Ross Griffiths explains what the new code will mean for both employers and employees, and looks at the possible benefits and pitfalls.

The Code of Practice in Workforce Matters in Public Sector Service Contracts, commonly known as the 'two-tier code', was replaced by the new Principles of Good Employment Practice in December.

The voluntary two-tier code, which was almost always incorporated into commercial contracts, applied when staff transferred from a public sector organisation to a new provider of a public sector service contract. It aimed to prevent a two-tier workforce, where new staff were offered less favourable terms and conditions than the transferred staff in an effort by the service provider to cut costs and make their tender more competitive.

Under the code, service providers were required to offer new (but not existing) employees fair and reasonable terms and conditions that were, overall, no less favourable than those of transferring employees, and consult with a trade union or other elected representatives on the terms and conditions. They also had to provide membership of either a "good quality employer pension scheme" or a stakeholder scheme, in each case matching employee contributions up to 6%.

The voluntary principles provide a more flexible guide which the government hopes will enable SMEs, charities, social enterprises, staff owned mutual providers of public services and voluntary groups to have a greater involvement in the running of public services. The move is in line with the government's commitment to opening up government procurement and reducing costs, and is designed to encourage greater innovation in the provision of public services, deliver greater competitiveness and drive efficiency and value for money for the taxpayer.

However, there have been mixed reviews. Some trade unions are concerned the principles will lead to a race to the bottom; employers' organisations, on the other hand, believe it will aid efficiency and increased employment through flexible ways of rewarding staff. The eventual outcome will only become apparent with time, but the likelihood is that the result will be somewhere in between, either marred or recommended by particular examples.

Let's put this into context. Public sector contracting is going to move from being measured and rewarded on inputs to being measured and rewarded on outcomes. Paying contractors for the achievement of outcomes is an emerging trend – I am concerned how such contracts will be written. And with payment for achievement of results probably being the means by which a contractor makes a profit, we can start to see things in a new light.

Outcomes and results are likely to be qualitative as well as quantitative, and a well-motivated workforce must surely add to the prospect of getting successful outcomes. Am I being naive to hope that rather than trying to pay the lowest possible wages, it is more likely that employers will be anxious to deliver on quality by getting the best out of their staff?

I don't believe the new principles are either a guarantee against sloppy management nor an automatic move to a tyrannical employment regime. For the time being, however, it is likely to be portrayed at those two extremes until commissioners and providers have become accustomed to the ideas of payment for outcomes and quality, and contractors get used to taking the risk at the beginning of a contract and receiving their bonuses or rewards when they have demonstrated success.