Home Office payroll and pensions staff walked out on Friday and were set to strike for three days this week in a dispute over what they call "an unworkable computer system".
The action, by 350 members of the Professional and Commercial Services Union in Bootle, could affect the payment of salaries to 70,000 civil servants at the Home Office and its agencies, including prisons, immigration, passport offices and the Criminal Records Bureau.
Staff said the payroll system, LogicaCMG's Payfact Enterprise, had been beset by flaws since its introduction in 2001. "Payfact cannot deliver the payroll without a Byzantine series of workarounds, nearly all of which require additional work," said PCS branch secretary Martin Kelsey.
Workers at the Bootle headquarters of the Home Office Pay and Pensions Service (Hopps) said the new pensions system, Penserver, is also flawed.
The Home Office admitted there had been problems with the managed payroll service from CMG, and Hopps management agreed to pay staff at Bootle an "exceptional circumstances allowance" in August 2000.
"The allowance was in recognition of the difficulties caused by the shifting implementation dates for Payfact and Penserver, and the unusually high staff turnover at the time," said Tony Fitzgerald, head of Hopps.
"In October 2001, the allow-ance was uprated... and an additional element paid to payroll staff in recognition of the stress caused by systematic overtime coupled with problems surrounding the introduction of Payfact." The allowance, worth £2,000, was withdrawn in March 2003.
A spokesman for the Home Office said, "We have had a system in place that has met the industry standard of 99.5% accuracy for more than a year." This was dismissed by the PCS, which said Payfact was unavailable for almost 20% of its scheduled running time during the past year.
Kelsey compared the payroll implementation to other high-profile IT failures at the Home Office, such as the Passport Agency, Immigration and Nationality Department and the Prison Service's Quantum project.
Kelsey said the Home Office has maintained its disgraceful record of frittering away taxpayers' money on private sector computer systems that fail to deliver.
The Home Office/CMG deal was hailed as a breakthrough in public-private partnership agreements when it was signed in 1998.