ONS reclassification demands a new way of thinking about staffing issues

Reclassification puts new expectations on colleges when dealing with senior pay and severance. Matthew Kelly and Ben Wood explain

Reclassification puts new expectations on colleges when dealing with senior pay and severance. Matthew Kelly and Ben Wood explain

8 Oct 2023, 5:00

An immediate impact of the reclassification of FE colleges as public sector institutions has been that the Department for Education now requires colleges to follow the overall financial control framework for all central government bodies. This is set out in HM Treasury’s Managing Public Money guidance, which aims to achieve value for money across the public sector and touches on many areas, including staffing costs. 

While a level of financial decision making remains delegated to individual institutions, certain classes of transactions require prior approval from the treasury. This includes controls over senior pay and some severance arrangements.

Senior Pay Controls

Colleges face a constant battle to attract and retain talent. This is exacerbated by the fact that they often have to compete with other areas of the education sector as well as the private sector. 

Prior to reclassification, colleges were generally free to set levels of senior pay, subject to applying a value-for-money test and affordability within their own budgets.

Now, treasury approval is required where a remuneration package for a new starter is valued at or above £150,000 per annum or where any bonus arrangements could exceed £17,500 per annum. 

Approval is also required if adjustments to an existing employee’s pay will take them over these thresholds and for pay awards above 9 per cent for those already above them. 

For these purposes, remuneration includes pay, fees, pension “in excess of normal levels” and allowances. Private medical insurance and salary sacrifice schemes should not be provided unless the treasury has given prior approval.

The limits on a college’s delegated authority have been made relatively clear. However, the criteria that the treasury will apply in deciding whether to approve any request to exceed the limits remain less transparent.    

Settlement agreements

Like other employers, colleges often want to enter into settlement agreements. These avoid costly and protracted HR disputes and provide protection from future litigation. 

Prior to reclassification, colleges were generally free to decide to make payments to settle employment disputes as long as they could demonstrate that any sums paid were affordable and value-for-money. 

Since reclassification, colleges continue to have delegated authority to pay an employee’s statutory and contractual entitlements on termination. They can also make “special staff severance payments” that do not exceed the equivalent of three months’ pay or £50,000, whichever is lower.

Any proposed payments exceeding these limits will generally require treasury approval.  

The three-month limit on severance payments is not consistent with other parts of the education sector.  By way of example, academies only need to seek approval for severance payments that exceed £50,000. 

It should also be noted that unless the right to pay in lieu of notice is specified in an employee’s contract, any such proposed payment may be regarded as non-contractual and therefore count towards the limits on special staff severance payments. 

Colleges should now consider including an express right to pay in lieu of notice in their contracts of employment. 

As with controls on senior pay, the treasury’s criteria for granting approval in any particular case are somewhat opaque.

What it means in practice

Institutions are being required to comply with guidance that was written with central government in mind rather than a college sector that has until recently had a much greater level of autonomy over financial matters.

The handbook due to be published in the next year may provide more clarity for colleges on their obligations. In the meantime, colleges may wish to think about three immediate practical effects:

Forward thinking is key. Treasury approval takes time. Factor in a number of weeks, if not months for decisions. 

Approval is not guaranteed. Factor this possibility into your risk management plan.  Applications to exceed the delegated authority limit will need to be supported by a detailed business case, and DfE will often ask to see legal advice in support of that business case.  

Keep an audit trail. Even when treasury approval is not required it will remain important to show how decisions were arrived at, and in particular how each represents value for public money. 

In all cases, colleges should be willing to defend decisions on pay or an exit in the face of regulatory or public scrutiny.

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