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The Public Accounts Committee publishes its 36th report of 2013-14 on confidentiality clauses and special severance payments.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“We are deeply concerned about the use of compromise agreements and special severance payments to terminate employment in the public sector.

“It is clear that confidentiality clauses may have been used in compromise agreements to cover up failure, and this is simply outrageous. We heard evidence of shocking examples of using taxpayers’ money to ‘pay-off’ individuals who have flagged up concerns about patient or child safety.

“It is vital that people feel free to speak out to help prevent terrible tragedies or even deaths, and protecting the reputation of an organization, such as the NHS, at the expense of public safety is unacceptable.

“A confidentiality clause in a compromise agreement is not meant to prevent legitimate whistleblowing – but people who have been offered, or accepted compromise agreements have clearly felt gagged.

“There is simply no way of knowing how many of these special severance payments have been made across the public sector – or whether the compromise agreements have been used to ‘gag’ employees. To date neither the Treasury nor individual departments have monitored this adequately.

“The end result here is the risk that public bodies reward failure just to avoid attracting unwelcome publicity. No one has taken responsibility for identifying early warnings of service failure, such as organizations with unusually high numbers of agreements, or individuals transferring between departments receiving large severance payments.

“After my Committee discussed the seriousness of the failings under the current system, the Treasury acknowledged the need to do more. Under new proposals, the Cabinet Office will be responsible for looking at whether there are trends across the Civil Service which need to be addressed.

“We welcome the progress made by the Treasury and the Cabinet Office, but believe the Treasury must now take a more robust approach to the use of compromise agreements not only by the wider public sector but also by private contractors receiving public funding.”

Margaret Hodge was speaking as the Committee published its 36th Report of this Session which, on the basis of evidence from the Treasury, the Cabinet Office, the Department of Health, the Department of Culture, Media and Sport, the Ministry of Defence and the National Health Service, examined the use of compromise agreements in the public sector.

It is not uncommon for public and private sector bodies to use compromise (or settlement) agreements to terminate an employment contract and there is usually an associated special severance payment. Departments and their arm’s-length bodies must seek the Treasury’s approval in advance of making a special severance payment. According to Treasury’s data, in the three years to March 2013, the Treasury approved 1,053 special severance payments totalling £28.4 million. But the true number and value of payments across the public sector is unknown and likely to be higher as the Treasury does not approve payments by, for example, local government, the police, the BBC, and private sector providers of public services.

Following our initial hearing in July, which highlighted the lack of any meaningful central oversight, we asked the Treasury and Cabinet Office to return with proposals for a framework which would allow Parliament to hold government properly to account. We held our second hearing in October. The Cabinet Office is now preparing guidance for the civil service on the appropriate use of compromise agreements and confidentiality clauses. It plans to introduce improved monitoring processes and is committed to publishing annually a consolidated report on the number and value of special severance payments made by the civil service. The Treasury committed to changing the civil service financial reporting requirements to improve transparency around special severance payments, and it plans to ‘encourage’ wider public sector bodies to comply with the revised requirements.

Use of compromise agreements and special severence payments by the public sector

There has been a worrying lack of proper accountability and oversight around the use of compromise agreements and special severance payments by the public sector. There has been no system of central oversight to monitor or control the use of compromise agreements across the public sector. Neither the Cabinet Office nor the Treasury provide formal guidance to departments, and neither keeps records of how departments use compromise agreements. The Treasury does take a role in approving severance payments over and above contractual amounts. But it has not done enough to make sure that payments stand up to public scrutiny and could not tell us the number or value of special severance payments made across government or the wider public sector. Departments have had full discretion over when to use a compromise agreement, but have not policed effectively the use of compromise agreements within their departmental groups. For example, the Department for Education has given Academy Trusts the authority to approve extra-contractual payments of up to £50,000 without the Treasury’s prior approval. Departments provided inconsistent responses to questions on who was accountable for their use—the Treasury, the departmental Accounting Officer, or for other organisations, the designated Accounting Officer.

Recommendation:

The Cabinet Office should issue guidance on the appropriate use of compromise agreements and special severance payments, the governance arrangements that should be in place to approve them, and who is accountable for their use.

Confidentiality clauses

Confidentiality clauses have been used in compromise agreements to cover up failure. Public sector employers decide when to use compromise agreements and have discretion over whether to include confidentiality clauses—whereby the employee agrees to keep the facts surrounding their termination confidential. Neither the Treasury nor the Cabinet Office review the confidentiality clauses contained within compromise agreements. Recent high profile cases, particularly in the NHS, have highlighted where the employer’s interest may have masked the wider public interest. This is when employers have used taxpayers’ money to ‘pay-off’ individuals who have flagged up concerns about patient or child safety to protect the reputation of the organisation. The National Audit Office report found that 88% of compromise agreements sampled contained a confidentiality clause. Two agreements contained provisions that might be considered ‘gagging’ clauses. A confidentiality clause in a compromise agreement cannot legally be used to prevent a person from raising issues under the Public Interest Disclosure Act (‘whistleblowing’)—but people who have been offered, or accepted compromise agreements have clearly felt gagged.

Recommendation:

In its revised guidance, the Cabinet Office should explicitly:

Require public sector organisations to secure approval from the Cabinet Office for all special severance payments and associated compromise agreements where they relate to cases of whistleblowing.

