The UK government, alongside the Scottish and Welsh governments, is preparing a new regulatory framework aimed at preventing the emergence of “two-tier workforces” in outsourced public services.
The reforms are expected to be implemented under powers contained in the Employment Rights Act 2025 and are currently anticipated to take effect from October 2026.
The measures are designed to address situations where workers delivering the same public service operate on materially different terms and conditions depending on whether they transferred from the public sector or were newly recruited by a private contractor.
The government’s objective is to ensure that workers performing comparable roles on public sector contracts receive treatment that is not less favourable than colleagues engaged on the same service.
For HR teams working within organisations that deliver public sector services, the reforms signal a more interventionist approach to workforce protections within government procurement and outsourcing arrangements.
Background to the proposed reforms
The issue of two-tier workforces has been debated for many years in the context of public sector outsourcing. Concerns typically arise where staff transferred from a public authority retain more favourable employment terms through the Transfer of Undertakings (Protection of Employment) Regulations (TUPE), while new hires recruited by the contractor operate on different pay, benefits or working conditions.
Historically, the UK government addressed this through the Code of Practice on Workforce Matters in Public Sector Service Contracts. That code sought to encourage broadly comparable terms for new recruits but was withdrawn several years ago.
Wales has continued to operate its own version of the code, while the UK government has relied primarily on procurement policy and contractual mechanisms.
The new proposals represent the first attempt to create a statutory framework addressing the issue across the UK since the withdrawal of the original code.
Core principle: no less favourable treatment
At the centre of the reforms is a “no less favourable treatment” requirement. Regulations are expected to require contracting authorities to include provisions in outsourcing contracts ensuring that workers engaged in delivering the service are not treated less favourably than comparable workers.
While the detailed wording of the regulations has not yet been published, the approach is expected to go beyond simple pay parity.
The concept of favourable treatment may extend to a wider range of employment conditions, potentially including:
- Pay and contractual benefits
- Working hours and leave arrangements
- Access to workplace facilities
- Workplace policies and day-to-day working practices
- Participation in training or development opportunities
This broader interpretation could mean that parity considerations arise across a wider range of workforce management issues than previously seen in outsourcing contracts.
The regulations may also allow different contractual requirements depending on the type or value of the public service contract.
Workers covered by the protections
The protections are expected to apply not only to employees transferring from the public sector but also to individuals working on the relevant service contract more broadly. This may include:
- Employees transferring to a supplier under TUPE
- Workers engaged by the supplier who are assigned to the contract
- New hires recruited specifically to deliver the service
- Individuals engaged through subcontracting arrangements
The extension of the protections to workers as well as employees represents a notable feature of the proposed framework. In practice, this could bring within scope categories of staff who historically had fewer protections under outsourcing arrangements.
New compliance obligations for contracting authorities
The reforms will not only affect private sector suppliers; contracting authorities themselves will also have statutory duties to oversee compliance.
Authorities are expected to be required to take “all reasonable steps” to ensure that public service contracts contain appropriate workforce protections. They will also be expected to take ongoing steps to monitor compliance by suppliers throughout the life of the contract.
This approach moves responsibility beyond the traditional procurement stage. Authorities may need to incorporate workforce compliance into contract management processes, monitoring frameworks and supplier performance reviews.
For many public bodies, this could mean closer engagement with suppliers on employment practices than has previously been typical.
Impact on outsourcing and procurement
The new regime is expected to apply primarily to outsourcing arrangements where services previously delivered by a public authority are transferred to a private supplier or subcontractor. It is not expected to apply retrospectively to existing contracts but will affect new procurements and situations where services are retendered. This means the reforms may have a significant impact on second-generation outsourcing exercises, where services move from one contractor to another at the end of an existing contract period.
For suppliers bidding for public contracts, the rules introduce additional workforce due diligence requirements. Organisations may need to identify individuals likely to work on the contract and analyse existing terms and conditions early in the procurement process in order to assess potential cost implications.
Where there is a significant difference between public sector employment terms and those typically offered in the private sector, this could influence bid pricing and commercial models.
Practical implications for HR teams
HR professionals within organisations that deliver public sector services should begin preparing for the operational implications of the new framework.
Key areas of focus may include:
- Early workforce analysis when preparing bids for public sector contracts
- Reviewing employment terms for staff assigned to outsourced services
- Ensuring workforce obligations are reflected in subcontracting arrangements
- Training managers responsible for contract delivery on compliance expectations
- Monitoring pay and working conditions across staff groups delivering the same service
Employers may also encounter wider workforce relations issues. Where staff working on a public sector contract receive enhanced protections or more favourable terms than colleagues elsewhere in the business, questions about internal parity and fairness could arise.
Organisations with recognised trade unions may also need to consider how the new requirements interact with existing collective bargaining arrangements.
Next steps
The government currently expects the framework to take effect from October 2026, although implementation will depend on the timing of secondary legislation.
Further detail will emerge once draft regulations and statutory codes of practice are published. These codes are expected to provide practical guidance on how contracting authorities and suppliers should interpret the “no less favourable treatment” requirement.
In the meantime, HR teams and procurement specialists working in sectors heavily involved in public service delivery may wish to monitor developments closely. The reforms are likely to reshape how workforce terms are assessed in public sector contracting and could affect both bidding strategies and ongoing contract management practices.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing & Content Agency for the Professional Services Sector.
