Recent legal interpretations of the 1977 Acquired Rights Directive, and impending provisions in the Trade Union Reform and Employment Rights Bill - which will belatedly implement the directive in full at the end of this year - have already raised questions over the commercial viability of hospital and school meals contracts, contracting out the running of prisons and the replacement of the United Kingdom Immigrant Advisory Service.
Where the directive applies, workers cannot be sacked in connection with the transfer of the activity and their old terms and conditions of employment must be maintained. A legal challenge from the health services union Cohse, due for hearing shortly, to a pounds 22m-a-year hospital catering contract in south Wales could, if successful, deter other companies from tendering for lucrative cleaning, catering and maintenance contracts because they would have to pay for any redundancies involved in the changeover, and maintain the terms and conditions of the staff transferred.
The potential value of contracted-out activities could rise from pounds 25m this year to almost pounds 1.5bn next year under the programme of market testing - the first step in the process leading to contracting out - announced last November by William Waldegrave, the public service minister. The programme is aimed at ensuring that more than 44,000 civil servants across a range of departments compete with outside contractors to keep their jobs.
But a request last month for legal advice from the Treasury Solicitor's department highlights that the Government risks claims for damages if employees' rights are not protected in cases where the directive is thought to apply.
The Cohse application for a judicial review arose last September after the Welsh Office ordered South Glamorgan Health Authority to award the hospital contract to Gardner Merchant Limited, which had bid pounds 65,000 lower for supplying meals at the University of Wales Hospital in Cardiff and two smaller institutions.
The contract had initially been awarded to an in-house consortium in November 1991. Cohse invoked the Transfer of Undertakings (Protection of Employment) Regulations, passed by the Government in 1981 to implement the directive. When its decision was challenged, Denzil Jones, a senior Welsh Office civil servant said in a letter to all Welsh health authorities: 'Departmental lawyers advise that this issue has far-reaching implications for government departments and local authorities as well as the NHS. Cohse could well succeed in any action brought to test the issue.'
The letter warned that uncertainty could continue for some time and a 'damaging effect' in taking forward the 'Competing for Quality' initiative in the public sector was not discounted.
The changes in the Trade Union Reform and Employment Rights Bill, currently before the Commons, will mean that the 1981 regulations will be extended to non-commercial ventures and to cases where the person running an activity changes even if the owner of assets and other rights connected with it does not. The changes could deal a blow to compulsory competitive tendering.
One way out of the Government's problems would be to encourage a wave of contracting out before the changes come into force. But the Treasury Solicitor's note points out that recent interpretations of the law by the European Court of Justice would be likely to mean similar rulings in British courts.