Employment Rights Bill: new requirement on charities and social enterprises taking on public sector contracts

Whilst aspects of the Employment Rights Bill (the Bill) such as the changes to unfair dismissal, “fire and rehire” and zero-hours contracts have received much attention, the provisions relating to public sector outsourcing have been less widely reported, despite their significant potential impact. 

This article focuses on these proposed changes and highlights the potential implications for charity and social enterprise employers taking on public sector contracts, particularly in relation to the additional associated costs. These costs could be very significant indeed and, to date, the Government has not committed to any additional funding to cover these costs. 

Background 

In 2005, the previous Labour government introduced the ‘Code of Practice on Workforce Matters in Public Service Contracts’ (the Code). The primary objective of the Code was to ensure “fair and reasonable” employment conditions for new employees working on outsourced public sector contracts, which overall were no less favourable than those of staff transferring out of the public sector under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The Government particularly emphasised preventing the emergence of a “two-tier workforce” in which transferring employees and new joiners working alongside each other would have different terms and conditions.

The Code was withdrawn in 2010 by the Conservative and Liberal Democrat coalition government and replaced with the ‘Principles of Good Employment Practice’ (the Principles), which do not include reference to a two-tier workforce, but instead mention that “where a supplier employs new entrants that sit alongside former public sector workers, new entrants should have fair and reasonable pay, terms and conditions”. The Principles do not mention “equal” or “equitable” pay, terms and conditions, and are widely seen as “laxer” than the previous Code. 

What’s changing?

In summary, the proposed changes under the Bill are intended to avoid a two-tier workforce where ex-public sector employees and employees who have not transferred from the public sector are working on the same contract but employed on different terms and conditions. 

To do this, the Bill will give the Government the power to amend the Procurement Act 2023. The Government will be able to make regulations requiring contracting authorities to include within outsourcing contracts provisions setting out that:

• workers transferring from the public sector are treated no less favourably than they were in the public sector; and
• workers who have not transferred from the public sector are treated no less favourably than transferring public sector workers. 

The Government will also have the power to establish a new statutory code of practice, with more “teeth” than the current voluntary Principles, which contracting authorities will be required to have regard to when outsourcing public sector contracts.

These changes are currently expected to come into force in October 2026, as set out in the Government’s roadmap for implementation of the Bill, published in July 2025. There is currently no mention of any proposed consultation on the regulations, however, the Government previously highlighted that where plans required substantial secondary legislation (as is the case with these proposals) they would engage widely with experts and stakeholders, including employers. Thus, we expect that there will be future opportunities for charities and social enterprises affected by the proposals to state their opinions and highlight any concerns.

Implications

Given that further regulations will be required to bring these proposals into effect, and much of the detail of how the proposals will work in practice has been left to further regulations, the full extent of the implications for charities and social enterprises taking on public sector contracts remains unclear. However, they are potentially very significant indeed, particularly in terms of the additional associated costs.

These additional costs will come off the back of other significant employment-related costs pressures faced by charity and social enterprise clients taking on public sector contracts. These include the existing cost burden of meeting terms and conditions of employees transferring out of the public sector under TUPE, and meeting the associated requirement for reasonably equivalent pension arrangements. The increase in employers’ National Insurance Contributions has also placed considerable financial pressure on charities and social enterprises.

One area that could be particularly problematic is public sector pension entitlements (if these will be covered under the regulations). As a general rule, these are exempt from transferring under TUPE (although there can be a requirement to offer reasonably equivalent arrangements for transferring employees, as noted above). The new provisions could mean that charity and social enterprise employers are obliged to offer public sector pensions to transferring employees and new joiners alike. This could have a major impact on the cost for charities and social enterprises of taking on public sector contracts, given the high costs associated with public sector pensions generally.

Comment

For charity and social enterprise providers of people-focused services, there is a risk with these proposals of the Government not fully taking into account their distinctive public benefit role. They should not be treated as commercial suppliers within a marketised procurement system, when they are purpose-driven providers, purpose-aligned with commissioning authorities.

There is a risk of missing the point that people-focused service contracts are chronically underfunded, and the underfunding means providers cannot reasonably be expected simply to match public sector employment terms and conditions without additional funding. A focus on improved terms and conditions is a good thing, but not taking account of the whole picture could be counterproductive.

These proposals need to be balanced by a focus on the funding of people-focused services and the distinctive capabilities of charity and social enterprise providers and the conditions to which they are subject. We would encourage charity and social enterprise leaders to voice their thoughts on these proposals and engage with any future government consultations on the proposals.

This article was written by Senior Associate Damian Ward and Apprentice Solicitor Kimberly Chitifa. If you have any questions on this article, please do get in touch.