Outsourcing is a contemporary business practice in both the private and public sectors. Typically outsourcing involves an organisation engaging under contract the services of another entity to carry out certain functions which that first organisation had performed itself. The Federal Court of Australia noted that whilst there may be varying details of the outsourcing arrangements in particular instances, outsourcing usually involves a contractor being engaged to carry out ‘a function or operation, previously undertaken by the enterprise itself, in a more efficient way; perhaps by the use of more sophisticated equipment, perhaps by using specialised labour’.^[1] The Australian Public Service (‘APS’) itself adopted a similar definition: ‘Outsourcing refers to an arrangement whereby an APS agency has a function or service which was previously undertaken in-house performed by a private sector provider’.^[2]

Various terms are applied to this outsourcing, including ‘contracting out’, but in the public sector the term ‘privatisation’ may also be used. Outsourcing or the privatisation of some APS functions commenced as far back as the early 1980s. However the real growth of outsourcing in the Australian public sector occurred from the 1990s and the pace accelerated in more recent years. In the fields particularly of information technology and human resources, there has been an enormous increase in outsourcing in the last five to ten years with implications for terms and conditions of employment of former public sector employees.

This chapter will explore first the nature and extent of this public sector outsourcing and the legal and administrative framework for that outsourcing. It then analyses the legal implications for public sector employment which occur as a consequence of the new interposed entity (which is the new employer) now performing functions previously undertaken directly by government. The question whether previous conditions of public sector employment continue to govern the terms of employment of the outsourced employees and bind the new employers will be examined, together with the concept of transmission of business and the effects of the Workplace Relations Act 1996 (Cth) and the Workplace Relations Amendment (Work Choices) Act 2005 (Cth) (‘Work Choices Act’). Reducing labour costs as a type of cost cutting might be achieved primarily through avoiding the operation of particular industrial instruments; the freedom of association objectives in the Workplace Relations Act 1996 (Cth) can act as a safeguard to ensure there is no avoidance of such obligations through outsourcing. This will be explored in the chapter.

Other implications also arise from outsourcing — for example, in terms of discrimination, equal opportunity and affirmative action issues; whether there is an obligation to abide by the APS Values and APS Code of Conduct by the outsourced employees or new employees taking over the former government-performed functions; the shift of government control to contract management and the rights and remedies of employees moving from administrative, statutory and public law regimes to those mainly under the contract of employment. These will be examained.

The first section of this chapter provides an overview of outsourcing in the public sector.

Scanning the Landscape: Overview of Public Sector Outsourcing

The Commonwealth government’s outsourcing, contracting out and privatisation activities became very significant in the 1990s.

The functions outsourced tended to be a part of the government function. In 1997, for example, the Commonwealth took the decision that IT infrastructure would be outsourced but subject to competitive tendering; it ‘embarked upon one of the largest and most complex information technology outsourcing initiatives in Australia’.^[3] Thus in December 1999, IBM Global Services Australia and the Australian Federal Government signed an agreement, the Health Group Agencies IT Outsourcing Agreement, in which IBM undertook to provide information technology and technology services worth $350 million over five years to the Department of Health and Aged Care, the Health Insurance Commission and Medibank Private. By December 2000, ‘23 departments and agencies in five groups had outsourced their IT infrastructure. This [represented] around half of the agencies in the Whole of Government Information Technology Outsourcing Initiative (the Initiative) and approximately $1.2 billion in contract value out of a total estimated $4 billion for the entire Initiative’.^[4] Mindful of the risks, the government decided to set up a review of the IT outsourcing initiative — to review IT outsourcing and report on risks and the future — and appointed Richard Humphrey to undertake the review. The report, submitted in December 2000 and entitled Review of the Whole of Government IT Outsourcing Initiative, became known as the Humphrey Report.

The Humphrey Report described the Commonwealth government outsourcing of IT policy initiative as being ‘ambitious and broad‑ranging’ with the purpose of ‘complementing modern management practices within the Commonwealth Public Service and enhancing access to wider technical skills and technologies’.^[5] Further, the aim was to achieve economies of scale and to decrease costs.^[6] Although the policy reasons were clear, the task itself was enormous, bringing with it risks and concern by members of the public and others, including members of the opposition.^[7] The Humphrey Report’s comprehensive 105 pages focussed on the implementation risks and the transition from in-house provision to outsourcing.

Following the Humphrey Report, on 23 March 2001, two Commonwealth government departments, the (then) Department of Employment, Workplace Relations and Small Business and the Department of Education, Training and Youth Affairs, announced that they would pursue the outsourcing of the IT infrastructure and do this using a ‘segment-by-segment approach’. Behind this decision was the consideration by the departments of the contents and recommendations of the Humphrey Report.

