NAO slams "unacceptable" lack of transparency on compromise agreements

The National Audit Office has attacked a lack of transparency, consistency and accountability in the use of compromise agreements in the public sector.

Publishing a report on its investigation into compromise agreements, the spending watchdog said: “This is unacceptable for three reasons: the imbalance of power between the employer and employee leaves the system open to abuse; poor performance or working practices can be hidden from view, meaning lessons are not learned; and significant sums of public money are at stake."

The NAO acknowledged that compromise agreements could be used for legitimate reasons such as to minimise potentially time-consuming processes, manage poor performance or mitigate the chances of a grievance being taken to an employment tribunal.

But the spending watchdog found that there was no central or coordinated system of controls over how compromise agreements were used.

It added: “We could not accurately gauge the prevalence of compromise agreements or the associated severance payments. This was owing to: decentralised decision-making; limited recording; and the inclusion of confidentiality clauses which mean they are not openly discussed. No individual body has shown leadership to address these issues.”

As part of its investigation the NAO reviewed 50 agreements. It found that none would restrict a person’s rights under the Public Interest Disclosure Act. Six agreements – all from the health sector – specifically stated that nothing in the agreement prevented the individual whistleblowing.

Of the agreements, 98% contained a confidentiality clause preventing a person from disclosing the existence and terms of the agreement.

Almost half (46%) had clauses requiring employees not to disclose confidential information obtained during the course of employment.

The same percentage contained a clause prohibiting a person from publishing derogatory, defamatory or disparaging statements about the employer. Twelve of the 50 agreements contained a mutual clause in respect of the employee.

The NAO said that some of the people it spoke to who had been offered, or accepted, compromise agreements felt that they had been ‘gagged’.

The report said: “An organisation’s culture, the events leading up to the person being offered an agreement, and the wording of the agreements contributed to whether the individual felt gagged.

“Legal advice to the employee is a prerequisite of making a compromise agreement legally enforceable. However, the individuals we spoke to felt that it was not generally made clear that confidentiality clauses do not prevent employees from raising legitimate public interest concerns.”

The NAO said that because employees were at a relative disadvantage in negotiations they found it difficult to speak out.

It pointed out that if a person was unfairly dismissed and they turned down a compromise agreement, they might be unable to find another job in their chosen profession without a reference.

“Some people said that they felt compelled to sign a compromise agreement to ‘draw a line’ under the issue,” the report added. “They felt that this maintained their chances of finding another job; but the terms of the agreement left them unable to speak out.”

Other findings from the report were:

• There was little transparency in how government departments used compromise agreements. Neither the Cabinet Office nor the Treasury provided formal guidance to departments, nor kept records of how departments used compromise agreements.
• The only central oversight of the system comes from the Treasury, which approves associated payments. In the three years to 31 March 2013, the Treasury approved an estimated 1,053 special severance payments totaling £28.4m for departments and their associated bodies, but this money was not necessarily paid out (departments negotiate amounts with the individuals). The median approval across all the Treasury’s data was £15,000.
• The majority of approvals related to accusations of unfair or constructive dismissal, which might include discrimination. There were also several cases where the primary grounds for dismissal were for capability and attendance issues. In these cases, the department did not wish to follow the performance management process, owing to the length of time it might take, and wished to prevent a case of unfair dismissal.
• On the cases reviewed, approved payments were lower than the estimated damages had the employee won at an employment tribunal. However, the NAO warned that this was not necessarily value for money. “Saving time and money by avoiding a tribunal should not be the overriding factor as some cases may be worth defending where the cost of defeating a claim will exceed the cost of the proposed settlement.”

The NAO made a series of recommendations:

1. Departments and their related bodies should include a provision in all compromise agreements stating that nothing within the agreement shall prejudice employees’ rights under PIDA.
2. The Cabinet Office should provide guidance on the use of compromise agreements, including the appropriate application of confidentiality clauses and the requirement for independent accountability.
3. Departments should improve their information on compromise agreements, and both the Treasury and departments should improve their information on the related severance payments.
4. Departments and their arm’s-length bodies should be more transparent in reporting special severance payments. “Compromise agreements can protect public sector organisations from legal challenges. They can, however, be used to limit public accountability on the full cost of early departures. Our position is that there is no case for non-disclosure if statute (or the Treasury and Cabinet Office financial reporting guidance) requires it.”
5. The Treasury should be consistent in offering authority to make payments without prior approval, and require organisations with authority to report payments so that it has a complete picture of approvals.
6. The Treasury should modify the special severance payment business case pro forma to include confirmations that strengthen transparency and accountability.

Amyas Morse, head of the National Audit Office, said: "Compromise agreements are widely, and often legitimately used. But the lack of transparency, consistency and accountability is unacceptable.

“With the public purse under sustained pressure and services increasingly delivered at arm’s length, it is important that compromise agreements do not leave staff feeling gagged or reward the failure either of an employee or an organisation. The centre of government should get a grip on the use of compromise agreements in the public sector.”