2025 Two-Tier Workforce Code

The United Kingdom's employment law landscape is undergoing significant reform with the introduction of the Employment Rights Act 2025. This landmark legislation, which received Royal Assent on 18 December 2025, is a cornerstone of the government's "Plan to Make Work Pay," aiming to modernise employment rights and enhance worker protections across the country. A pivotal element of this Act is the reintroduction and strengthening of a Statutory Code of Practice on Two-Tier Workforces, specifically targeting issues arising from public sector outsourcing. This code is designed to prevent disparities in terms and conditions between public sector employees who transfer to a private contractor and new staff hired directly by that contractor to perform the same outsourced public services.

Overview

The Employment Rights Act 2025 represents a comprehensive overhaul of UK employment law, building upon and amending existing legislation such as the Employment Rights Act 1996. Its overarching goal is to foster a fairer and more equitable working environment, addressing various aspects of employment from flexible working to unfair dismissal. Among its key provisions, the Act reinstates the "two-tier code," which had previously been withdrawn in 2011 and replaced by voluntary "Principles of Good Employment Practice." Unlike its predecessor, the new code will have a legal footing, providing a more robust framework for enforcement.

A "two-tier workforce" typically arises in the context of public sector outsourcing, where services previously delivered by public authorities are contracted out to private companies. In such scenarios, employees who transfer from the public sector to the private contractor often have their existing terms and conditions protected under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). However, new employees subsequently hired by the private contractor to work alongside these transferred staff may be offered less favourable pay, benefits, and other terms, leading to a disparity in treatment for individuals performing similar roles.

The primary objective of the Statutory Code of Practice on Two-Tier Workforces is to eradicate this inequality. It aims to ensure that private sector employees engaged in outsourced public sector service contracts are afforded terms and conditions broadly comparable to those of their public sector counterparts who have transferred. This measure is intended to maintain high morale among the workforce, reduce staff turnover, and ultimately uphold the quality of public service delivery by ensuring consistent employment standards.

Key Requirements

The Employment Rights Act 2025 empowers Ministers of the Crown, as well as Scottish and Welsh Ministers, to introduce regulations and publish a statutory code of practice. These measures will apply to procurement processes where public sector staff are transferred, and private sector employees will work alongside them to deliver outsourced public sector service contracts.

The core requirement of the reinstated two-tier code is to prevent the creation of a two-tier workforce. This translates into specific obligations for contracting authorities and their suppliers:

Comparable Terms and Conditions: Contracting authorities must ensure that workers employed by a supplier on an outsourced public sector contract are treated no less favourably than those transferred from the public authority. This means that new staff joining the private contractor should receive pay and conditions that are, overall, no less favourable than those of the staff transferred from the public sector.
Protection for Transferred Workers: The Act reinforces that transferring workers must be treated no less favourably than they were when employed by the public authority.
Scope of Terms and Conditions: While the previous voluntary code made specific mention of pensions, requiring "reasonable" pension provision for new joiners, the new statutory code aims for "broadly comparable" terms and conditions. This broader phrasing suggests a comprehensive assessment of remuneration, benefits, and other employment terms to ensure parity.
Legal Footing: A significant departure from the past is that the new code will have a legal basis, giving it greater weight and enforceability compared to the previous non-statutory code. This legal backing allows Ministers to set out minimum requirements that all contracting authorities must take reasonable steps to implement in their outsourcing contracts.
Amendment to Procurement Act 2023: The legislation will amend the Procurement Act 2023 to incorporate these protections for transferring workers and those working alongside them on outsourcing contracts.

Covered Employers

The Statutory Code of Practice on Two-Tier Workforces primarily impacts entities involved in public sector outsourcing. This includes:

Contracting Authorities: These are public sector bodies, such as local authorities, NHS trusts, government departments, and other public organisations, that outsource services to private providers. They will be responsible for incorporating the requirements of the code into their procurement processes and contracts.
Private Sector Suppliers: Companies that bid for and secure contracts to deliver public services will be directly affected. They will need to ensure that the terms and conditions offered to their employees working on these outsourced contracts align with the principles of the code, particularly in relation to staff who have transferred from the public sector and new hires.

The focus is specifically on situations where public services are outsourced, leading to a blended workforce of former public sector employees and private sector employees working side-by-side.

Employee Rights

The reintroduction of the two-tier code under the Employment Rights Act 2025 significantly strengthens the rights of employees working on outsourced public sector contracts. Key employee rights include:

Right to Comparable Terms and Conditions: Employees hired directly by a private contractor to deliver outsourced public services will have the right to terms and conditions that are broadly comparable to those of public sector employees who transferred to the contractor under TUPE. This aims to eliminate the historical practice of creating a "two-tier" system where new hires receive inferior conditions.
Protection Against Less Favourable Treatment: The code explicitly seeks to prevent private sector employees from being treated less favourably than their transferred public sector colleagues when performing the same or similar work.
Legal Recourse: As the code will have a legal footing, employees who believe their rights under the code have been breached will likely have avenues for legal challenge, potentially through employment tribunals. This provides a more robust mechanism for redress compared to the previous voluntary principles.

