1.6 Disclosure of severance payments
1.601
Local authorities are required to disclose information in the annual report about “severance payments” made to the chief executive or other staff. We are required to audit the local authority’s compliance with this disclosure requirement as part of our audit of the information in the annual report.
1.602
As well as the disclosure requirement, severance payments are an area of legal, financial, and political risk for local authorities. We need to be satisfied that there are no issues of lawfulness, probity, or waste in the settlement.
1.603
The Local Government Act 2002 (the 2002 Act) defines a “severance payment” as—
any consideration that a local authority has agreed to provide to an employee in respect of that employee’s agreement to the termination of his or her employment[emphasis added], being consideration, whether of a monetary nature of otherwise, additional to any entitlement of that employee to—
(a) any final payment of salary; or
(b) any holiday pay; or
(c) any superannuation contributions.17
1.604
A local authority’s annual report must:
- state the amount of any severance payments made in the year to any person who vacated office as chief executive of the local authority;
- the number of employees of the local authority to whom severance payments were made in the year; and
- the amount of every such severance payment.
1.605
From the words emphasised above in the definition of “severance payment”, it can be seen that the disclosure requirement is intended to capture payments made for an employee’s agreement to end their employment rather than payments that the employee would be entitled to receive under the employment agreement had they simply resigned or retired. This is confirmed by the reference to payments such as an employee’s final salary payment and superannuation payments, which do not need to be disclosed because the employee would be entitled to those payments regardless of how their employment ended. The focus is on any additional payments negotiated to help reach an agreement for the employee’s departure, rather than on the payments that would normally be due purely as a result of the existing obligations on the employer.
1.606
Any payments made because the employee agreed to end their employment and settle the dispute in return for money would fit within the definition of “severance payment” in the 2002 Act and would need to be disclosed. In our experience, such agreements often contain a number of different types of payments, such as payment of the employee’s legal fees, a compensatory payment that may be taxfree, and other items such as a payment in lieu of notice.
1.607
Our audit report must give our view on each local authority’s compliance with all the disclosure requirements for annual reports. If a local authority has not disclosed a severance payment, the fact of non-disclosure would normally be reported in the audit report as a legislative breach. We would also consider making the disclosure ourselves in the audit report. This would depend on the significance of the matter, including the size, nature, and circumstances of the severance payment. In deciding our approach in a particular case, we would take account of any disclosure by the authority in the notes to its financial statements.
1.608
To date, we have not made any such disclosures through an audit report.
Confidentiality
1.609
Given the disclosure requirement in the 2002 Act, a local authority can expose itself to legal risk by purporting to enter into a confidential employment settlement. Confidentiality is the norm in many employment settlements. A former employee may be able to seek further redress if the authority discloses the amount of a severance payment in breach of confidentiality, even if it does so to comply with its disclosure obligation under the 2002 Act. As public entities, local authorities should actively consider in each case if confidentiality is needed, why, and to what extent the parties could meet any confidentiality obligations they agree to. In particular, when settling an employment dispute, local authorities should consider how they will be able to meet the disclosure requirement in the 2002 Act. One option is to make any confidentiality obligation “subject to any disclosure required or permitted by law”. Local authorities need to ensure that, when they use employment law specialists in such negotiations, such specialists are aware of the disclosure requirement in the 2002 Act.18
1.610
Confidentiality agreements can also raise difficulties in the audit process. Some local authorities have been unwilling to give our auditors copies of settlement agreements that are subject to confidentiality. However, the Auditor-General has power under the Public Audit Act 2001 to require public entities to produce any information necessary for the conduct of an audit – including to enable an auditor to review the evidence supporting annual report disclosures, or to consider any probity or other issues. This power overrides any confidentiality agreement or privacy considerations.
1.611
Two councils that were reluctant to disclose severance payments in their 2004-05 financial statements were mainly concerned about confidentiality.
1.612
One council was initially unwilling to disclose the amount of various payments made to a former employee. The payments had been made under a confidential agreement, and the council disagreed with our view that the payments were “severance payments” as defined in the 2002 Act. The council’s view was that, because the employee had signalled an intention to resign before a settlement agreement was entered into, the payments were made to settle outstanding employment matters rather than for the employee’s agreement to end their employment. The council intended to disclose the payments in the annual report as remuneration rather than as severance payments.
1.613
A settlement agreement negotiated by lawyers acting for each party had recorded the terms on which the employee’s employment would end. This agreement stated that the council agreed to make the payments in consideration for that agreement. Moreover, the payments were not referred to in the employment agreement. Even though the employee had previously signalled an intention to resign, our view was that, based on the wording of the settlement agreement, the payments needed to be disclosed in the annual report as severance payments.
1.614
The former employee agreed that the payments needed to be disclosed, but was concerned about the connotations of disclosure as “severance payments” under the 2002 Act. The former employee was concerned about being identifiable as the recipient of the payments, and that their description as severance payments would imply that there had been a performance issue (which was not the case).
1.615
The former employee was also concerned that the confidentiality requirement would prevent them from being able to tell their side of the story in the event of public speculation about their identity. This illustrates that confidentiality can be detrimental to both parties in these matters.
1.616
Following discussion with our auditor, the council agreed to make separate disclosure of the payments in the annual report. We were satisfied with the disclosure made and did not refer to the matter in our audit report.
1.617
Another council had made a severance payment to one employee during the year. Being a small council, it was concerned that disclosing the fact and amount of the payment would mean that the employee could easily be identified. The payment was subject to a confidentiality requirement and had been made following mediation under the Employment Relations Act 2000. The Act applies confidentiality to all aspects of the mediation process. However, it does not override disclosure obligations under other Acts, such as the Local Government Official Information and Meetings Act 1987 or the 2002 Act. We could understand the council’s concern about revealing the identity of the former employee to the community, but the 2002 Act does not permit non-disclosure for that reason. The council reluctantly agreed to disclose the payment.
17: Schedule 10, clause 19(2).
18: For further discussion of confidentiality and other matters concerning severance payments, see our 2002 report Severance Payments in the Public Sector, ISBN 0-477-02895-0.