The Employment Rights Act 2025 introduces a significant change for public sector outsourcing. New Regulations, expected to come into force on 30 October 2026, will seek to address the long-standing issue of the "two-tier workforce" which can arise following a TUPE transfer.
Although the detail remains subject to consultation and implementation of Regulations, the changes could have important cost and compliance implications for both public authorities and private sector suppliers when engaging in procurement exercises.
The current position
Where the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies to an outsourcing arrangement, employees transferring from the public sector transfer on their existing terms and conditions. In many cases, those terms and conditions may be more favourable than those of the supplier's existing workforce, particularly in relation to pensions.
This can create a workforce comprising:
- Existing employees of the supplier, who remain on their current terms and conditions.
- Employees transferring from the public sector, who retain their public sector terms and conditions.
- New recruits engaged after the transfer, who may be employed on different terms entirely.
The issue is compounded by TUPE's restrictions on varying contractual terms. The result can be a "two-tier workforce", with employees performing similar roles but benefiting from very different terms and conditions.
What’s changing?
Section 32 of the Employment Rights Act 2025 inserts a new Part 5A into the Procurement Act 2023.
The legislation gives Ministers the power to make Regulations requiring certain provisions to be included in relevant outsourcing contracts. The objective is to ensure that specified workers working on the same outsourced public contract are treated "no less favourably than each other”.
A statutory code of practice is expected to be published to provide guidance on implementing the new regime, and contracting authorities will be required to have regard to that guidance.
What do we know so far?
While the Regulations have not yet been published, the government has indicated the following:
- The reforms are expected to apply broadly across the public sector.
- The protections will extend to workers as well as employees. This is notable because the application of TUPE to workers has long been uncertain. The new provisions appear intended to ensure that workers are expressly protected, regardless of the scope of TUPE itself.
- The protections will extend beyond transferring staff. Existing workers of a supplier who are working on the outsourced contract are expected to fall within scope. It remains unclear whether this will also apply to workers recruited after the transfer takes place and the Regulations are expected to clarify this point.
- The Regulations may set out different requirements to apply to different sectors or categories of contract, and for exemptions to be introduced where appropriate.
The unanswered question: What does "no less favourable" mean?
The most significant uncertainty at present is what terms will need to be matched as between the relevant workers.
The legislation does not currently define "no less favourable", so it is not yet clear which terms and benefits will fall within scope. Pay, holiday entitlement, family-friendly rights and pension provision may all be relevant, but until the Regulations are published the extent of the obligations remains unknown.
What is the likely impact?
The reforms could have a significant impact on the cost of public sector outsourcing.
Broadly, the financial impact will depend on the extent of the differences between the employment terms offered by the contracting authority and those offered by the supplier. In particular, the cost implications could be substantial if access to public service pension arrangements is ultimately required for a wider group of workers.
The changes may also affect procurement processes. Suppliers are likely to seek detailed information about transferring workers' terms and conditions at an earlier stage, to enable them to price bids more accurately. This may increase the administrative burden on contracting authorities during the procurement process.
The reforms will also create additional compliance obligations. Contracting authorities will be required to take "all reasonable steps" to ensure that the required protections – likely to be in the form of model clauses – are included in relevant outsourcing contracts and to monitor suppliers' compliance throughout the life of the contract.
As a result, public authorities may need to strengthen contract management arrangements, enhance supplier monitoring processes and provide additional training for those responsible for overseeing outsourced services.
Looking ahead
The Regulations and accompanying Code of Practice will be critical in determining how far these reforms will go in practice. What is already clear, however, is that the government intends to tackle the two-tier workforce issue that has long been associated with public sector outsourcing.
Both contracting authorities and suppliers should monitor developments closely and begin considering the potential impact on future procurements, workforce costs and contract management arrangements.
For more information, please get in touch with a member of our employment team.
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