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ONS reclassification: A college's guide to special payments

Back in December last year, we wrote of the employment law implications of the ONS reclassification of colleges. The decision that colleges are now required to follow the overall financial control framework for all central government bodies means that they face significant financial and accounting changes which limit how much they can pay senior staff, the circumstances in which they can enter into a settlement agreement, and how much they can pay someone to settle actual or potential claims without authority from the Department for Education (DfE).

In January this year, the Education & Skills Funding Agency (ESFA) issued some guidance regarding the sums which a college may be permitted to make as special payments without DfE approval.

Special payments 

Special payments are payments which fall outside the usual statutory or contractual obligations of a public body (and in this case, colleges). In this article, we will be exploring three kinds of special payment and the controls which are placed on them because of the ONS reclassification:

  • Severance payments.
  • Compensation payments.
  • Ex-gratia payments.

Severance payments 

These are payments that are made when an individual leaves employment (whether they resign, are dismissed or reach an agreed termination of contract) that are discretionary and go beyond what is required by contract or statute.

Colleges have delegated authority to make severance payments up to certain limits. Beyond these limits, they must be referred to the DfE for approval in advance. 

The guidance states that DfE approval is required for severance payments where any of the following scenarios arise individually or collectively

  • the proposed special staff severance payment is for £50,000 or more (gross, before income tax or other deductions)
  • the proposed special staff severance payment is equivalent to 3 months’ salary or more (gross, before income tax or other deductions)
  • an exit package (including contractual payments) which includes a special staff severance payment is at, or above, £100,000
  • the employee earns over £150,000.

The guidance at Annex 1 provides examples of payments which will and will not require approval, although colleges should note that these are examples only and there are other circumstances in which severance payments should not be made without DfE approval (for example, for staff with poor performance).

Severance and non-contractual payments  

Payments such as pay in lieu of notice (PILON) or in respect of time spent on garden leave will not be special severance payments if they are contractual.

If there is no contractual right to PILON or to place someone on garden leave, then these payments are non-contractual and are deemed to be special severance. As such, if a college makes a non-contractual PILON payment of just below 3 months' salary, there could be no further severance payment without the DfE's prior approval.

Severance payments - contribution to legal fees 

We have received a few questions regarding whether an employer’s contribution to legal fees will be considered severance pay. The guidance at paragraph 11 defines special severance payments as payments made to “employees, contractors or others” outside of normal statutory or contractual requirements, when leaving employment.

Payments made directly to an employee or their legal advisor (who is likely to fall within the category of “others”) in respect of legal fees will be part of a severance payment if they are connected with the termination of employment.

Given that an employee is required to obtain independent legal advice for a settlement agreement to be legally binding, and most employers contribute to the legal fees of their staff to cover at least advice on the terms and effect of any settlement agreement, the impact of this is potentially significant. Because the overall severance payment must be below £50,000 and no more than the equivalent of 3 months’ salary for an individual employee, this will reduce the actual sum that colleges can pay to staff by way of severance payment without DfE approval.

Colleges should carefully consider whether the settlement terms that they propose are within the delegated authority prior to making them. In doing so, colleges should carefully consider the contract of employment and the impact they will have on the sums paid as part of a settlement agreement.

Severance - confidentiality agreements 

The guidance provides that colleges must ensure that confidentiality clauses associated with severance payments (so included in settlement agreements and COT3s) do not prevent an individual’s right to make disclosures in the public interest (whistleblowing) under the Public Interest Disclosure Act 1998.

Some commentary states that standard confidentiality clauses can only be included in a settlement agreement or COT3 if approval has been obtained from the DfE. We disagree.

Having liaised with ESFA, the requirement that DfE approval be required for special severance payments linked to non-disclosure agreements is not intended to suppress routine agreements on business confidentiality. Rather, it is intended to stop non-disclosure agreements being used to prevent an individual’s right to make disclosures in the public interest. In our view, this is clear from the guidance  at paragraph 12.

If colleges wish to include a confidentiality provision in a COT3 or settlement agreement, they should ensure the wording does not prevent such disclosures and, we suggest, some wider disclosures that would enable the individual to properly raise statutory and regulatory concerns.

Compensation and Ex Gratia payments 

Compensation Payments are sums paid to an employee to provide redress for actual or alleged loss or injury. They may therefore include sums paid to settle a claim (or potential claim) in the Employment Tribunal, for example, by way of a COT3 agreement.

Colleges have delegated authority to make individual compensation payments provided that the non-statutory / non-contractual payment is under £50,000 and the guidance sets out certain factors that colleges should consider in deciding whether to make, and how much to make, by way of a Compensation Payment. This includes factors such as whether legal advice has been sought on merits of the claim, the documentation of procedures to support the rationale and whether the payment is appropriate in the circumstances.

Ex gratia payments are different – they are transactions which are outside of legal or contractual obligation, for example, good will payments made to meet hardship caused which are not severance payments or payments which go beyond what an employee could recover from a College by way of compensation in an Employment Tribunal. These transactions must always be referred to the DfE for approval.

Whether a payment will be a special severance, compensation or ex gratia payment will turn on the individual facts and if you are uncertain, we recommend that you obtain legal advice.

COT3 agreements

We have seen some commentary which suggests that colleges should obtain DfE approval in respect of all COT3 agreements, no matter how much money is being paid to the employee. We disagree.

Whether DfE approval is required will depend on the circumstances, the claim (or potential claim), the type of special payment being made (e.g.  special severance, compensation, or ex gratia) and whether the sums exceed the limits set out in the guidance.

Need help?

Please contact Jenny Arrowsmith, Helen Dyke or Poppy Ford if you would like to discuss any of the above or need help with any aspect of a severance or settlement proposal. We regularly advise colleges on the implications of the ONS reclassification and support settlement negotiations.