Contracting out of Government Services

CHAPTER 4

EMPLOYMENT ISSUES

The outsourcing of IT will have significant employment implications for those currently employed in Commonwealth agencies. Staff who are 'in scope' will be faced with a number of options. A high proportion will transfer more or less smoothly to the IT vendor serving their agency. Some will be redeployed within the public sector and a proportion will be made redundant.

Unemployment

The most significant employment issue is, obviously, the impact on those who lose their jobs when services are contracted out. Estimates of job losses vary. The Community and Public Sector Union (CPSU) estimates that approximately 1100 public sector employees within the scope of the outsourcing will lose their jobs, assuming that 60 per cent of positions transfer to the outsourced service provider. Fifty-one of DVA's 93 eligible IT staff transferred to the new supplier in the recent outsourcing in that agency. The CPSU estimate must be treated cautiously because it may not reflect long term unemployment and thus may be a transitional problem only. IT is an expanding industry and therefore qualified and experience workers may experience relatively little difficulty in rejoining the work force. Research elsewhere suggests that unemployment as a result of outsourcing falls disproportionately on the unskilled who are not, typically, employed in IT. It has been put to the committee that advertised vacancies in South Australia suggest that demand for experienced IT staff exceeds supply in the wake of the state government outsourcing its IT. In addition it must be acknowledged that public sector staff may use the outsourcing of their agency's IT to take early retirement, move to employment outside the IT industry or return to the workforce after a voluntary break, having benefited from a redundancy payout. Thus while the loss of any job is a serious matter it is not possible to estimate the likely permanent impact on employment of the outsourcing of IT. Nevertheless any genuine effort to calculate the costs of outsourcing should recognise the costs of unemployment to those who are forced out of the workforce.

It has been put to the committee that the adverse employment effects should be limited by requiring the contractor to employ all 'in scope' employees for a defined period after the commencement of the contract. A witness to the inquiry, Mr Ian Dennis of the Australian Computer Society, suggested other options:

There is no need to transfer all staff. ... There is absolutely no reason why you cannot use secondment [or] ... contract-back arrangements to the benefit of staff and to the benefit of the government. [1]

The committee would encourage agencies to investigate all such options.

At the same time it has to be recognised that, in seeking efficiency gains, there will frequently be implications for staffing levels and that this is not restricted to outsourcing. As mentioned earlier in this report the Department of Defence approximately halved the number of staff involved in IT as it rationalised its services prior to market testing.

Arrangements for the Transition of Staff

The successful transfer of a significant proportion of agency staff to the new service provider prior to the commencement of the contract is essential to ensuring continuity of service. Thus agencies have an incentive to ensure that the transfer occurs. However the APS redundancy provisions provide some employees with a financial incentive to seek redundancy. The alternative arrangements for handling the transition of staff are known as the 'clean break' approach and the 'phased' approach.

Under the clean break approach staff simply take redundancy, leave the APS and receive their entitlements. They are then free to negotiate their future employment with an outsourcing vendor or any other employer. However they may not return to APS employment in the following twelve months.

The phased approach involves an agency and the contractor cooperating to place staff with the contractor, thus ensuring continuous employment and continuity of service provision.

DVA's IT outsourcing in 1992 is justifiably held up as a successful exercise overall. However it is well to remember that the transition process gave rise to an industrial dispute described as 'one of the most protracted and bitter in the history of the APS'.[2] A subsequent Auditor General's report estimated that problems with the transition had reduced the potential savings by $2.57m or approximately 18 per cent.[3] DVA used the clean break approach but commented that it would have been more successful if staff making the transition to the new vendor had had access to the employer's component of their superannuation. Other agencies have also commented on the need to encourage a smooth transition to the outsourcer.

In its comments on the cabinet submission the Public Service and Merit Protection Commission (PSMPC) was opposed to the adoption by ministers of 'a particular strategy for managing the staffing aspects ...or agree that what is termed the phased approach is preferred'. The PSMPC and other agencies have also advised that 'without legislation there is nothing which can compel existing staff to accept employment with the new vendor, that there is no way of predicting with certainty how many employees will accept employment with the new vendor, and the transition costs under the phased approach will increase significantly if fewer that 70% of staff [transfer]'.[4]

Transitional Costs

The redundancy and other employment related costs incurred by agencies as a result of outsourcing have been widely debated and are seen as critical to the government's savings estimates. The cost implications of shedding IT staff are fundamental to the financial outcomes. The former Department of Industrial Relations (DIR) pointed out that widespread use of the clean break approach in preference to the phased approach would quickly absorb most of the projected savings for financial year 1998-99. Other agencies including Treasury and the Australian Taxation Office expressed similar concerns. With the adoption of a phased approach involving a transitional payment those projected savings will come under increased pressure whichever approach is adopted. Adoption of the phased approach, which now imposes some financial demands on the contractor, can also be expected to have an impact on vendor pricing.

