What are the employment law implications of the ONS reclassification of colleges?

On 29 November 2022, the Office for National Statistics announced that it had reclassified further education and sixth form college corporations, and their subsidiaries, into the public sector. They are now part of central government.

Colleges continue to be self-governing charities but are now subject to the Managing Public Money (“MPM”) framework. This imposes significant financial and accounting changes which, in turn, will limit how much colleges can pay their 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. 

We consider each of these:

Senior pay controls 

Colleges still remain responsible for setting the pay of their workforce. However, they now fall within the scope of HM Treasury’s (“HMT”) senior pay controls process which allows the government to ensure that senior pay is set at an ‘appropriate level’.

The Education and Skills Funding Agency (“ESFA”) have said that they will update the existing guidance on senior pay to reflect the principles set out in HMT’s guidance and will work with the sector to make sure that colleges are able to seek approval for any new or amended reward packages that fall within the scope of the controls.

The HMT guidance states that the Chief Secretary to the Treasury must approve remuneration when an appointment will attract:

• Total remuneration at or above the defined threshold of £150,000, or the pro-rata equivalent for part-time staff; or
• Performance related pay (‘bonus’) arrangements that exceed the threshold of £17,500.

Senior pay includes all elements of base salary, fees, pension in excess of normal levels and allowances.

Colleges will need to consider whether this will impact on many senior employees and, where it does, whether they will be able to justify high pay awards when making pay increases or recruiting new senior staff.  

Settlement agreements 

Settlements involve the payment of money by a college in return for the employee making a legally binding agreement not to bring a claim against them. They are a useful tool in settling workplace disputes and protect colleges from protracted and expensive litigation. Prior to 29 November 2022, the only requirement colleges had to show was that they could afford to pay the agreed amount and the payment represented value for public money. No upper financial caps applied. 

Now colleges are subject to the MPM framework, they must comply with the financial restrictions and caps on non-contractual payments as follows: 

Special severance payments  

These are payments that are discretionary and additional to those arising from statutory and contractual redundancy or severance terms. It’s not entirely clear whether a payment in lieu of notice (PILON) and pension strain payments may be caught under these provisions. 

The MPM framework states that these types of payments do not usually provide ‘good value for money’ or offer fairness to the taxpayers who fund them. ESFA have said that they should only be paid in ‘exceptional’ cases.

However, they have made it clear that payments may be permitted when:

• There is a clear, evidenced justification
• All relevant internal policies and procedures have been followed and
• All alternative actions have been fully explored and documented

Colleges will have delegated authority to make individual severance payments, provided any non-statutory or non-contractual element is under £50,000 or is under three months’ salary (whichever is the lower). Colleges will need to seek approval from the Department for Education for any payments that exceed these thresholds.

In accordance with current guidance on Public Sector Exit Payments, colleges must also obtain prior approval from the Department for Education before making a special staff severance payment where:

• An exit package which includes a special severance payment is at, or above, £100,000; and/or
• The employee earns over £150,000

Regardless of the above thresholds, any special severance payment which is ‘novel, contentious or repercussive’ of whatever value, must be referred to the Department for Education for approval. These are payments that a college has no experience of paying or are outside the range of its normal business.

Compensation payments  

Compensation payments are those that provide redress for loss or injury such as personal injury. According to the ESFA, if a college is considering making a compensation payment, it must base its decision on a careful appraisal, including obtaining legal advice (where relevant), and ensure value for money.

Colleges have delegated authority to approve payments provided that any non-statutory or non-contractual element is under £50,000. Where the payment is above this threshold, it must obtain prior approval from the Department for Education.

Ex gratia payments 

This includes payments to meet hardship caused by official failure or delay, and to avoid legal action due to official inadequacy. These payments must always be referred to the Department for Education for prior approval, regardless of the amount.

Overall 

The reclassification does impose financial restraints on colleges and their subsidiaries that they didn’t previously have. It also adds a new layer of bureaucracy and will add real-time delays to the decision-making process. In the context of settlement agreements, if the DfE don’t approve the payment, colleges will have to continue to defend any litigation unless they can persuade a claimant to accept a lesser amount.  

At Irwin Mitchell we expect further guidance to be issued and the Department for Education have confirmed that they will begin to write a new College Financial Handbook. This is due to be issued to colleges and public sector bodies in autumn 2023 for consultation.

By Jenny Arrowsmith, partner at Irwin Mitchell