More generally, the government was conscious of the need to oversee the process of outsourcing. In the early 2000s, a section of the Commonwealth Department of Finance and Administration, the Competitive Tendering and Contracting Branch (CTC), oversaw the contracting out of the delivery of activities, previously performed by a Commonwealth agency, to another organisation. This form of outsourcing was described then as:

a vital part of the government’s reform agenda which is about making the public sector more responsive to the needs of government; and building a performance culture through devolved decision making, responsibilities and accountability.^[8]

Competitive tendering and contracting processes were utilised in numerous areas, during this period, including in Centrelink; the Department of Defence; the (then) Department of Employment, Workplace Relations and Small Business; and the Department of Foreign Affairs and Trade.

Examples of functions which have been outsourced are somewhat varied. The Department of Foreign Affairs and Trade outsourced the Australian Passport Service and its passport interviewing and application processes. Clearly this had an implication for the jobs and nature of work of those staff who remained in the Australian Passport Service within the Department of Foreign Affairs and Trade. According to the Department:

While work loads have increased due to demand and additional security requirements, staff levels have been steady as outsourcing allows staff to concentrate on policy matters and ‘big picture’ issues such as improvements in customer service, instead of being focused on routine, simple processing activities, so providing greater job satisfaction.^[9]

The Department of Employment, Workplace Relations and Small Business contracted out workplace services delivery to the states and contracted out its federal award and agreements inquiry and compliance services to two state governments.

Further examples of public sector outsourcing undertaken at various stages include:-

The Department of Defence outsourced the delivery of port services and support craft for the Royal Australian Navy;
The Department of Human Services and Health outsourced cost recovery process for medical services;
The Department of Immigration and Multicultural Affairs outsourced the internal audit function to the private sector.

Parallels occurred in the states too where, for example, there were various models used in the outsourcing of the provision of public transport; and Tourism Victoria outsourced the core function of marketing.

In 2005, Commonwealth government agencies reported as follows:^[10]

Overall, 49 agencies (60 per cent) reported finalising new outsourcing contracts or contract extensions in regard to at least one aspect of an ICT or HR function or service during 2004–05 … Finalising or extending an outsourcing contract in relation to at least one aspect of ICT services occurred in 44 per cent of agencies in 2004–05, consistent with 47 per cent of agencies in 2003–04. However, there was a substantial increase in 2004–05 in the proportion of agencies that entered or extended an outsourcing contract in relation to at least one aspect of HR services (38 per cent in 2004–05 compared with 20 per cent in 2003–04).

The table below summarises the changes from 2002-2003 to 2004-2005 in respect of information and communication technology services and strategic planning and human resource services.

Figure 7.1. Agencies’ outsourcing activity, 2002–03 to 2004–05

Source: Agency survey ^[11]

In 2005, too, in accordance with the requirements of the Financial Management and Accountability Act 1997 (Cth), the Commonwealth Procurement Guidelines 2005^[12] were promulgated for agencies to ensure value for money in procuring goods and services, as well as efficiency, encouraging competition, accountability and transparency, and effective and ethical use of resources.

It seems that there has been a significant expansion in outsourcing in the past few years. Whilst the Commonwealth’s State of the Services Report itself acknowledges that it is not clear whether this change is cyclical, the point remains that outsourcing is significant.^[13] Recent figures for outsourcing are not now available through the State of the Services Report because it was decided that it was no longer necessary to report that data. Hence the extent of current federal government outsourcing is now difficult to accurately ascertain.

How Does Public Sector Outsourcing Compare to Private Sector Outsourcing?

In the survey Changes at Work: 1995 Australian Workplace Industrial Relations Survey,^[14] according to the workplaces surveyed (both private and public sector) outsourcing was more prevalent among workplaces which had 200 or more employees. Workplaces with 200 or more employees reported 51 per cent contracting out compared to only 33 per cent of smaller workplaces. Outsourcing, even at that time, was more prevalent in the public sector, with 52 per cent, compared to the private sector, 32 per cent.

The services which were contracted out related mainly to cleaning (36 per cent), building maintenance (23 per cent) or parts of manufacturing or production processes (23 per cent). In terms of industries in which outsourcing occurred most strongly, figures are as follows:

electricity, gas and water supply (67 per cent of firms);
construction (61 per cent of firms);
education (60 per cent of firms);
mining (55 per cent of firms).

Similarly, the analysis set out in Australia at Work: Just Managing ^[15] shows that the main users of outsourcing were public sector organisations — government business enterprises (53 per cent), statutory authorities (56 per cent) and State public service departments (53 per cent), whilst less than one-third of private sector firms had engaged in outsourcing.

