• The “golden handshake” syndrome
• Why we are concerned
• Our expectations about severance payments
• Comments on scope and definition

The “golden handshake” syndrome

The public keep a close and wary eye on how their taxes and rates are spent. They can be quick to react – and rightly so – to suggestions of public officials gaining unreasonably at their expense.

Few things are more likely to provoke outrage than a perception that a public sector organisation has secretly agreed to make a substantial, tax-free, payment to an employee in return for the employee’s departure from the organisation.

The media and some politicians like to describe these payments as “golden handshakes”. The term can be misleading, but it nevertheless evokes several vivid images.

The image with the closest link to tradition is of a parting gift or bonus to a long-serving employee – the modern equivalent, perhaps, of the gold watch. Such gifts or payments tend not to be objectionable – provided they are properly authorised and not unreasonably large.

But there are several other images. They include:

• a damaged or broken working relationship, where the parties agree to put aside their differences, shake hands (metaphorically), and part company – with compensation paid to the employee;
• an unsuitable or poorly performing employee, perhaps on a fixed-term contract, being “paid off” for the balance of the term; and
• an organisation in restructuring or on the verge of abolition, making ex gratia "sympathy" payments to departing employees.

Why we are concerned

During the last few years, we have inquired into a number of “golden handshake” cases in the public sector. Their common characteristic is that they involve an arrangement where the employer makes a severance payment, and (in some cases) gives an undertaking of confidentiality, in return for the employee’s resignation.

In many of our reports of these inquiries, we have been critical of the way in which the public sector employer handled the process leading up to the agreement – along with the substance of the agreement itself.

We have observed a number of themes – among them:

• In some cases, employers have rushed to sign an agreement, before obtaining specialist advice about the other options that might have been open to them.
• In other cases, employers have structured settlements in a questionable manner, involving unjustifiably high tax-free compensatory payments.
• Secrecy clauses have featured in most of the agreements we have seen.

It seems to us that many severance payments are also open to criticism because the employer has failed to establish, and follow, fundamental employment practices – resulting in the needless termination of the employment relationship. The principles of good employment practice are well known:

• a fair and transparent recruitment and appointment process;
• a clear and comprehensive employment agreement – with express provisions regarding termination and redundancy;
• regular reviews of performance against measurable benchmarks; and
• a clear and well-documented process for resolving disputes.

Our expectations about severance payments

This report draws together the common themes, in order to illustrate the risks involved in severance payments – and other kinds of non-contractual payments to departing employees – in the public sector. And, in order to provide some practical guidance, the report sets out my expectations of what public sector employers can do to address those risks.

The report is not a guide to managing an employment relationship or resolving an employment dispute. Its main focus is much narrower – on how to deal with a situation where an employment dispute escalates to a point where termination of the employment relationship appears to be the only feasible option. However, we acknowledge the obvious point that an employer should endeavour to manage the employment relationship in a way that makes these situations truly exceptional.

In some of these exceptional situations, a severance agreement may be the most appropriate, fair, and cost-effective means of terminating the employment relationship. In other cases it may not. Public sector employers need to act in a manner that is consistent with their obligations both as an employer and in respect of the public funds that they manage. Balancing the two sets of obligations can be difficult. The main purpose of the report is to find an effective way of doing so.

From our inquiries, we have formed a set of expectations of what a public sector employer ought to do or consider before making a severance payment. These expectations are reflected in the six principles set out in Part 2 on pages 16-28.

In summary, we expect a public sector employer to:

• seek and obtain specialist advice (in writing) before reaching a severance agreement;
• use a fair, sound, and documented process leading up to the severance agreement;
• ensure the terms of the severance agreement are fair, reasonable, transparent, and properly authorised; and
• keep its stakeholders appropriately informed throughout the process – taking into account the nature of the stakeholder’s interest and the need to protect other interests (such as the privacy of employees).

We hope this report raises the awareness of public sector employers of the risks involved in making severance payments in the public sector, and provides helpful guidance on how the risks can be addressed.

Comments on scope and definition

What we mean by an “employment settlement”

The report uses the term “employment settlement”. At its broadest, this means any settlement of an employment dispute which results in a payment of money to the employee – whether or not the employment relationship continues.

Our main focus – reflected in the title of the report – is on payments made to employees when the employment relationship comes to an end. Payments which result directly in, or bring about, the employee’s resignation are commonly known as “severance payments” because, in effect, they signify severance of the employment relationship.

But many other types of payment can be made on termination – for example:

• bonus and ex gratia payments (mentioned above); and
• payments made to resolve a personal grievance or other dispute which arose in connection with, or contributed towards, the employee’s departure.

The risks which the report discusses can apply to any decision by a public sector employer to make an abnormal type of payment to an employee.

What we mean by “the public sector”

The report is about the risks facing employers in “the public sector”. We should stress that “the public sector” covers both central and local government and the wide range of other organisations that are subject to our auditing mandate under the Public Audit Act 2001. The principles in Part 2 have been expressed in a way which acknowledges the diversity of interests and activities involved.

Some of the principles, and the examples which illustrate them, are relevant to all employment situations – whether in the public or private sector. Accordingly, we hope that the report will be useful to all employers and their advisers.

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