Delivering public services through mutual – addressing the employment issues

The Cabinet Office has recently celebrated the fact that 100 new mutuals have been spun out of the public sector.

The Cabinet Office has recently celebrated the fact that 100 new mutuals have been spun out of the public sector, delivering public services with a value of just under £1.5 million.

Mutuals are an important component of the Coalition Government’s pledge to transform the way in which public services are delivered, seeking to make them more efficient and more effective. Guidance is provided by the Mutuals Team in the Cabinet Office and support is available through the Mutuals Support Programme; political direction is provided by the Mutuals Taskforce.

There is plenty of evidence to suggest that employee-owned businesses create jobs at a faster rate than ordinary businesses and that they are more sustainable and more productive - yet issues remain around how to realise the benefits which have been identified from their use and around the implications for employees where such structures are utilised.

What is a “public service mutual”?

The term is used to cover a multitude of situations, many of which are outside the scope of this programme. It is therefore important to define what is meant by a mutual for these purposes.

“Public service mutuals” are organisations which contain the following features: 

  • They have spun out of the public sector
  • They continue to deliver public services
  • Employee control plays a significant role in their operation

The first mutuals spun out of central government was MyCSP in 2012, to deliver pensions services and it has been followed by mutuals delivering services such as healthcare, leisure and education. Oldham Community Leisure, for example, is set up as an industrial and provident society. Those with an interest in the service – employees, customers and members of the local community – can buy a share for £1. That creates the right to vote in elections for the board of directors who in turn appoint the CEO. 

This does not give real “ownership” in any meaningful sense, but it does create a collective right to participate in the management of the business and it is the engagement created through this ownership, coupled with the participation in decision making, which is the critical feature. Ownership in the sense of possessing and enhancing value is secondary.   

Other kinds of mutuals

It is necessary to distinguish this model from other uses of the term “mutuals”.

For example, building societies are mutuals and the concept of “demutualisation” entered the common vocabulary when there was a rush of building society transfers from mutual to corporate status in the 1990s, driven by the wish to convert to a bank and hence to deliver a wider range of services.

Mutualisation in this context is a reference to the fact that the model for building societies is ownership by those who deposit money or those who have a mortgage with the society. Although there may be a distinct ethos attached to such models which might find its way into the employment relationship, the employees do not have an ownership stake in the society. This is not, therefore, the type of model to which this programme refers: the public sector mutual programme is all about employee ownership as a way of creating engagement. 

Certain private sector organisations are lauded as “mutuals” but should not be confused with what is envisaged by the programme.  A case in point is Circle Health, largely as a consequence of its success in turning around performance at Hinchingbroke. There is a substantial element of employee ownership in Circle Health, but this must be seen in the context of its private equity backing. It may be that there is a powerful employee perception that they are stakeholders in the business but the element of true control is missing because of the corporate structure, which ensures that the investors have adequate control to protect their investment.  

It is structures like these that lead unions to decry mutualisation as akin to management buy-out style privatisation. Moreover, the structure of the project at Hinchingbroke involves employees remaining in the pubic sector, rather than becoming employees of the mutuals. The mutuals merely provides direction.  Hence the mutuals structure is at a stage removed from the employees.

Why use public sector mutuals? 

Francis Maude explains the rationale thus: “All the evidence shows that employees, who have a stake in their business, or take ownership of it completely, have more power and motivation to improve the services they run. This is why I believe that the move towards greater delivery of public services by mutuals is transformative – empowering employees to redesign services around the needs of their users and communities, and make services more efficient.” 

Of course, there is no need to use a mutual to achieve the objective of providing employees with a stake in their businesses so as to link their participation with the collective success of the enterprise. A stake might be provided in the direct sense of ownership through an employee share scheme, and a direct relationship between the success of the business and the remuneration of the employee can be created without any element of ownership through a phantom share scheme or even a simple bonus scheme. So it is not immediately apparent why a mutual structure as opposed to a more conventional structure is going to deliver “transformative” results in relation to the delivery of public services, though employee decision-making is clearly central. 

Also, in each project it will be necessary to create a legal structure for the mutuals and a range of solutions is available, all of which will have specific consequences for the employees, for example a joint venture, an employee cooperative or a limited liability company.  These structures will bring with them challenges which may not have existed hitherto – for example, the challenge of funding the enterprise and the need for skills which may not have been required hitherto such as the development of marketing strategies and the generation of income. 

Leaving aside political and economic theory, however, what appears to be at the heart of the policy objective is to create employee control of the business. This envisages a fusion of employee ownership and employee control, whereas in a corporate model there is a clear distinction between the shareholders and the management of the company. It is important to keep this objective in mind when designing the structure of the mutual and when considering the HR issues which are discussed below. 

Transferring employees into a mutuals 

The transfer of responsibility for the delivery of services from the public sector to the mutuals will ordinarily involve a “relevant transfer” for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). 

