Severance payments, South Somerset and Best Value

September 23, 2022

External auditors recently criticised the failure of a district council to take legal advice on a pay-off for a senior staff member. Paul Feild examines what happened.

In August 2022 Grant Thornton, the Local Auditor for South Somerset District Council, made a statutory recommendation in its External Auditors Annual Report (the Report) pursuant to S.24 and Schedule 7 of the Local Audit and Accountability Act 2014 [i] (the 2014 Act) when completing the accounts for year ending 2020/21. A recommendation under this Schedule must be considered by the council.

The statutory recommendation related to an employment settlement and the governance implications of how it was agreed to be paid. The council accepted the finding.

The key point to be made is that the local auditors are increasingly looking at areas which one would have considered primary that of Monitoring Officers territory [ii]. By this I mean is a financial transaction lawful. That’s not to say there is any usurping, but as I have argued before on Local Government Lawyer because the local auditor’s findings are published and influential, Monitoring Officers need to have a proper grasp of the local auditors' span. I say this because time and again it is the governance of financial affairs which is increasing being highlighted by local auditors or being subject to intervention under the 2014 Act.

In its report on South Sommerset, Grant Thornton notes that during 2020/21, Sommerset entered into an employment related settlement agreement with a senior officer. This resulted in the officer leaving the employment of the authority with what is described as a substantial settlement payment.

Grant Thornton notes: “From our enquiries of management, we have concerns that there was a lack of due process, insufficient records were maintained to evidence how the agreement was reached, and that the agreement does not reflect value for money.”

The auditors' report also notes that approval of the sign-off of the agreement did not follow the council’s financial regulation requirements or the council’s constitution. it is a legal requirement for councils to have financial rules. We further learn the council did not obtain legal advice and the Monitoring Officer and S151 Officer were also not aware of the agreement (see page 3 & 17 of the Report).

Grant Thornton made the following recommendations that when making settlement agreements with, or payments to employees, the council should:

Comply with financial regulations, standing orders and the constitution
Ensure that appropriate consultation takes place with the statutory officers
Ensure that approval for the agreement is obtained from appropriate elected Members
Maintain appropriate and sufficient evidence for the decision-making process
Assure itself of the legality of the transaction including seeking legal advice
Clearly demonstrate value for money has been achieved

One must take matters at face value, but in 2020/21 it is baffling that an employee settlement agreement for a senior officer could possibly be made without legal advice or if it was, that the Monitoring Officer and the Section 151 Officer Chief Finance Officer were not told [iii].

Obviously, legal advice should be involved in such a matter. For starters a compromise agreement would be a pre-requisite and that would contain such clauses such the employee agreeing to withdraw their claim or if not issued, make a potential claim and some (within the boundaries of lawful) non-disclosure clause. If such an agreement were not legally binding, then it would not have any purpose.

Furthermore, it is a clear public law legal principle that such agreements need to be in settlement of a cause of action which the employee had a reasonable prospect of winning. That is the point about value for money, the settlement must cost less that the other options and be the best choice in terms of cost, time and risk reduction. What it should not be is a default mode, because then any disgruntled senior officer who fancies a punt could make a claim, knowing they would get paid off as it being the line of least resistance. The damage to morale to the organisation of the news (and it gets around) of an unmerited ‘pay-off’ at the council taxpayer’s expense is not a triviality.

A further reason why such settlements need legal advice is that if there is wrongdoing by the authority by its officers or members of both, it needs to be followed up. Taxpayers’ money is not to be used as a balm.

Let’s take a hypothetical example. A member bullies a chief officer. It happens. They cannot work together anymore. So, a settlement is engineered and lump sum paid as part of that deal the chief officer does not put in a Localism Act 2011 complaint. Effectively silence is being bought. An important question is the compensation payment closing a matter that should be aired? It can be quite tempting to argue the line that it would be cheaper to settle the matter rather than a protracted dispute which if it involved senior officers would inevitably consume other officers time and elected members. It would get reported by the local and national press. It might put off new staff. It might embolden other victims to come forward and that could open a right can of worms! But hang on, the fear of harm to reputation begs the question - whose reputation? Is it really the council's reputation? What about a reputation for doing the right thing, standing up to bullying and breach of the Nolan Seven Principles of Public Life? The thing is to protecting reputation is rarely a good reason. To settle to avoid bad publicity is simply weak or poor management and contemptable. The best reputation is for doing the right thing.

Value for money is important but not the sole consideration. For example, it would be easy to manoeuvre a matter to an option of settling by commissioning external legal advisors for good reasons such as in that people might know the officer and objectivity, that the claim raises technical points of law and that would need counsel too. Then, the logic would go the projected costs be so high that it would be cheaper to settle via a compromise agreement. That is not right either.

It is possible to litigate employment matters within the public sector. Some councils do have units which can handle complex employment litigation and anyway the best employment counsel are always open to instruction due to the way the bar operates.

In the pre–Local Government Act 2000 with the committee system no one would have dreamt of a settlement without consulting with the Leader and the Chair of the staffing (establishment) committee, indeed any significant settlement would need to go to members.

So things have to change and a timely point to bring in the new Guidance.

Severance Payments and Best Value

Guidance was issued from Secretary of State on 12 May 2022 under section 3 of the Local Government Act 1999 on the making and disclosure of Special Severance Payments.

