ONS reclassification for colleges: What are your obligations when dealing with staff?

The Office for National Statistics (ONS) has announced that it has reclassified FE colleges, sixth form colleges and designated institutions in England to the central government sector. 

This means that colleges are now subject to new requirements, which primarily relate to financial controls and management. 

A link to the full guidance can be found here, but in this article Jill Donabie, partner in our employment team, has summarised each of the four new requirements which apply to colleges caught by the reclassification when dealing with staff.

1.   Senior pay controls

From 1 May 2023, approval from the Department for Education (DfE) must be sought where: 

• remuneration for appointments newly advertised is at or above £150,000; 
• performance related pay (i.e. bonuses) is above £17,500; or
• pay awards above 9% are made where an individual earns at least £150,000 or such an award would take them to (or above) that level.

When considering new appointments or pay awards at those levels, the current guidance recommends allowing a minimum of two months for clearance decisions, which gives an indication of what processing times may look like under this new system. 

A process guide for how to make an application to the DfE can be found here.

2.   Requirements for special payments, including severance, compensation and ex-gratia payments

With immediate effect, the Government classifies any staff severance or compensation payments which go beyond statutory or contractual entitlement, as well as any “ex-gratia” payments as “special payments” which are subject to greater control than other payments. 

Organisations should be mindful that payment in lieu of notice (PILON) and pension strain payments may be considered part of any special severance payment, subject to the terms of any employment contract, relevant statutory provisions and non-statutory schemes. 

In addition, payments reached under a settlement agreement and the value of any employee benefits or allowances which continue beyond the employee’s agreed exit date are some of the additional types of payments which are likely to constitute special severance payments. Statutory and contractual redundancy payments, payment for untaken leave and payments ordered by a court or tribunal are not considered special severance payments. 

HM Treasury require that special severance payments are exceptional and should not be treated as a “soft option” to avoid management action, disciplinary processes, unwelcome publicity or reputational damage.  Where Treasury approval is necessary, this should be sought before any offers (oral or in writing) are made and these approvals are likely to take at least 20 working days.   

HM Treasury will closely scrutinise Special Severance Payments and ensure that are made only in exceptional circumstances and represent value for money.  

Before making a special severance payment, colleges are now expected to do the following:

• consider whether a special severance payment is appropriate – for example, the guidance suggests that severance payments should not be made to staff with poor performance, and DfE and HM Treasury are unlikely to approve such payments. Evidence should be taken as to attempts to avoid making the payment, for example, attempting to resolve any grievance before it escalates to an employment tribunal claim;
• take and document any legal advice – the guidance suggests appraising any course of action with the associated costs and the likelihood of winning, and that legal advice recommends settling the claim. If there is a good chance of the college winning the “case” (if matters were to progress to a court or tribunal) it will also need to demonstrate why this route was not taken and instead, a payment was made to the employee.  Legal advice is not however conclusive, and organisations are still expected to consider all of the relevant factors in this matter in addition to legal advice;
• clearly document the management and approval process – the guidance states this must take account of a college’s own internal processes and employment law;
• consider the appropriate level of payment – the guidance suggests a college should ask that, following any legal advice, can a change from the settlement value be justified? The guidance highlights that as severance payment is made from the public purse and therefore value for money must be demonstrated; and
• ensure it can support any non-financial considerations with evidence – this is something we expect colleges already consider, but the example given by the guidance is being able to show learner performance has been affected by a lack of continuity of tuition due to absence or teaching by temporary staff.

Specific DfE approval must be sought where:

1. the proposed special staff severance payment is for £50,000 or more (gross, before income tax or other deductions);

2. the proposed special staff severance payment is equivalent to 3 months’ salary or more (gross, before income tax or other deductions – organisations are reminded to consider whether or not any PILON payment would be considered contractual or alternatively, constitute a special severance payment);

3. an exit package which includes a special staff severance payment is at, or above, £100,000; and/or

4. any payment is being made to an employee who earns over £150,000.

The DfE approval forms for any payments which fall into this category can be found here.

Additionally, irrespective of the amount of money involved any proposed payments linked to a non-disclosure agreement will require DfE approval.

3.   Requirements for write-offs and losses, indemnities, guarantees and letters of comfort

Before proposing any write-off of a debt, colleges must now consider and clearly document, taking legal advice where they consider appropriate, a number of different factors, including the circumstances of the write-off; the reasons and rationale behind that decision and the cost effectiveness of further action. Any financial controls and procedures should be documented in the college’s financial procedures manual and colleges should maintain an up-to-date record of losses. 

Colleges must also now carefully consider entering into indemnities, guarantees or letters of comfort. 

The guidance stresses particular emphasis on indemnities, which the guidance suggests colleges should seek legal advice on, as well as maintaining a contracts register to track any existing indemnities in contracts entered into by colleges.

Indemnities arising in the normal course of business do not require DfE approval, which will include those contained within a number of commercial contracts regularly entered into by colleges. Colleges should follow their normal internal approval procedures to enter into such indemnities.  

However, DfE approval must now be sought where any proposed write-off or indemnity in a contractual arrangement does not arise in the normal course of business and exceeds 1% of a college’s annual income or £45,000 individually (whichever is smaller), or the write-off takes the college’s cumulative total write-offs for the academic year beyond 5% of its annual income or £250,000 (whichever is the smaller).

The DfE approval forms for any write-offs which fall into this category can be found here.

4.   Requirements for novel, contentious and repercussive transactions

Where a college considers it is entering into a transaction which is outside of the range of its normal dealings or which could have a wider impact, be that on public perception or wider financial implications, colleges are now also expected to seek DfE approval before entering into such transactions. 

This definition is intentionally broad, and the guidance acknowledges this could cover a range of scenarios. If in doubt about whether any transaction is caught by this “catch-all” guidance, we would recommend seeking advice before entering into any arrangement which might be caught by this requirement. 

For support and advice on any of the issues covered in this article, or to find out how our expert Education team can help your organisation, please contact Jill Donabie at 0191 211 7899 or [email protected].