Consideration needs to be given to the timing of the transfer in the context of establishing the structure of the mutuals. 

To the extent that this amounts to a transfer within public ownership then the transfer may fall within the exception in regulation 3(5) of TUPE, though Cabinet Office Guidelines would suggest that similar treatment should be applied. Hence there will be an automatic transfer of employees from the public sector into the mutual. Terms and conditions of employment are preserved and “Fair Deal” principles require continuing participation in a public sector pension scheme or membership of a broadly equivalent scheme.

Once employment transfers it will be necessary for the mutuals to be geared to accepting the full responsibilities of an employer, and if and to the extent that any aspect of mutualisation changes the employment relationship there will be a need for sensitivity.  

Whilst there may be widespread welcome for the transfer and for changes in the roles of the employees some may be hostile and if there is to be a change in any of the terms and conditions of employment there will be an issue as to whether such changes will be enforceable. It will be necessary to look carefully at whether there is a link between the transfer itself and the change and whether there is an economic, technical or organisational reason which entails a change in the workforce. It is the latter element of this exception which will habitually prove particularly challenging. 

If there are aspects of the mutual environment which employees do not like, there is a risk of staff electing to leave. At the least this could lead to a loss of valuable skills and experience and at worst this could involve a claim that the employees have suffered a material detriment such as to justify an unfair dismissal claim, or a claim based upon constructive dismissal. This could arise, for example, if the mutual structure involves employees in a degree of risk which they are not prepared to accept. Ordinarily, however, such considerations might be expected not to arise. 

Transferring employees out of the mutual 

It is in the nature of service delivery that changes in service provision in future may result in the TUPE transfer of employees, for example if the mutual lost the right to deliver services or if there was a subcontracting of services. 

In these circumstances it is likely that there will be rights particular to mutualisation which would not transfer readily, such as share ownership rights or enhanced employment rights. This might give rise to friction which would be unhelpful in the context of achieving a smooth transfer and might also result in the material detriment/constructive dismissal issues raised above if the successor employer is in no position to replicate these features.  

It is also worth noting that TUPE not only transfers contractual employment rights but also rights in connection with the contract of employment. Hence, on a transfer out of the mutuals, rights which arise from ownership status within a mutuals as a necessary consequence of employment would ordinarily be expected to transfer. 

Employees as owners 

Thought needs to be given to the nature of the ownership element given to the employee. 

This could involve, at one end of the spectrum, employees holding an asset with scope for investment risk and, at the other, the ownership element being neutralised as an investment by the transfer of assets into the ownership of an employee trust. Although a nominal charge for the ownership of a share is unlikely to cause any controversy a request for a more substantial sum may well, and this begs the wider question of how the mutual is to be funded and the nature and extent of employee risk in this context. 

In order to retain ownership within the group of stakeholders there will need to be a mechanism for ownership to cease upon the termination of employment. Given that employment can end in acrimonious circumstances it would be advisable to put in place processes such as pre-delivered powers of attorney so as to ensure the effective transfer of the asset on termination. 

Thought also needs to be given, where the ownership element involves an exposure to increases or decreases in value, to a mechanism for determining the transfer value on the termination of employment. 

As most of the employee will not have come from an environment with an investor element these issues will all be new. 

It will also be necessary to consider whether employees will be required to assume any other risk associated with ownership, and to ensure that the necessary legal and insurance protection is in place to guard against such risks.  For example, is the mutual a limited liability company or a structure whereby the employees will be personally liable for any debts of the business? In the latter case there are issues of risk and reward which might be radically different from their employment environment hitherto. Employees could not be forced to accept such an environment and it may be that some will be lost to the business as a consequence. 

There is considerable scope for flexibility when establishing a model for employee representation. This could take a form of simple industrial democracy where employees elect management or it could take the form of a consultative process whereby employee opinion is gathered and fed back to management. It may be that some sort of elected employee body will sit aside management as a consultative/supervisory body. 

Adjusting employment rights    

Some mutuals, of which John Lewis is perhaps the best known example, adjust the rights of employees as a consequence of the mutuals status of the employer. In addition to a share in the profits and participation in the direction of the business (through such vehicles as an annual survey of employee opinion) John Lewis employees (or partners as they are known) benefit from disciplinary procedures which have a different dimension to those of many other employers, in that a more rigorous procedure is followed ahead of disciplinary action being taken. This type of feature is often seen as a natural adjustment given the greater degree of engagement of employees in the business, and may be particularly important where there are value issues attached to ownership.      

Where the employee acquires shares with a value of £2000 or more there is the option of employees taking employee shareholder status and opting out of certain employment rights. 

Conclusion 

To date, much of the rhetoric has been around collaboration and culture. However, close attention to the underlying legal structure of the enterprise and a focus on the exact nature of the employee participation which is appropriate in the context of the services in question, are necessary if the mutual is to achieve its objectives. There is a range of possibilities to choose from, depending upon the appetite for radical change in the nature of the employee participation.

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