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Staff mutual: understanding the 'what', 'why' and 'how'

With local authorities under ever-increasing financial pressure, they are being forced to consider new, innovative models of service delivery.

One such model is for local authority employees to form mutual bodies, which are fully independent of the local authority, and to take over the running of public services and facilities.

As a business model, staff mutuals have proved their viability and Cabinet Office evidence suggests that public service mutuals have not only delivered significant savings to their parent authorities but also innovate and improve the services they offer.

Public services staff mutual's now employ 40,000 people out of 5.4 million public sector workers and this looks set to rise. In a recent interview the minister for the Cabinet Office, Matt Hancock was asked his position on staff mutuals, his response: "…it's a clear manifesto commitment that we will have a right to mutualise", is reflected in the government’s plans to increase the number of mutuals delivering public services.

Indeed, for public sector employers facing spending cuts, employee mutuals' relatively high trust ratings among voters may make the model an increasingly attractive option. This is born out by recent news that in a bid to save £1.5 million over the next two years, Devon County Council has approved plans for a community-owned 'mutual' that will run the library service on behalf of the council.

Setting up a new staff mutual and then transferring staff, assets and services to it is a matter of some complexity. We look at the key legal issues that will underpin this process.

What is a staff mutual?

The Cabinet Office defines a public services staff mutual as an organisation that: 

  • has spun out from the public sector; 
  • continues to deliver public services; and 
  • involves a high degree of employee control.

Quite often a staff mutual will also be classed as a social enterprise - ie a business that has a social mission core to its purpose - although this is not necessarily always the case.

Examples of public services staff mutuals include: 

  • Employees from Staffordshire County Council established Evolve YP, which provides services for children and young people who are in care or leaving the care system. It operates as a not-for-profit social enterprise, under contract to the local authority. 
  • Sandwell IPS Ltd was established from a group of traded education support units of Sandwell Council. The company provides school support and school improvement services. 
  • Providing adult and community learning services, Aspire Sussex was set up by employees from West Sussex County Council. It operates as a charitable staff run social enterprise. 
  • 3MB was the first mutual joint venture and it operates as an employee owned business. It was created by employees from the London Borough of Hammersmith and Fulham, The Royal Borough of Kensington and Chelsea and The City of Westminster and provides education support, corporate building and financial services.

Why set up a staff mutual?

A public services staff mutual combines the best of business with the social motivations of the public sector. It has the freedom to be more flexible and fleet-footed than a local authority in its decision-making, to expand upon entrepreneurial ideas, to access new markets and to attract alternative investment; yet at the same time to remain true to the public service ethos of the local authority and its staff.

Experience also shows that giving employees a more direct voice in running the organisation leads to increased productivity, motivation, innovation and employee well-being.

Legal powers

One of the first legal issues is to identify a suitable legal power to undertake the staff mutual project. It used to be that an authority could only do things that it was specifically permitted to do under legislation, but the introduction of the "general power of competence" under the Localism Act 2011 has turned this on its head and an authority is now permitted to do anything that is not expressly forbidden. The general power of competence will provide the power base for most staff mutual projects.

Legal form

There are a range of legal forms that could potentially be suitable for a staff mutual, such as industrial and provident society, company limited by guarantee, company limited by shares or community interest company. Each of these forms brings different advantages and disadvantages. Charitable status may also be an option, which can bring significant tax benefits and alternative funding options. The most suitable model is likely to be influenced by the following matters: 

  • What residual involvement does the local authority want/need (if any)? 
  • How much involvement will employees have in the business or in decision-making? 
  • Will the organisation have charitable status? 
  • How much of the organisation's assets will be dedicated to a charitable or social purpose? 
  • To what extent will these issues be built into the staff mutual's constitution and protected so they cannot be easily changed?

Contributor: Claire Welch 
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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