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The DoE has dropped its objections to South Lakeland DC's decision to seek indemnity from contractors' redundancy c...
The DoE has dropped its objections to South Lakeland DC's decision to seek indemnity from contractors' redundancy costs if transfer of undertakings regulations are found to apply to contracting out.

South Lakeland had issued invitations to tender for a street cleaning contract last year when, following European court rulings, it began to consider whether the Transfer of Undertakings (Protection of Employment) Regulations 1981 would apply.

The council thought it would receive a section notice for anti competitive practices if it said TUPE applied. But it realised later if it did not apply the regulations and a court subsequently ruled a TUPE transfer had occurred, it could find it had needlessly paid out redundancy money.

According to deputy clerk and chief executive Bruce Parkinson, the council was concerned such spending could be challenged by the district auditor. 'At the end of the day we decided to include an indemnity provision - a clause requiring an indemnity backed by a contract of guarantee', he said. 'If a council pays out any money in any situation it has got to be satisfied it has statutory authority to make that payment.

'If a contract is a TUPE transfer, I would argue staff who are a part of the contract should transfer to the contractor so there is no liability to make redundancy payments. Therefore if it does make those payments there is an argument that this is ultra vires and therefore potentially challengeable', he said.

'I am not suggesting an indemnity would rectify the ultra vires act but in view of the doubts surrounding the law it is a prudent and responsible way of trying to cover the situation'.

While South Lakeland is not alone in fearing the scrutiny of district auditors, Audit Commission Director of Legal Services Tony Child does not believe councils face a risk of legal challenge. Mr Child said no parallel can be drawn with the North Tyneside case where the council is now seeking to recover money paid out under an unlawful severance scheme.

'The point in the North Tyneside case was whether or not councils had power to pay above a level fixed in statute. There is no doubt that councils have the power to make severance payments', he said. Although South Lakeland initially had four private contractors interested in tendering for the work, interest dropped off after it announced it was including the indemnity clause. No external bid was received and the contract was awarded to the council's direct service organisation.

The council received a letter from the DoE warning it may have cted anti competitively and seeking an explanation of the indemnity clause. After several months of correspondence the DoE told South Lakeland late last month it would take no further action. 'The council sensibly sought an indemnity and the DoE presumably accepted that in the case of the street cleaning contract it was not anti competitive', said Mr Parkinson.

The council is now using the same clause in a grounds maintenance contract.

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