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.
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