Financial resilience: voluntary severance schemes

As financial pressure continues, we are advising universities on Voluntary Severance (“VS”) schemes to help reduce overheads.  VS schemes typically involve employees choosing to leave their employer voluntarily, generally with a financial incentive. Universities have been using these schemes for a number of years, either to avoid instigating lengthy formal procedures for redundancy or alongside them. Points to consider when using a VS scheme include:  

  1. Discrimination - Schemes should be designed and implemented in a fair and transparent way which does not disadvantage a particular group. For example, the university might target the professorial group due to higher salaries, but this may put older employees at a particular disadvantage. If a targeted approach is planned, an equality impact assessment is worth doing. If particular groups are disadvantaged, then justification for the approach should be carefully considered and ways to mitigate the impact implemented. Similarly, if there is any discretion to refuse an application, the criteria or principles within which that discretion will be exercised should be prescribed, non-discriminatory and stand up to scrutiny. For example, refusing an employee’s VS application because it will result in the university being liable for an actuarially reduced pension is likely to be discriminatory.
  1. Collective consultation - Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 requires an employer to collective consult if it is proposing 20 or more redundancies within 90 days at a single establishment. It is possible for this obligation to be triggered by the commencement of a VS scheme alone, particularly if the scheme has a target number of employees who need to leave through VS to avoid compulsory redundancies being implemented thereafter. Additionally, the end of employment is more likely to constitute a dismissal rather than a consensual bilateral agreement to end the contract. A practical assessment of the context should therefore be made. If VS is unlikely to achieve the required staff reduction, it may be prudent to commence collective consultation and run a VS scheme alongside it to avoid challenges for breach of s.188 and/or delaying redundancies (and costs savings) to allow time to comply.
  1. Settlement agreements - One of the advantages of an employee leaving via VS is that it is usually subject to their agreement to settle claims arising from the end of their employment. We will not rehearse the legal requirements of a valid settlement agreement here. It is, however, worth mentioning recent developments regarding non-disclosure clauses (or agreements, “NDAs”). A number of universities signed the pledge to not use legally binding NDAs in dealing with complaints of sexual misconduct but the moral considerations in using them for broader circumstances should also be considered. The Higher Education (Freedom of Speech) Act 2023 prohibits relevant providers from entering into NDAs relating to complaints of ‘misconduct’ which includes bullying, harassment, sexual abuse, sexual harassment and sexual misconduct. This is expected to come into force before the 2024-2025 academic year. 
  1. Without prejudice / protected conversations - Whilst both aim to facilitate open conversations about an agreed exit, each have specific requirements to do so safely. For a discussion to be genuinely without prejudice there must be an existing dispute. There is extensive case law on what constitutes a dispute and even an employee who is the subject of a formal procedure may not be considered to be in ‘dispute’. In contrast, there must be no existing dispute for a protected conversation and participation must be voluntary. It therefore cannot be assumed that a discussion about VS will not be able to be referred to in litigation if settlement is not reached. Discussions should be planned according to the particular circumstances of the employee.
  1. The Payment
    1. Whether a termination payment qualifies for the £30,000 tax exemption depends on the reason for it. It will not apply to any payment for service (earnings), pay in lieu of notice, holiday pay or a new restrictive covenant. If notice is not going to be worked, in full or in part, then a calculation for post-employment notice pay (“PENP”), which is subject to deductions for tax and NICs, will also need to be made.
    2. For senior staff, the Committee of University Chairs' Senior Staff Remuneration Code and associated guidance should be followed and requires that all severance payments are reasonable and justifiable.
    3. For universities which are within scope of the Redundancy Payments (Local Government) (Modification) Order, careful thought will need to be given and communicated regarding its application in VS schemes, particularly if the formula to be used for any enhanced VS payment is based on the statutory redundancy payment formula and continuous service date.

We’re assisting a number of universities with these schemes and associated issues so please get in touch if we can assist you.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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