Mediator is considered an enhancer of RNA-Polymerase II dependent transcription but its function and regulation in pluripotent mouse embryonic stem cells (mESCs) remains unresolved. One means of controlling the function of Mediator is provided by the binding of the Cdk8 module (Med12, Cdk8, Ccnc and Med13) to the core Mediator. Here we report that Med12 operates together with PRC1 to silence key developmental genes in pluripotency. At the molecular level, while PRC1 represses genes it is also required to assemble ncRNA containing Med12-Mediator complexes. In the course of cellular differentiation the H2A ubiquitin binding protein Zrf1 abrogates PRC1-Med12 binding and facilitates the association of Cdk8 with Mediator. This remodeling of Mediator-associated protein complexes converts Mediator from a transcriptional repressor to a transcriptional enhancer, which then mediates ncRNA-dependent activation of Polycomb target genes. Altogether, our data reveal how the interplay of PRC1, ncRNA and Mediator complexes controls pluripotency and cellular differentiation.