Part 3: Legal requirements to disclose severance payments
3.1
In this Part, we discuss:
- confidentiality clauses;
- legal disclosure requirements; and
- accounting standards requirements for severance payments.
Confidentiality clauses
3.2
The parties to a settlement often include a confidentiality clause in the settlement agreement. As a result, public organisations can be reluctant to disclose the payments made.
3.3
However, most public organisations will have some kind of obligation to disclose severance payments. Accounting standards require the disclosure of some payments in the financial statements, and the governing legislation for some types of organisations contains additional requirements for what must be disclosed in the annual report. Whether a particular payment needs to be disclosed will depend on the specific wording of the relevant legislation and accounting standards. A legal disclosure requirement will override any contractual undertaking; public organisations cannot contract out of their statutory obligations.
3.4
The standard wording for confidentiality clauses provides that the discussions and terms of settlement are confidential, “except as required by law”. This wording should always be inserted into settlement agreements where confidentiality has been agreed. Employees and their representatives should be made aware of the public organisation’s disclosure requirements, and the limits of any promise of confidentiality. Settlement agreements might need to be tailored to reflect the circumstances, including limitations on confidentiality.
3.5
MBIE’s mediation processes are subject to statutory confidentiality.8 That means that what is said at mediation is confidential and inadmissible in court. However, this does not mean that the terms of every settlement agreement signed at mediation are confidential or that they must include a clause stating that the settlement is confidential. The terms, including any confidentiality clause about the fact or amount of settlement, are for the parties to negotiate and agree. The statutory requirement to observe confidentiality in the mediation discussion and process does not override legal disclosure requirements.
Legislative disclosure requirements
3.6
Councils and Crown entities have specific disclosure obligations under the Local Government Act 2002 and the Crown Entities Act 2004 respectively.
3.7
Settlement agreements usually list all the payments that will be made when the person’s employment ends. Some of these will be ordinary contractual and statutory entitlements (for example, accrued annual leave), and others will be additional payments that have helped end the employment relationship on an agreed basis (such as payment of the employee’s legal fees, or a compensation payment).
3.8
Which payments need to be disclosed will depend on the facts, the person’s employment agreement, the terms of the settlement agreement, and the requirements of the relevant legislation. It is important to note that the legal requirements are the minimum. Sometimes additional explanation might be useful for the reader.
Local Government Act 2002
3.9
The Local Government 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, being consideration, whether of a monetary nature or 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.9
3.10
A council’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 council;
- the number of employees of the council to whom severance payments were made in the year; and
- the amount of every such severance payment.
3.11
This means that each severance payment needs to be disclosed separately, and not as a total for the council.
3.12
The definition of severance payment in the Local Government Act requires disclosure of any payments made to an employee as part of an agreement to end their employment that are additional to the employee’s existing employment agreement or statutory entitlements. This does not include payments that an employer is required to make under an employment agreement if the employment ends, including pay instead (in lieu) of notice where there is a provision in the employment agreement allowing the employer to pay part or all of the notice period in lieu. However, any payment in lieu of notice that is greater than the notice period in the employment agreement must be disclosed.
3.13
If the employer agrees to pay in lieu of notice without a provision allowing it to do so, then that payment must also be disclosed. It is not based on a contractual entitlement.
3.14
For example, redundancy entitlements in the employment agreement would not have to be disclosed if the employee was effectively made redundant. They are not a new or additional payment that has been negotiated to end the employment relationship. However, a redundancy payment higher than the employment agreement allowed for, or not based on the employment agreement, would have to be disclosed. Similarly, payments in lieu of notice would be disclosed only if they exceeded the notice period in the employment agreement or where the employment agreement does not have a provision allowing the employer to pay in lieu of notice.
Crown Entities and Education Acts
3.15
Section 152 of the Crown Entities Act requires Crown entities to include in their annual report:
… the total value of any compensation or other benefits paid or payable to persons who ceased to be members, committee members, or employees during the financial year in relation to that cessation and the number of persons to whom all or part of that total was paid or payable.
3.16
Under the Education Act 1989, schools also do not need to disclose individual payments. An aggregate amount for the school is enough.
3.17
The legislative requirement under these two Acts and the Local Government Act is to disclose the compensation and benefits that are tied to the end of employment. This means that any payment that relates to the ending of the employment relationship needs to be disclosed, whether it is based on contractual entitlements or not.
Companies Act 1993
3.18
Companies are also required to disclose certain payments, including all remuneration and other benefits received by directors and former directors; and by any other employee or former employee if the value was $100,000 or more a year.10
Government departments
3.19
Government departments do not have an equivalent duty to disclose severance payments in their annual reports. However, they are accountable to Ministers and to Parliament and can be required to disclose this information through other accountability mechanisms (for example, when asked to do so by select committees).
Review by auditors
3.20
In our annual audit work, we look at compliance with disclosure requirements. We can report the non-disclosure of a severance payment as a legislative breach in the audit report. Sometimes the appointed auditor will include the missing information in the audit report, depending on the size, nature, and circumstances of the payment.
Summary of the legislative disclosure requirements for severance payments
3.21
Figure 1 summarises the disclosure requirements for common types of payments made at the end of an employment relationship. Whether a specific payment needs to be disclosed will depend on the facts, the person’s employment agreement, the terms of the settlement agreement, and the requirements of the relevant legislation.
