Labour is set to bring in sweeping changes to give minority ethnic councillors and women reserved seats in local elections in a move that could radically diversify the party but also cause suspicions that the changes might be used to de-select sitting councillors.

The party’s democracy review will recommended that the party compile a legal case to justify BAME and disabled reserved seats in multi-member council wards, the Guardian understands.

It will also propose that the party campaigns for a change in the law to allow all-BAME shortlists for parliamentary seats, which are not permitted under current legislation. Critics, however, are likely to raise alarm that the changes could eventually be used to remove sitting councillors by reserving their seats when they come up for re-selection.

The proposals form part of the “democracy review” overseen by the former MP Katy Clark into the party’s democratic structures, which has been billed as an overhaul of how the Labour elects its leadership and selects its MPs. The party’s proposals are set to be put to the ruling national executive committee (NEC) on Tuesday.

Labour has been criticised by some MPs, including David Lammy and Tulip Siddiq, for failing to select more than a handful of ethnic minority candidates for its target seats in the selections taking place over the past six months.

A party source said it was hoped the changes would address those concerns: “Campaigning for a change to the law to allow BAME candidate shortlists and shortlists from all protected characteristics will allow us to select more candidates from all backgrounds.”

The party is proposing an overhaul of BAME Labour – the party’s ethnic minority affiliate, which holds a valuable seat on the NEC. The seat is held by MP Keith Vaz, whose election sparked some controversy when only 700 people took part out of an estimated 90,000 BAME party members.

The election was seen by party insiders as part of a wider struggle between Labour’s moderate, Corbyn-sceptic wing and leftwing backers of the Labour leader, who supported Vaz’s challenger at the election last year.

The planned changes will result in all members who self-define as ethnic minorities becoming automatic members of BAME Labour and the election of a new national BAME committee with places elected using the one member, one vote system.

The proposals in the democracy review – which is more than 80 pages long – are likely to be highly controversial. They include allowing party members to elect local council leaders and dramatically reducing the threshold in the number of MPs needed to nominate a potential leadership candidate.

On Monday, all Labour staff were warned in an email from the general secretary, Jennie Formby, that their jobs could be affected by the outcome of the review, which may recommend the election of posts such as regional directors.

“There are aspects of the democracy review that could potentially impact on the work of some teams,” she wrote.

“I want to reassure you all that you will be fully informed and proper consultation will take place in the event of any changes to duties and roles. The democracy review may suggest changes to the way we currently work but it is not an exercise to reduce staffing.”