Set out standard terms and conditions to be used in compromise agreements, including a provision in all compromise agreements stating that nothing within the agreement shall prejudice employees’ rights under the Public Interest Disclosure Act.

Require public sector organisations to secure approval from the Cabinet Office before departing from these standard terms.

Monitoring trends

No one, either within departments or across government, has taken any responsibility for monitoring trends that might provide an early warning of service failure or for learning lessons across government. Neither the Treasury nor departments monitor overall trends or unusual practices in the use of compromise agreements, such as departments or arm’s-length bodies with unusually high numbers of agreements that might provide an early warning of management failure, individuals transferring between departments receiving large severance payments, or whether lessons from one area can be replicated more widely across government. Under the Cabinet Office’s new guidance, departmental Accounting Officers will be expected to identify trends across their departmental group, while the Cabinet Office will be responsible for looking at whether there are trends across the civil service which need to be addressed. It is still not clear who will monitor trends across the wider public sector (local authorities, NHS trusts and Academy trusts) and private sector providers of public services.

Recommendations:

The Cabinet Office guidance should set out how lessons are going to be learnt across government to prevent reoccurrence where a failure of process has occurred within an organisation.

The Treasury should be responsible for monitoring activity across the wider public sector, and for defining what action will be taken where significant patterns or trends are identified.

Treasury's criteria

The Treasury’s criteria for approving special severance payments are too narrow, focusing on cost alone and ignoring wider value for money issues. The Treasury’s approval focuses primarily on whether a special severance payment is less than the potential costs of defending an employment tribunal case and the chances of winning or losing the case. This fear of incurring tribunal costs can mean that managers avoid taking executive responsibility for dealing with employee failures. The Treasury has approved payments which covered up organisational and management failure or inappropriate behaviour by individuals, despite guidance that special severance payments should not be used to evade disciplinary action or avoid reputational risk.

Recommendation:

When the Treasury does approve special severance payments, it should ensure that its decisions are based on the principles of economy, efficiency and effectiveness, not simply on cost alone.

Transparency  

The lack of transparency over the extent and cost of compromise agreements entered into by public sector bodies means there is no proper accountability. While it is mandatory for public bodies to publish details of special severance payments in their annual reports and accounts, there is a lack of consistency as the level of detail varies, depending on the monetary value, the employee’s grade and the body offering the agreement. Organisations can sometimes be reluctant to publish details of individual payments and non-disclosure is allowable under the Financial Reporting Manual requirements if the disclosure would breach the terms of the compromise agreement. It is not mandatory for public sector bodies to state how many compromise agreements they have entered into, with whom, on what terms, at what value and why. Requests for information under the Freedom of Information Act on the use of compromise agreements and special severance payments have been refused.

Recommendation:

The Treasury should revise the reporting requirements in the Financial Reporting Manual to ensure the mandatory and consistent disclosure of special severance payments in public sector annual accounts. This should include disclosure of the number of individual payments, the size of payment and the requirement for individual payments for members of the Senior Civil Service or equivalent to be publically disclosed. The guidance should include explicit criteria for where non-disclosure is allowable—but such instances must be the exception and subject to the Treasury’s approval. 

Compromise agreements 

We formally request that the Treasury inform the Committee of its proposals to ‘encourage’ wider public sector bodies to comply with the guidance will be effective in controlling the use of compromise agreements across the public sector. We are grateful for the Cabinet Office’s commitment to produce new guidance for the Civil Service on the use of compromise agreements. However, the Treasury could not make clear, other than through encouragement, how it will ensure that the wider public sector (including, for example, local authorities, Academy trusts, housing associations and the police) also adopts the new guidance. The Treasury could not explain to us why compliance with the guidance cannot be required as a condition of receiving public funding.

Recommendation:

The Treasury should write to the Committee setting out what steps it will take to ensure wider public sector adoption of the guidance, including full consideration of making compliance a condition of funding.

Private sector contractors

With the increasing role of private sector providers delivering services on behalf of government, it is important that we can follow the taxpayer’s pound and have confidence that employees feel able to raise matters of public interest. The Treasury’s proposed framework does not include private sector contractors who provide public services funded by the taxpayer and there is no requirement for these organisations to disclose special severance payments in their accounts or to get prior approval from departments or the Treasury. The fact that the out-of-hours service in Cornwall was short staffed and the contractor Serco had altered performance data came to light only after whistleblowers raised concerns. The staff responsible for altering the performance data have left the company and the terms of their departure included confidentiality agreements, but Serco offered no convincing explanation as to why this was necessary. Contractors receiving public funding should demonstrate the same commitment to the proper conduct of public business as their public sector counterparts. 

Recommendation:

 The Treasury should make clear what it expects from private sector employers when they enter into contracts to deliver publically funded services. This should include the expectation that staff working for private sector contractors are encouraged to raise matters of public interest, ensuring whistleblowing policies include the option to raise issues directly with government, and public reporting requirements such as the requirement to disclose special severance payments related to public services.

Recommendation:

Effective safeguards should be introduced ensuring that the employees of private sector providers of public services, who use compromise agreements, feel protected when raising matters of public interest.