LAW SPECIAL REPORT: The government is proposing changes to the regulations governing staff transfers in response to the ongoing row over PFI in the NHS. Daniel Lee explains the proposed route through the legal minefield

Sign language: PFI protests at Wordsley Hospital in the West Midlands.

Unison members at Dudley Group of Hospitals trust held a series of well-publicised strikes over their transfer out of the NHS under a private finance initiative deal. As the row simmered earlier this year, few people would have predicted that changes to employment rights under such schemes were imminent.

But then, few people knew that Unison general secretary Dave Prentis had threatened to spark disputes at 29 PFI hospitals if the government failed to change policy. After years of union campaigning, this year's Labour manifesto included a commitment that 'private finance initiatives should not be delivered at the expense of the pay and conditions of the staff employed in these schemes'.

The commitment, confirmed by the government in June, aims to offer the perfect compromise: industry should be happy because private involvement in the NHS will continue, and staff should be happy because they will maintain their conditions of employment.

But will it be possible to put a legal stamp on this marriage between a distinctly uneasy, not to say odd, couple?

At the moment, transfers are covered by TUPE - the acronym for the catchily named Transfer of Undertakings (Protection of Employment) regulations, laid down in 1981.

These apply to all staff transfers, in business as well as the public sector, and were supposed to satisfy everyone.

The idea was to allow transfers to proceed while protecting employee rights. But critics have always complained that they are open to a confusing variety of interpretations.

The Department of Trade and Industry recently issued a consultation paper on TUPE reforms in response to changes to the EC acquired rights directive, which prompted the introduction of the regulations in the first place (see box, overleaf).

Raymond Silverstein, employment partner at Browne Jacobson solicitors, says: 'The proposals are the result of more than 20 years of legal and political uncertainty and wrangling over the effect of TUPE, so hopefully the changes will improve the situation. Some certainty would be nice.'

At the moment, when NHS PFI deals go through, staff in ancillary services are transferred to employment with the private-sector contractor taking over the running of those services.

This transfer is covered by the TUPE regulations, so employees should keep more or less the same conditions as before the transfer of the services. However, unions say they are often put under pressure to accept poorer conditions.

That pressure can increase if the private contractor brings in new people on different terms. In addition, private contractor pension arrangements are seen as inferior to those provided by the NHS.

The government is now proposing that staff in soft ancillary services (such as catering and cleaning) will remain employed in the NHS, but will be seconded to the private sector. Under what the government is calling the retention of employment model, the private sector would manage the staff, even though they would not be its employees.

In an attempt to iron out glitches in this big idea, the Department of Health has launched pilot schemes at Queen Marys Hospital in Roehampton, Stoke Mandeville Hospital trust and Barking, Havering and Redbridge Hospitals trust.

Helen Walley, chief executive of South West London Community trust, which runs Queen Marys, says: 'At the moment, discussions are going on between us, the DoH and the trade unions about what level of staff we are talking about.

In the first discussions we had with the government, we talked about managerial and some supervisory staff being transferred under TUPE to the private sector.

'Everybody else below that level of management would stay within the NHS and would be seconded across, under the terms of the contract. The definition of a manager is still under consideration.'

The new schemes will not simplify life for trusts. 'All trusts will need to consider value for money and affordability, ' Ms Walley says.

'We also need to consider exactly what the new relationship with the private provider will be, and how things will work in relation to the staff and the day-to-day running of the hospital. There will always be issues that come up over the 30-year period of a contract.'

Vincent Doherty, PFI project director at Stoke Mandeville, says the idea of using three trusts in the pilot is to explore issues from different perspectives for the benefit of the whole NHS.

'Each trust currently has a different mix of contracted and contracted-out soft services, so we hope to draw out a common approach which can be applied across PFI in the NHS.'

All very well, but there are concerns about the potential for confusion over the legal basis for these types of arrangements. Charles Newman, a partner at Beachcroft Wansbroughs, says:

'The government has not made this clear, but it is almost certainly based on the rather strange wording of regulation 5 (1) of TUPE that staff are only transferred under TUPE if their employment 'would have otherwise been terminated by the transfer'.

'The argument would run that the employer, the NHS, would not be terminating employment, and therefore there would be no TUPE transfer. There are some doubts as to whether this accords with the European directive on which TUPE is based, and whether there would be a TUPE transfer automatically anyway. There is very little case law in this area.'

The government is well aware of this issue. The DTI consultation paper is inviting comments on whether there should be separate measures for different government departments, or general changes to the regulations.

Meanwhile, managers at the three NHS pilots are waiting for government law officers to pronounce on this issue. Both the private sector and unions say they will explore other models if it cannot be resolved.

On a practical level, the retention of employment model also appears to raise some potentially serious legal problems. One is: who will hire and fire - the NHS, the private sector contractor or both? How much control will it be reasonable for the trust to retain without undermining the contractor's role?

Another issue relates to procedures for disciplining employees. Again, should this be done by the contractor, the NHS or both? Which will prevail if they disagree?

Jean Sapeta, partner in Bevan Ashford's employment team, says: 'It will be difficult to frame these arrangements because in these situations the law operates to transfer people over to the contractor automatically. There is a question mark over whether this can be done without changing the law. There is a real problem about where risk will lie if things go wrong and the proposals may be impractical, depending on what can be thrashed out between unions and private sector. The plans may work on a small scale, but we are talking about whole tranches of people.'

Clearly the schemes are breaking new ground. But Capsticks partner Trevor Mawer, who was involved in drafting standard employment clauses for PFI contracts before the current proposals, says there is no cause for alarm.

There are ways of solving possible legal pitfalls.

'Everything is very much provisional at this stage. But at the end of the day, for any legal action such as wrongful dismissal or discrimination, the trust would remain liable.

It could deal with this by taking an indemnity from the contractor to cover any potential proceedings. It would be no good for the NHS to be liable for things done badly by the contractor.'

There are many questions to answer before legal judgement can be passed on the government's proposals, but if everything works out then perhaps we will, indeed, be on the way to a perfect world.

Now and in the future

TUPE regulations were introduced to implement the EC acquired rights directive, which was adopted in 1977. They are designed to safeguard employees' rights when the business in which they work changes hands. Where the employing entity remains the same except for a shift in ownership, the employee's contract of employment is taken over by the new employer, who has a legal obligation to continue it unchanged. At Queen Marys Hospital, for example, under the present PFI arrangements, both the hard and soft facilities management services were transferred under TUPE to the private sector. The EC directive was revised in 1998 to give member states more flexibility over how to interpret it.

The Department of Trade and Industry recently issued a consultation document setting out how the British government plans to reform TUPE regulations 'to ensure they operate as effectively as possible'. The document addresses some issues specific to the public sector: including whether 'an economic entity' is transferred when staff are contracted out. It also aims to protect an employee's occupational pension rights - a bone of contention in public-sector transfers. It suggests ways of ensuring existing rules are enforced and looks at protection against dismissal.

In the NHS, the government is proposing that staff in soft ancillary services (such as catering and cleaning) will remain employed by the health service. Staff in hard ancillary services (such as maintenance) would still transfer under TUPE to a private contractor, but would be covered by any changes made after the DTI consultation ends on 15 December.

Chief executive of South West London Community trust Helen Walley says that problems with the new arrangements should be minimised because the legal structure is likely to include a joint liaison group, a partnership between the private sector and the trust to manage unforeseen issues.

This will have a formal dispute resolution procedure and manage problems that cannot be resolved.