There is also an impact on employment; one review in 1999 concluded that: ‘Public sector employment share in Australia has fallen dramatically over the past 20 years. A number of factors have contributed to this, significant among which has been the increased privatisation of functions at both Commonwealth and state levels of government’.^[16]

Whilst both private and public sectors undertake outsourcing, it seems that, relative to the public sector, outsourcing in the private sector has become more global with functions including information technology, call centres, financial services and back-room office functions outsourced to countries such as India.^[17]

Framework for Outsourcing

In the Commonwealth public sector, an established legislative framework is relevant to decisions by the Commonwealth to outsource, as well as to purchase goods and services which do not involve outsourcing. This Commonwealth legislative and administrative framework includes: the Financial Management and Accountability Act 1997 (Cth), the Auditor-General Act 1997 (Cth), the Commonwealth Procurement Guidelines and Best Practice Guidance (September 2001) and, more recently, the Commonwealth Procurement Guidelines 2005. The Department of Finance and Administration has published a number of Guidance Notes to assist in compliance with the legislative requirements and the Guidelines.^[18]

The Commonwealth Procurement Guidelines (‘CPGs’) provide that:

1.2 The CPGs establish the core procurement policy framework and articulate the Government’s expectations of all departments and agencies (agencies) subject to the Financial Management and Accountability Act 1997 (FMA Act) and their officials, when performing duties in relation to procurement.^[19]

The CPGs thus apply to ‘officials’ who are persons in agencies (or part of agencies) and therefore include members of the APS.^[20]

A decision to outsource the provision of a service or function (previously undertaken by members of the APS) necessarily involves responsibilities of officials under the Financial Management and Accountability Act 1997 (‘FMA Act’) and the Regulations made pursuant to the FMA Act (‘FMA Regulations’), since it involves the expenditure of public monies through contracts entered into between the Commonwealth and an external service provider. The impact of this regulatory environment on the work of officials has a number of facets.

A chief executive of an agency in the APS (eg. a department) is required to ensure the efficient, effective and ethical use of public monies.^[21] The FMA Act then authorises a chief executive to issue ‘Chief Executive Instructions’ (to personnel in the relevant agency) to ensure that this objective is achieved.^[22] Further, the FMA Act provides for the chief executive to delegate powers to other officials; that is, members of the APS.^[23] To support this legal framework for expenditure, the FMA Regulations provide that the Chief Executive Instructions can deal with a number of matters, including making commitments to spend public monies.^[24]

In addition, the FMA Regulations provide for the Minister for Finance and Administration to issue the Commonwealth Procurement Guidelines which an official must have regard to and, if the official takes action which is not consistent with the Guidelines, the official must record reasons for doing so.^[25]

In respect of the duties of a member of the APS, the FMA Regulations provide that a proposal to expend public monies may only be approved if it is in accord with the policies of the Commonwealth and if it makes efficient and effective use of public monies.^[26] An official must not approve a proposal to expend public monies unless he or she is so authorised.^[27] Of most importance in relation to outsourcing is the requirement that an official cannot enter into a contract on behalf of the Commonwealth unless a proposal for the expenditure of public monies has been approved under FMA Regulation 9.^[28]

There is therefore a range of sources of obligations of a member of the APS in respect of a proposal and a decision to outsource particular services or functions. Those obligations are enforceable not only through the ordinary contractual obligations of an employee but also through the APS Code of Conduct dealing with the obligation of members of the APS to comply with Australian laws (which of course include the FMA Act and the FMA Regulations).

In addition, individual departments may determine rules and procedures relevant to outsourcing through their rules dealing with procurement. It is also to be kept in mind that a particular official must have appropriate delegated financial authority to commit the Commonwealth to particular expenditure.

There is nothing specific in the FMA Act or the FMA Regulations which requires an official in making a proposal for, or in considering or approving, an expenditure of public monies associated with entering into a contract for outsourced services to take account of the terms and conditions of employment of the APS employees who may be affected by the proposal. Despite this, some aspects of the APS Values and the APS Code of Conduct themselves could arguably require that consideration be given to the impact of an outsourcing decision on members of the APS — for example, s 10(1)(i) and (j) of the APS Values extracted in the Appendix to this chapter, and the requirement in the APS Code of Conduct to uphold the APS Values.^[29]

It follows that, in effect, decisions to outsource are not regarded in the basic legislative framework as being different in legal character to any other decision by the Commonwealth to enter into a contract, at least viewed from the perspective of the regulatory regime provided by the FMA Act and instruments made under it. As we have seen the regime does impose obligations on APS employees involved in implementing a government policy decision to outsource a particular function or activity.

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