It is important to note that while the Employment Rights Act 2025 encompasses a broader range of worker protections, such as changes to unfair dismissal qualifying periods and compensation caps, and reforms to zero-hour contracts, the Statutory Code of Practice on Two-Tier Workforces specifically addresses pay equity and terms for workers in outsourced public services.

Penalties

While the search results do not explicitly detail specific penalties solely for breaches of the Statutory Code of Practice on Two-Tier Workforces, the fact that the code will have a "legal footing" implies that non-compliance will carry legal consequences. Historically, breaches of employment law in the UK can lead to:

Employment Tribunal Claims: Employees who are subjected to less favourable terms and conditions in contravention of the code could bring claims before an employment tribunal. Tribunals have the power to make various awards, including compensation for financial losses.
Enforcement by Regulatory Bodies: The Act generally strengthens the enforcement of labour market legislation. While specific enforcement bodies for this code are not detailed, it is plausible that existing or new regulatory bodies could play a role in ensuring compliance.
Reputational Damage: Non-compliance with statutory codes of practice, especially those aimed at fairness and equity, can lead to significant reputational damage for both contracting authorities and private sector suppliers. This can impact future contract awards and employee recruitment and retention.

The legal basis of the code suggests that contracting authorities will be held accountable for ensuring their outsourced contracts adhere to its principles, and suppliers will face legal obligations to comply with the terms. Further regulations accompanying the code may provide more specific details on enforcement mechanisms and penalties.

Timeline

The journey of the Employment Rights Act 2025 and its associated Code of Practice has a clear timeline:

10 October 2024: The Employment Rights Bill was introduced to Parliament.
18 December 2025: The Employment Rights Bill received Royal Assent, officially becoming the Employment Rights Act 2025.
During 2025: The government sought views from a broad range of stakeholders on the content of the new code of practice.
October 2026: The Statutory Code of Practice on Two-Tier Workforces is expected to be implemented and come into force.

It is important to note that while the Act itself is now law, many of its provisions, including the two-tier code, are subject to phased implementation throughout 2026 and 2027 to allow employers and workers time to prepare for the changes. For instance, other significant changes within the Act, such as the reduction of the qualifying period for unfair dismissal claims and the removal of the compensatory award cap, are slated for January 2027.

Compliance Steps

Both public sector contracting authorities and private sector suppliers involved in outsourced public services must take proactive steps to ensure compliance with the forthcoming Statutory Code of Practice on Two-Tier Workforces:

For Public Sector Contracting Authorities:

Review Procurement Strategies: Assess current and future outsourcing strategies to ensure that the principles of the two-tier code are embedded from the outset of any new procurement process.
Update Tender Documents: Revise tender specifications and contract terms to explicitly require potential suppliers to demonstrate how they will comply with the code, ensuring comparable terms and conditions for all workers on outsourced contracts.
Due Diligence on Suppliers: Conduct thorough due diligence on prospective suppliers to evaluate their existing employment practices and their capacity to meet the requirements of the code.
Contractual Obligations: Ensure that contracts with suppliers include robust clauses mandating adherence to the code and providing mechanisms for monitoring and enforcement.
Internal Training: Educate procurement teams, legal departments, and other relevant staff on the implications of the new code and their responsibilities.

For Private Sector Suppliers:

Audit Existing Contracts: Review current public sector outsourcing contracts and the terms and conditions of employees working on them, identifying any potential disparities between transferred staff and direct hires.
Develop Fair Pay Structures: Implement pay and grading structures that ensure new employees on public sector contracts receive terms and conditions broadly comparable to those of transferred public sector staff. This may involve benchmarking and adjustments.
Consultation: Engage in meaningful consultation with trade unions or employee representatives on workforce matters, particularly concerning terms and conditions for new hires on outsourced contracts.
Policy and Procedure Updates: Update internal HR policies and procedures to reflect the requirements of the code, covering recruitment, remuneration, benefits, and other employment terms for staff on public sector contracts.
Training and Awareness: Provide comprehensive training to HR professionals, line managers, and relevant staff on the new legal obligations and best practices for preventing a two-tier workforce.
Ongoing Monitoring: Establish mechanisms for continuous monitoring and auditing of employment terms and conditions to ensure ongoing compliance and address any emerging disparities promptly.

Proactive engagement with these compliance steps will be crucial for both public and private sector organisations to navigate the changes introduced by the Employment Rights Act 2025 and uphold the principles of fair and equitable treatment for all workers involved in public service delivery.