Updated guidance on special severance payments for academy trusts
Additional requirements for academy trusts considering agreed exits for staff.
The Education & Skills Funding Agency (ESFA) has updated the rules for academy trusts considering making a special severance payment to a member of staff. These rules now reflect the Public Sector Exit Payments Guidance on Special Severance Payments published in June this year and the new Academy Trust Handbook which replaced the Academies Financial Handbook from 1 September 2021.
Further information on the updated Academy Trust Handbook can be found in our previous article (available on our website): Academy Trust Handbook 2021 - what's new?.
The new rules on ESFA / HM Treasury approval
In addition to the normal considerations for academy trusts making severance payments (set out below), trusts are now required to obtain prior approval from the ESFA where the exit package as a whole is £100,000 gross or more and includes a special severance payment; and/or any case where the employee earns over £150,000 gross.
What are special staff severance payments?
Special staff severance payments are payments which fall outside a member of staff’s contractual or statutory entitlements when their contract comes to an end. For example, a payment in excess of an employee’s entitlement to notice pay, statutory redundancy pay and/or contractual redundancy pay.
Such payments may be made when employment is terminated through mutual agreement, rather than through resignation or dismissal. They might also be contemplated following resignation or dismissal where there is a risk of claims being brought against the trust.
What must academy trusts consider before making a special staff severance payment?
Under part 5 of the Academy Trust Handbook, academy trusts must consider the following issues before agreeing to make a special severance payment of any size:
- whether the proposed payment is in the trust's interests;
- whether the payment is justified, based on a legal assessment of the trust's chances of successfully defending the claim and the likely costs of that defence; and
- a legal assessment of what a court or tribunal is likely to award if the claim were to be successful.
The guidance suggests that special severance payments should not be made in cases of gross misconduct or poor performance unless justified by the risk of claims, or the costs to the trust of taking an employee through performance management / capability procedures.
There are special requirements for ESFA approval for severance payments where one or more of the following are the case. The latter two of these are new requirements from June 2021:
- they include a payment of at least £50,000 gross above contractual and/or statutory entitlements;
- any amount over contractual or statutory entitlements is proposed and the academy trust is under a Financial Notice to Improve or a Notice to Improve;
- the exit package as a whole is £100,000 gross or more and includes a special severance payment; and/or
- the employee earns over £150,000 gross (not taking into account employer pensions contributions) – whether a special severance payment is being made or not.
As the ESFA will refer applications for approval in all these cases to HM Treasury, it is very important to allow time for the approval process before making the offer.
Where ESFA prior approval is required, academy trusts must complete the Academy Trust Severance Payments Form.
Business case and legal assessment required to justify all special severance payments
The guidance makes clear that, for all other special severance payments, academy trusts must still “be able to show you applied the same level of scrutiny to a payment. ESFA expects academy trusts to have a business case for any non-contractual severance payment and to provide this to ESFA in a timely manner if requested.”
This means that academy trusts should seek a legal assessment of the risk of claims in order to assess whether a severance payment over contractual and/or statutory entitlements is justified on a value for money basis.
Action taken by ESFA where severance payments are not justified
The ESFA reserves the right to claw back special severance payments which are not justified. The ESFA may, additionally or alternatively, visit the trust and impose sanctions in relation to further severance payments.
It is also possible for the ESFA to issue a Notice to Improve “in extreme circumstances” where severance payments have been made without proper scrutiny.
Our previous articles on this topic can be found on our website:
Given these compliance requirements and the rules concerning the taxation of termination payments (outlined in Part 2 of our previous article above), we strongly recommend that academy trusts take legal advice in good time before making a settlement offer.