Private sector providers of PPP services have had a recent legislative jolt that has sent them rushing to review their business plans for the future. On 13 February 2003 the UK government announced that the long awaited Code of Practice on the Two Tier Workforce applies to Best Value contracts advertised after the beginning of March.

A two-tier workforce exists where private sector providers employ ex-public sector staff alongside new staff on less favourable terms and conditions. The Unions have long lobbied to extend public sector terms and conditions to these new staff. Many employers have resisted ? public sector terms are generally considerably more generous than terms in the private sector.

Consequently, the new Code of Practice requires all PPP contractors on local authority contracts to provide newly recruited staff with terms and conditions of employment that are ?no less favourable? than the often superior terms of workers that transferred from the public sector.

The Government's code extends the pay and conditions, and some would say inflexibilities, of public sector employment policy to all staff within a PPP. Private sector partners will not just be constrained in their employment of staff who transferred from the private sector, but to all new recruits coming into the private sector organisation.

Arguably the new Code restricts the private sector's ability to deliver services in the most efficient manner. This is not just because it increases staff costs but also because it makes it harder to improve productivity by introducing incentives, such as performance related pay, that might be seen as being less favourable to public sector terms. Reduced productivity means that there is less money to spend on improving the service to the end user.

Introducing more flexible working practices, rather than being locked into deals struck between the public sector and the unions, was seen as one of the efficiencies that the private sector could bring to PPPs. PPP contractors will now have to factor higher employment costs into their competitive bidding, so in the end it is the public purse that loses out.

The new Code will effectively set up a two tier workforce within the contractors' staff ? of those providing public services and those not. That is a tension that cannot now be reduced, over time, by the natural attrition of staff.

This new Code is a radical new departure and nobody should mistake it for a tweaking of TUPE (Transfer of Undertaking Protection of Employment) Regulations. In effect the Code addresses one of the main reasons why private sector contractors tender for public sector contracts and will undoubtedly have an effect on the viability and future of such transfers. But was that what was intended?

Employers obligations in detail:

? contractors have to offer new staff ?fair and reasonable terms and conditions, which are, overall, no less favourable to those of transferred employees?. The comparison is made by looking at the overall package rather than considering salary and benefits separately;

? membership of local authority pension scheme; or membership of a good quality employer's pension scheme. This is referred to as a scheme where employers at least match employee contributions up to a maximum of 6% to an employer's own money purchase or stakeholder scheme or give membership of the employer's final salary scheme;

? The Code does not address issues raised by employers in the consultation which will now have to be resolved through law.

? There is already confusion about whether some local authority contracts are ?Best Value contracts?.

? The Code could create a new two tier within employers' workforces where employees providing public services are on enhanced terms and other staff are not. How will an existing employer deal, for instance, with equal pay issues raised by such inequality? What exactly will constitute ?no less favourable terms and conditions??