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ONS reclassification and further education and sixth form colleges: What does this mean for settlement agreements?

  • United Kingdom
  • Education - Briefings



On 29 November 2022, the ONS reclassified further education and sixth form college corporations as public sector organisations, i.e. part of central government. The decision has wide-ranging implications for the college sector in a number of respects, including in connection with settling employment disputes via settlement agreements or ACAS brokered COT3s.

Settlement agreements and COT3s are a useful route to settling workplace disputes with protection from employment litigation. Settlements typically involve the payment of money by a college in return for the employee making a binding agreement not to bring or continue with a legal claim. The sums payable under an agreement may flow from the employment contract, i.e. payments in lieu of notice and/or accrued but untaken leave. They also often include an additional element in return for signing away employment rights.

Up until 29 November 2022, colleges had a certain degree of latitude in determining the value of the non-contractual payments they offered to settlement disputes. The ESFA’s Conditions of Funding Agreement required an institution to be able to demonstrate that any such payment was affordable and represented value for public money. No upper financial caps applied. Colleges could weigh up the costs of managing a dispute and defending tribunal proceedings against the potential value of the claim and the claimant’s prospects of success and negotiate a sum from that base.

Following the reclassification decision the Department for Education moved swiftly to impose new financial controls on colleges and their subsidiaries. Whilst college corporations continue to be self-governing charities regulated by the Secretary of State, they are now subject to the framework for financial management set out in the Treasury’s Managing Public Money document. Further guidance on the approach to employee settlements (and other matters) was set out in a letter from the ESFA to all accounting officers, dated 29 November 2022. Specifically, a financial cap was immediately applied to all  non-contractual payments, above which Treasury approval is required before a settlement can be entered into. Settlements concluded prior to 29 November are not affected.

The Managing Public Money Document refers to three types of payments: special severance payments, compensation payments and ex-gratia payments, the nature of which can be summarised as follows:

Special severance payments

These are payments that are discretionary and additional to those arising from statutory and contractual redundancy or severance terms. To date, these have been commonly been referred to as “ex gratia payments” which, confusingly, means something else under managing Public Money (see below). Colleges have delegated authority to make special staff severance payments provided that value is below £50,000 or under the equivalent of three months’ salary, whichever is the lower. It is noteworthy that this is more restrictive than the regime under the current iteration of the Academies Handbook which imposes a £50,000 cap but not the three-month pay limit. Colleges should also note that where the total value of any severance package, i.e. including contractual elements, exceeds £100,000 or the employee’s salary exceeds £150,000 prior Treasury approval is required.

Compensation payments

According to the guidance compensation payments may be paid for loss or injury such as personal injury, RTAs or damage to property. Colleges have delegated authority to approve individual payments provided any non-statutory/non-contractual element is under £50,000. From a settlement perspective, compensation payments may be part of a negotiated deal but in most employment disputes it is likely to be possible to justify making separate special staff severance payments alongside compensation payments.

Ex-gratia payments

Ex-gratia payments include payments to meet a hardship caused by official failure or delay, and to avoid legal action due to official inadequacy. These must always be referred to the DFE for prior approval, whatever the amount. The circumstances where such payments are justified in employment disputes are likely to be rare.


The new restrictions may significantly impact on college practice around settling employment disputes. Seeking Treasury approval to exceed the specified limits can be time consuming and the response will not always be positive. Some potential claimants may settle for less than they would have done, accepting that approval for higher sums may be difficult or impossible for their employer to obtain. Others may feel that they have no alternative but to commence or continue with litigation in the hope that any tribunal award will exceed a college’s settlement limit.

Further guidance in relation to the financial implications of the ONS’s decision is likely to be forthcoming – a Financial Handbook for colleges is promised in the new year.