Guidance

College requirements for special payments, including severance, compensation and ex-gratia payments

Updated 12 April 2023

Applies to England

Purpose

1: This document is to help colleges understand:

• what special payments are
• what they must consider before making such payments
• when and how to seek approval from the Department for Education (DfE) for special payments when required.

2: It is one of a series of guides issued by the Education and Skills Funding Agency (ESFA) following the decision of the Office for National Statistics (ONS) in November 2022 to classify the English further education (FE) college sector as central government.

Status

3: This guide explains requirements for colleges and their subsidiaries, which arise from their status as central government bodies, as well as providing guidance in respect of those requirements. The overall requirements for all central government bodies are set out in HM Treasury’s Managing Public Money (MPM). This publication seeks to explain those requirements in the context of the FE college sector.

4: The requirements set out in this guide will remain in force until such time as it is withdrawn or superseded.

Who is this publication for?

5: This guide is primarily for use by:

• college finance directors and accounting officers, and
• college governors as charity trustees.

6: Colleges include further education colleges, sixth for colleges and designated institutions under the Further and Higher Education Act 1992. This guide also covers their subsidiaries (i.e. references to “colleges” in this guide should be taken to mean “colleges and subsidiaries”).

7: College internal and external auditors may also find it helpful in planning their work.

Background

8: When ONS determined that English FE colleges were to be classified to the central government sector, this decision meant that colleges would be required to follow the overall financial control framework for all central government bodies, HM Treasury’s Managing Public Money. MPM provides a framework of financial oversight, whereby the majority of financial decision-making is delegated to operational leadership in government bodies. However, there are certain classes of transactions where additional controls apply. Special payments are one of these.

Special payments

9: Certain transactions by public bodies may fall outside their usual planned range of activity and may exceed statutory and contractual obligations. HM Treasury (HMT) calls these special payments (see annex 4.13 of Managing Public Money) and are subject to greater control than other payments. They include:

• staff severance payments which go beyond statutory or contractual entitlement
• compensation payments which go beyond statutory or contractual entitlement
• ex-gratia, extra-contractual, extra-statutory and extra-regulatory payments

10: Such payments need to be justified in the public interest against key public sector principles, set out in Chapter 1, Box 1,1 of Managing Public Money.

Severance payments

11: Special severance payments are paid to employees, contractors and others outside of normal statutory or contractual requirements, when leaving employment in public service, whether they resign, are dismissed or reach an agreed termination of contract. Special severance must not be treated as a soft option, e.g. to avoid management action, disciplinary processes, unwelcome publicity or reputational damage. You can read more in section A4.13A of HM Treasury’s Managing Public Money and in the linked Guidance on Public Sector Exit Payments: Use of Special Severance Payments.

What to consider before making a special severance payment

12: You must take the following steps:

• Consider whether a special severance payment is appropriate in this case

A severance payment may not always be the right approach: for example, severance payments should not be made to staff with poor performance, and DfE and HM Treasury are unlikely to approve such payments.

• Take and document legal/HR advice

Appraise any course of action with the associated costs and the likelihood of winning. If there is a good chance of the college winning the case, you will also need to demonstrate why this route was not taken and instead, a payment was made to the employee. You should balance the legal and management costs against the level of payout.

• Clearly document the management and approval process

This must take account of the college’s own internal processes and employment law.

• Consider the appropriate level of payment

Following any legal advice, can a change from the settlement value be justified? A severance payment is made from the public purse and therefore value for money must be demonstrated.

• Ensure you can support any non-financial considerations with evidence

For example, that learner performance has been affected by a lack of continuity of tuition due to absence or teaching by temporary staff.

• Confidentiality clauses

Colleges must ensure that the use of confidentiality clauses associated with staff severance payments do not prevent an individual’s right to make disclosures in the public interest (whistleblowing) under the Public Interest Disclosure Act 1998. Such payments, specifically non-contractual elements, are always under scrutiny. The National Audit Office published a report on confidentiality clauses and severance payments in June 2013 and the Public Accounts Committee followed this up shortly afterwards.

