The ERA change that slipped under the radar: the return of the Two-Tier Workforce Code
The Employment Rights Act 2025 will re-introduce protections for workers on outsourced public contracts and those working alongside them. The aim is to prevent a “two-tier workforce” where one group is employed on less favourable terms.
This significant change for employers involved in public sector outsourcing has received comparatively little attention. Hidden between all the other changes making the news, the return of two-tier workforce principles could fundamentally reshape how employers who contract with the public sector approach workforce planning and pay structures. Whilst it may not have generated the same headlines as other reforms, for businesses operating in this arena, it could prove to be one of the most commercially significant changes of the Act.
What is the two-tier workforce issue?
The term “two-tier workforce” describes a situation where employees transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) work alongside directly recruited employees on significantly different terms and conditions of employment, with one set of terms being more favourable than the other.
Historically, this has resulted in workers who hold the same or similar roles receiving different levels of contractual benefits. The government’s concern is that, where this applies to public sector contracts, this approach can create an unfair working environment, leading to recruitment and retention challenges due to the effects it has on workforce morale. The objective is to prevent this and to ensure that workers carrying out the same or similar work on outsourced public services are treated fairly, regardless of whether they transferred under TUPE or were recruited directly by the contractor.
What does the Employment Rights Act 2025 change?
The ERA 2025 allows for regulations to be introduced aimed at protecting workers engaged on certain public sector outsourcing contracts.
The government has indicated that a new framework tackling two-tier workforces could:
- require contracting authorities to take “all reasonable steps” to include workforce protections within relevant outsourcing contracts
- include sector-specific requirements
- include a statutory Code of Practice that contracting authorities must consider during procurement exercises
At present, however, the detailed obligations remain unknown. Much will depend on the content of the secondary legislation and guidance that will follow.
A return to familiar principles?
The amendments under consideration are said to reinstate, and strengthen, the former Code of Practice on Workforce Matters in Public Sector Service Contracts (two-tier code), introduced by the previous Labour government in 2005 and withdrawn in 2011.
Under that framework, contractors were generally expected to offer new recruits terms and conditions that were, taken as a whole, no less favourable than those enjoyed by transferred employees. Under the ERA 25 it will also work the other way around. That is, contractors should also ensure that transferred employees are engaged on terms that are, taken as a whole, no less favourable than those offered to direct hires.
When will the changes take effect?
We are still awaiting further regulations and supporting guidance from the government. Whilst employers still have time to prepare, they should closely monitor developments over the coming months.
What should employers be doing now?
While we await the supporting regulations and statutory Code of Practice, employers can take sensible preparatory steps to:
- Review current outsourced contracts
- Identify any public sector contracts where transferred employees work alongside direct hires on different terms and conditions. When the previous Code was introduced in 2005, the provisions did not apply retrospectively to current contracts. However, the scope of the current changes remain unknown.
- Assess workforce costs
- Evaluate the potential financial impact if greater alignment of terms and conditions becomes necessary in future procurement exercises.
- Consider:
- Pay and reward structures
- Pension arrangements
- Other contractual benefits and allowances
- Engage early with procurement and HR teams
- Ensure this is a known issue for any contracts being bid for.
- Monitor regulatory developments
How can Greenwoods help?
If your business delivers services under public sector contracts, now is the time to assess how future workforce protections could affect your employment model, procurement and price strategy. Greenwoods is ideally placed to assist with this work.
For more on the wider reforms, including what’s already in force and what’s coming next, visit our ERA 2025 Hub.
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