At the time the budget savings for IT outsourcing were announced, the government was unwilling even to acknowledge which approach to staffing transition it was using in its modelling. It advised the Finance and Public Administration Legislation Committee at a hearing on 16 June 1997 that the phased approach had been used. The phased approach is considered to be significantly cheaper for agencies as it does not involve redundancy payments and hence transitional staffing costs could be kept to a minimum. The details of the phased approach were not clearly identified at that time.

The employment transition framework ultimately adopted by government was detailed in an OGIT special bulletin and is the product of consultation with the PSMPC, the Department of Workplace Relations and Small Business and budget funded agencies. In the bulletin, refinements on the phased approach were outlined. Staff moving to the vendor will be eligible for a transitional payment equivalent to one week's pay for every year of service with the Commonwealth up to a maximum of sixteen weeks. Transferees' severance payment rights will also be preserved for three years after the transfer. If a transferee is made redundant by the contractor within three years he or she will be eligible for redundancy payments from the Commonwealth less the value of any transitional payment already received.

Superannuation arrangements have also been modified. The government announced in June of this year that employees made redundant as a result of outsourcing would have access to their lump sum superannuation entitlements. It will also enable employees who resign from the public service and take up employment with the new service provider to transfer their superannuation entitlements to a new fund or a Retirement Savings Account.

These changes seek to ensure that sufficient staff make the transition to the contractor to ensure continuity of service by reducing the financial disincentives of the old phased approach. Whether the transition payments are sufficient to achieve this remains to be seen. Although the transitional payment is likely to be less than half an equivalent redundancy payout the introduction of a transition payment and the continuing Commonwealth liability for severance payments for three years does reduce the clear financial advantage of the phased approach over the clean break approach.

Agencies involved in clusters will be required to adopt the same transitional approach prior to the commencement of market testing. While this ensures that all staff within a cluster are treated equally, it does restrict the freedom of individual agencies to adopt the approach which best suits their circumstances. It does also raise the prospect of industrial disputation if staff and management do not agree on the approach to be used or where one agency in a cluster is compelled to accept the approach favoured by the others. Given the reduction in size and the changing employment relations environment and consequent insecurity felt by many employees in the APS, the committee believes that the employment implications of outsourcing will need to be handled with great skill to avoid industrial disputation.

Given that industrial relations problems were a feature of the transition to the first DVA IT outsourcing contractor, the committee welcomes the government's decision to modify the transitional arrangements to facilitate a smooth transition to a contract provider. However it believes that the encouragement for the phased approach evidenced in the Employment Transition Framework supports the committee's view that the government should review its savings targets.

Employment Conditions

Concern has been expressed, particularly by the CPSU, that outsourcing will lead to the loss of employment conditions and standards as workers move from the public to the private sector. Given the government's intention of moving employment conditions in the public sector more into line with equivalent private sector practice this issue may disappear. It is questionable whether this will apply in the case of IT outsourcing in any case. The private IT industry generally offers better salaries that the public sector (hence the anxiety about retaining good IT staff in the APS) and it seems likely that any advantage the APS has with regard to non-salary conditions is being reduced by changes to the public sector.

The phased approach seeks to preserve some employee entitlements for a transitional period. Twelve weeks paid maternity leave will be available during the first year of employment by the contractor. Thereafter the contractor's provisions will apply. With regard to long service leave, service with the Commonwealth will be counted towards access to the contractor's scheme.

The area of employment transition is a rapidly evolving one. In a recent Federal Court case, pursued under the transmission-of-business provisions of s.149 of the Workplace Relations Act (C'wealth), Justice Marshall ruled that workers should maintain their core public sector award entitlements when their jobs are transferred to another employer. While the case in question related to the outsourcing of Victorian psychiatric services, it may be of considerable relevance federally. The committee will address the issue of employment conditions at greater length in its second report as they are of less relevance in the information technology field.

Footnotes:

[1] Committee Hansard, 5 September 1997, p. F&PA 643.

[2] Public Sector Research Centre, UNSW, Supplementary Submission, p. 7.

[3] ANAO, DVA Outsourcing - the Management of Redundancy Arrangements, Audit Report no. 45, 1991-92.

[4] Cabsub, Attachment B, para 81.