The Best Value duty is about achieving economic, efficient, and effective outcomes. The Guidance is somewhat contrived in that the element of ‘economic’ gets its own guidance steer but ‘efficient’ and ‘effective’ are merged in a two for one guidance!

He states:

In considering whether it is appropriate to make a Special Severance Payment, the government expects local authorities to consider whether such a payment would be a proper use of public money. Local authorities should also monitor and review their policies on the award of special severance payments to ensure that they are also consistent with their Public Sector Equality Duty under the Equality Act 2010.

In taking into account the economic element of the reason to settle:

Whether there is any feasible possibility of exiting the individual at a lower cost. Only where there is no such possibility should a Special Severance Payment be considered
How the exit payment will be perceived by the public and whether it is in line with the duty to manage taxpayers’ money appropriately
What alternative use could be made of that expenditure. All Special Severance Payments necessarily reduce the funds that would otherwise be available to deliver important public services
The setting of any potential precedent (e.g. where a Special Severance Payment is made to certain employees and not others)
Evidence for additionality i.e. that those offered Special Severance Payments would not have been willing, under any circumstances, to leave with their statutory and contractual benefits alone

For the economic and efficient element:

Seek legal advice on the prospects of successfully defending an Employment Tribunal claim (or claim to any other court or tribunal with jurisdiction), if an employee were to take a legal route to appeal any grounds of their employment being terminated. The chance of success and the costs likely to be incurred should be noted and weighed up against the costs of making a Special Severance Payment
Ensure that these payments are not used to avoid management action, disciplinary processes, unwelcome publicity or avoidance of embarrassment
Consider aligning with private sector practice, where payments are typically less generous. This is important given the added duty in the public sector to prudently manage taxpayers’ money
Manage conflicts of interest to ensure that individuals who are the subject of complaints play absolutely no role in deciding whether those complaints should be settled by making an award to the complainant from public funds

There is a prescribed arrangement for settlement payments approval set out at paragraph 5:

5.1 The government expects that any Special Severance payments should be approved according to the following process:

payments of £100,000 and above must be approved by a vote of full council, as set out in the Localism Act 2011
payments of £20,000 and above, but below £100,000, must be personally approved and signed off by the Head of Paid Service, with a clear record of the Leader’s approval and that of any others who have signed off the payment
payments below £20,000 must be approved according to the local authority’s scheme of delegation. It is expected that local authorities should publish their policy and process for approving these payments

5.2 Where the proposed payment is to the Head of Paid Service, to avoid a conflict of interest it is expected that the payment should be approved by a panel including at least two independent persons. A system of legal duties also requires elected members to spend public money with regularity and propriety. Under section 151 of the Local Government Act 1972, “every local authority shall make arrangements for the proper administration of their financial affairs and shall secure that one of their officers (the section 151 officer or Chief Finance Officer) has responsibility for the administration of those affairs”. The section 151 officer has an important role in holding local authorities to account and has duties to alert elected members and the auditor in the case of unlawful expenditure.

5.3 This role is complemented and reinforced by authorities’ duty under section 5 of the Local Government and Housing Act 1989 to appoint a Monitoring Officer, who must report to the local authority when any proposal, decision or omission is likely to lead to contravention of any enactment, rule of law or statutory code.

5.4 As part of their duties, an authority’s s151 Officer, and where appropriate, the Monitoring Officer, should take a close interest in and be able to justify any special severance payments that are made by that authority and in particular any payments made that are not consistent with the content of this guidance.

This will likely mean for many councils tweaking the scheme of delegation to require consultation with the statutory officers and appropriate financial rules as to a requirement for Member involvement above a threshold figure where their role is now defined.

Conclusion

The local auditor is being drawn into a closer examination of legal and financial governance. The 2022 Guidance on Special Severance Payments is a welcome step which enables auditors to have some objective bench-marks to measure whether a decision to make a payment is sound.

So, Settlement Payments are now effectively drawn into a prescribed process in terms of putting together evidence to support a payment. Local authorities can expect the local auditor going forward asking about any special severance payments and details of the decision-making process including member involvement.

In the case of South Somerset District Council and York City Council the Secretary of State’s May 2022 Guidance would have been of assistance and obviously it is helpful in putting together a checklist for weighing up the merits of handling an employment dispute and the option of making a payment. Finally, I think we can all agree all local authorities should always seek legal advice before considering the option of an employment settlement agreement?

Dr Paul Feild is Principal Standards & Governance Solicitor working in the Barking & Dagenham Legal Service Governance Team. His 2015 Doctor of Business Administration thesis was ‘How does Localism for Standards Work in Practice? The Practitioner’s View of Local Standards Post Localism Act 2011’. He researches and writes on finance and governance issues and can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..

[i] Schedule 7 enables ‘Reports in the Public Interest’ and ‘Recommendations’. Two different things, the Public Interest report the most serious of course.

[ii] Having said that, some older readers may remember Allsop v North Tyneside Council (CA) 1991 where a severance payments scheme was challenged successful by the District Auditor.

[iii] This is extraordinary. District Councils have smaller fairly small establishments and one would expect people would know reasonably well their professional counterparts perhaps all in the same building. Can any reader think of a good reason why you would not ask for legal advice?