Ministers have decided that previous Conservative administrations, largely under Margaret Thatcher, ignored their obligations to ensure that working conditions were protected when private businesses took over public services under the Compulsory Competitive Tendering policy.
Tens of thousands of workers lost their jobs and others saw their wages cut in the period between 1983 and 1993.
Unions yesterday greeted the decision as a significant breakthrough and will launch fresh proceedings on behalf of some 1,500 health and local government workers claiming "thousands of pounds each". Exact amounts are not yet available, but it will cost the government several million pounds.
Other compensation cases may also be brought, but some union officials are pessimistic about their chances of success.
Roger Poole, assistant general secretary of the public-service union Unison, said the real significance of the case was that it proved governments could not flout European law and escape the consequences. And he added: "The new government has been lumbered with a Tory legacy of illegality. This landmark ruling will be a posthumous page in the last government's book of injustice."
Jack Dromey, national secretary of the Transport and General Workers' Union, said Conservative governments had deliberately broken the law. "They wanted to promote a Dutch auction of who would pay the least in the privatisation of public services."
Mick Graham, national secretary of GMB general union, said the ruling would show that the Conservatives had failed business as well as union members by giving misleading advice.
"I hope that contractors who have been taken through legal proceedings on the basis of the Tories' guidance now sue the party for bad faith."
Under the British version of European law, only private sector workers in commercial undertakings were protected. However, the European directives on which the UK law - the transfer of undertakings (Protection of Employment) regulations 1981 - was based, protected all workers.Reuse content