospitals and GP surgeries to set their own pay levels will lead to more competition in the public health sector and variance in pay according to living costs in different regions. Brendan Barber, General Secretary of the TUC, made its position on the proposal very clear: "The government will bite off more than it can chew if it gets rid of national pay bargaining in the NHS".

Opportunities for Outsourcing

If the NHS reforms go ahead, there will be significant opportunities for private outsourcing companies in the coming years. The reforms are aimed at slashing NHS management costs by 45% and moving at least £1 billion from back office functions to fund front-line services. Outsourcing providers have generally made the necessary investments in technology and skills in recent years to enable them to provide more cost-effective and tailored solutions which the NHS has not been able to achieve internally.

Outsourcing may also provide a mechanism for the NHS to move away from national pay bargaining without having to confront the difficult political battle the unions have already signalled they are willing to fight.

When any private sector company takes over the provision of an NHS function, this is likely to be a "service provision change" covered by TUPE, provided that, prior to the transfer there is an organised grouping of employees who carried out the function which is transferred. Accordingly, employees who transfer to the private company will have their existing terms and conditions preserved. Where NHS employees` terms and conditions are governed by collective agreements, there has been conflicting case law on whether or not the new contractor company would be bound to honour any future pay increases or other contractual changes negotiated with unions at the national level. This posed a significant constraint on contactors and meant they had little control over future staffing costs.

This uncertainty has now been clarified by the Court of Appeal`s decision in Alemo-Herron and Ors v Parkwood Leisure. Private sector employers who take on employees in an outsourcing exercise will only be bound by the collective terms (including pay rates) that are in force at the time of transfer. Employees will not be able to demand the benefit of any collective terms negotiated after they have transferred to their new employer.  Therefore, private sector companies will be able to offer compensation packages which are appropriate for the specific contract and location in which the employees are engaged. In turn, this will give contractors more certainty of costs and hopefully encourage more competitive bids when tendering for public sector contracts.

It is an understatement to say there is a rocky road ahead for the public sector. Government funding cuts on such a massive scale will naturally be traumatic at times. Only time will tell whether the billions of pounds of cost-savings budgeted by the government can actually be achieved. Public sector employers will at least have some advantage in being able to look to private sector experiences during the recession. Organisations can learn from companies` mistakes and make the necessary job cuts and organisational changes with an eye on ensuring the public sector is well positioned to move towards growth in the future. Private enterprise will also provide part of the solution through outsourcing. This massive opportunity for business is at least a silver lining to the cloud of reforms hanging over the public sector. 

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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