Figure 1
Summary of legislative requirements to disclose common types of severance payments
| Type of payment | Local Government Act 2002 | Crown Entities Act 2004 | Education Act 1989 |
|---|---|---|---|
| Salary or wages | No disclosure needed | No disclosure needed | No disclosure needed |
| Holiday pay; time off in lieu |
No disclosure needed | No disclosure needed | No disclosure needed |
| Employer’s contributions to superannuation | No disclosure needed | No disclosure needed | No disclosure needed |
| Payment in lieu of notice | Disclose if the payment exceeds the notice provision in employment agreement | Disclose if the payment exceeds the notice provision in employment agreement | Disclose if the payment exceeds the notice provision in employment agreement |
| Redundancy compensation | Disclose payments that exceed any employment agreement provisions | Disclose | Disclose |
| Hurt and humiliation payments | Disclose | Disclose | Disclose |
| Any other compensation | Disclose | Disclose | Disclose |
| Legal or other fees | Disclose | Disclose | Disclose |
| Transfer of property (such as a car) | Depends on the facts and employment agreement | Depends on the facts and employment agreement | Disclose |
Accounting standards requirements
Generally accepted accounting practice
3.22
The information in general purpose financial reports11 prepared by a public organisation might be required by legislation, by founding documents (such as trust deeds), by its parent organisation, or by the responsible Minister to comply with generally accepted accounting practice.
3.23
Generally accepted accounting practice is the overall body of accounting standards and other guidance that sets out how an organisation should prepare general purpose financial reports. Importantly, generally accepted accounting practice is a set of objective principles and requirements that are not subject to the preparer’s individual preference.
3.24
Since 2015, the financial reporting standards used when preparing general purpose financial reports have been determined by the External Reporting Board’s Accounting Standards Framework.12 The applicable financial reporting standards are determined by whether the organisation is profit-oriented or exists for a public benefit, and its size.
3.25
The primary objective of most public organisations is to deliver services to the public rather than to generate a commercial return for investors. These organisations are referred to as public sector public benefit entities. The applicable financial reporting standards for these organisations are referred to as public sector public benefit entity accounting standards.
3.26
Some public organisations have a greater focus on achieving a commercial return. These organisations are referred to as public sector for-profit entities (for-profit entities). They include State-owned enterprises, mixed ownership model companies, and Crown Research Institutes. The applicable financial reporting standards for these entities are referred to as NZ IFRS.
Accounting standards disclosure requirements
3.27
The disclosure requirements for severance payments are similar for both for-profit entities and public benefit entities. The relevant accounting standards are summarised in Figure 2.13
Figure 2
Accounting standards that apply to disclosing severance payments
| Public benefit entities | For-profit entities | |
|---|---|---|
| Accounting and disclosure requirements for employee benefits | PBE IPSAS 39 Employee benefits | NZ IAS 19 Employee benefits |
| Related-party disclosure requirements | PBE IPSAS 20 Related party disclosures | NZ IAS 24 Related party disclosures |
3.28
Key management personnel are people who have authority and responsibility for planning, directing, and controlling the activities of the organisation, directly or indirectly, including any director (executive or otherwise) of that organisation.14 Employee benefits are all forms of consideration given by an organisation in exchange for service rendered by employees.15 Termination benefits are employee benefits payable as a result of either:
- an organisation’s decision to end an employee’s employment before the normal retirement date; or
- an employee’s decision to accept voluntary redundancy in exchange for those benefits.16
3.29
In summary, the accounting standards require the disclosure of the total employee benefits made to key management personnel (senior staff) during the financial period.17 The employer should review the requirements of the applicable accounting standards in detail and apply these to the individual circumstances.
3.30
Total employee benefits might include:
- salary and wages;
- holiday pay, or time off in lieu;
- employer’s contributions to superannuation;
- payment in lieu of notice;
- redundancy compensation;
- hurt and humiliation payments;
- any other compensation;
- legal or other fees; and
- transfer of property (such as a vehicle).
3.31
Organisations applying NZ IAS 24 Related party disclosures must disclose key management personnel employee benefits in total and by category, one of which is termination benefits.18 For other organisations, the total employee benefits paid to key management personnel is enough to comply with the accounting standards.19
8: See section 148 of the Employment Relations Act.
9: See schedule 10, clause 33, of the Local Government Act.
10: See sections 211(1)(f) and 211(1)(g) of the Companies Act 1993.
11: More information about general purpose financial reports can be found in our 2016 publication, Improving financial reporting in the public sector.
12: Information about the External Reporting Board’s Accounting Standards Framework is on its website, www.xrb.govt.nz.
13: Small public entities that can apply the public benefit entity simple format reporting – accrual (public sector) accounting standard or the public benefit entity simple format reporting – cash (public sector) have simpler disclosure requirements. However, it is likely that public organisations following these accounting standards will produce similar disclosures as larger public organisations.
14: Paragraph 9, NZ IAS 24 Related party disclosures and paragraph 4, PBE IPSAS 20 Related party disclosures.
15: Paragraph 8, NZ IAS 19 Employee Benefits and paragraph 8, PBE IPSAS 39 Employee benefits.
16: Paragraph 8, NZ IAS 19, Employee benefits and paragraph 8, PBE ISAS 39 Employee benefits.
17: Paragraph 17, NZ IAS 24 Related party disclosures and paragraphs 34 and 35, PBE IPSAS 20 Related party disclosures.
18: Paragraph 17, NZ IAS 24 Related party disclosures. If an entity is using the Reduced Disclosure Regime (Tier 2), key management personnel compensation is not required by category (see paragraph RDR 17.1). NZ IAS 19 Employee benefits provides detailed guidance on what is required to be included within each category.
19: Legislative requirements may require additional disclosure of individual payments. If an entity does not disclose these, it is a breach of legislation, not non-compliance with generally accepted accounting practice.