DfE approval process

13: Colleges have delegated authority to make special severance payments up to certain limits. Beyond these limits, they must be referred to DfE for approval in advance. DfE approval is required for special staff 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) Page 4 of 6
• the proposed special staff severance payment is equivalent to 3 months’ salary or more (gross, before income tax or other deductions)
• an exit package which includes a special staff severance payment is at, or above, £100,000
• the employee earns over £150,000.

14: Examples of approval levels are set out in the annex to this guide.

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

16: In turn DfE may need to consult HMT.

17: Colleges should use the DfE college approvals form to request permission for any transactions beyond their delegated limits. The proposed payment must not be entered into until the college has received documented permission from DfE.

18: Where prior approval is not required by DfE, you still must be able to show you applied the same level of scrutiny to the case. DfE expects colleges to have a business case, which, at least, addresses the matters set out in paragraph 12 above, for any special payments and to provide this to DfE in a timely manner, if requested.

Compensation payments

19: Compensation payments provide redress for loss or injury, for example personal injuries, traffic accidents or damage to property. If a college is considering a compensation payment, it must base its decision on a careful appraisal, including legal advice where relevant, and ensure value for money.

20: Colleges have delegated authority to approve individual compensation payments, provided any non-statutory/non-contractual element is under £50,000. Where the college is considering a non-statutory/non-contractual payment of £50,000 or more, DfE’s prior approval must be obtained using the ESFA contact form.

21: Where prior approval is not required by DfE, you still must be able to show you applied the same level of scrutiny to the case. DfE expects colleges to have a business case, which, at least, addresses the matters set out in paragraph 12 above, for any compensation payments and to provide this to DfE in a timely manner if required or requested.

22: Colleges should consider whether cases reveal concerns about the effectiveness of internal control systems and take steps to correct failings.

Ex-gratia payments and other types of special payment

23: Managing Public Money identifies a number of other types of special payment:

• Ex gratia payments are transactions going beyond statutory or contractual cover, or administrative rules. Annex 4.13 of Managing Public Money provides examples, including payments to meet hardship caused by official failure or delay, and to avoid legal action due to official inadequacy.

• Extra-contractual payments are those which, though not legally due under contract, appear to place an obligation on a public sector organisation which the courts might uphold. Typically, these arise from the organisation’s action or inaction in relation to a contract. Payments may be extra-contractual, even where there is some doubt about the organisation’s liability to pay, e.g. where the contract provides for arbitration, but a settlement is reached without it. (A payment made as a result of an arbitration award is contractual.)

• Extra-statutory and extra-regulatory payments are within the broad intention of the statute or regulation, respectively, but go beyond a strict interpretation of its terms.

24: These transactions must always be referred to DfE for prior approval. The referral should include a business case, which, at least, addresses the matters set out in paragraph 12 above.

25: If colleges are in doubt about a proposed transaction, and/or the transaction may be considered to be novel/contentious/repercussive, they should seek DfE advice.

Annex: examples of approval thresholds for special severance payments

DfE approval required for non-statutory/non-contractual severance payment?

	Member of staff earns up to £150K	Member of staff earns over £150K
Non-statutory/non-contractual severance payment of £50k or more	Yes	Yes
Non-statutory/non-contractual severance payment equivalent to at least 3 month’s salary	Yes	Yes
Non-statutory/non-contractual severance payment is greater than £0 but under £50k, and/or is under 3 months’ salary and: a. Total severance payment (sum total of statutory/contractual and non-statutory/non-contractual elements) is under £100k b. Total severance payment (sum total of statutory/contractual and non-statutory/non-contractual elements) is £100k or more	No Yes	Yes Yes

Note: If the total severance payment comprises both statutory/contractual and non-statutory/non-contractual elements, it is the non-statutory/contractual element that the college must seek approval for, although details of the whole payment must be declared to DfE so the full context of the request is known.