Martineau Education Bulletin

October 2009

www.sghmartineau.com

Key contact:
Smita Jamdar
Partner and Head of Education
T: 0870 763 1332
E: smita.jamdar@sghmartineau.com

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Contents

Strategy, Students and Governance

HE governance - the real lines of responsibility | read
Recent events have brought HE governance into the spotlight. In this article we summarise the responsibilities of HE governing bodies and look at the new power of the Charity Commission to intervene in a university's activities.
HEFCE addresses unsatisfactory quality in higher education | read
HEFCE recently published its "Policy for addressing unsatisfactory quality in institutions" which is designed to regulate its dealings with institutions that demonstrate unsatisfactory quality in learning and teaching. This article summarises HEFCE's policy.

Finance, Technology and IP

Flagging design | read
We look at a recent case indicating that universities need to take care when considering the use of certain protected emblems, such as Royal crowns, flags and the Union Jack, when re-branding or changing logo.
OPTIMISE: contracts and getting the best deal | read
In this article we highlight a number of ways universities might be able to make costs savings by renegotiating their existing contracts.

Estates

Universities leading the way | read
A consultation on carbon reduction and strategy for HE in England was published in July 2009. This article considers the background to the consultation before commenting on the proposals being consulted on by HEFCE.
Can we get insurance cover to pay the rent if our tenant goes bust? | read
We examine the benefits of a relatively new product on the insurance market which may be of interest to university landlords.

Human Resources

UK retirement age challenge fails - but law must change | read
We comment on the recent High Court judgment in which Age Concern's challenge to the UK's default retirement age of 65 failed.
Compromise agreements - tax issues | read
In last month's bulletin we highlighted some of the pitfalls involved in compromise agreements. We now consider the tax implications for universities of entering into compromise agreements.
Right to legal representation at internal disciplinary hearings | read We comment on recent cases which considered whether a employee has the right to bring a legal representative to an internal disciplinary hearing.

Full article details

• Strategy, Students and Governance

HE governance - the real lines of responsibility | back to top

HEFCE has published its new policy for intervention where universities “suffer chronic and continuing problems in the quality of learning and teaching” (see article below). A lay governor at Brunel University accuses the Vice-Chancellor of megalomania and describes the council as “about as effective as a bunch of stuffed donkeys”. KPMG’s review of the lessons for HEFCE from the London Metropolitan University funding problems has been published, whilst the report commissioned by the University from Sir David Melville and Deloitte is awaited.

Reports from the Lambert Review in 2003 to the Office of Public Management’s survey for the Leadership Foundation and the CUC reflect greater confidence in the standard of governance in HE than in the health sector or local government. Yet Allan Schofield’s recent review [What is an effective and high performing governing body in UK higher education? January 2009], seeking to define an effective and high performing HE governing body, found little systematic evidence of either. Some argue that the lack of remuneration limits what can reasonably be expected of volunteer governors, who in the worst case may settle for a complacent trade-off between a degree of prestige and an undemanding post. Much has been written about what constitutes good and bad governance but, at least when gross deficiencies are absent, the difference can be hard to pin down. Even on those rare occasions when an institution’s wheels come off, it is not always clear whether or where governance arrangements went wrong.

The first requirement of the CUC’s 2004 governance code of practice is that every university should be headed by an effective governing body which is unambiguously and collectively responsible for overseeing its activities, ensures compliance with regulatory provisions and takes all decisions of fundamental concern. By adopting a statement of primary responsibilities, a governing body should confirm to itself, others in the university and the outside world its ultimate responsibility for strategic and financial planning, appointing the head of the institution and monitoring the performance of both him/her and the university itself.

Schofield points out that whilst adoption of the code and the good practice suggestions in the CUC’s guidelines may reduce the possibility of ineffective governance, they cannot themselves ensure effectiveness. In FE, where there is far greater micro-regulation, this truth has not inhibited the regulator from issuing detailed lists of graded governance actions, resulting in classification of board performance.

The CUC’s voluntary code is partly derived from legally binding statements of governors’ responsibilities. HEFCE’s financial memorandum defines the governing body as ultimately responsible for the management and administration of the university’s revenue and property and the conduct of its affairs, and states that responsibility for compliance with the memorandum and the proper stewardship of funds rests with that body. It must ensure a sound system of internal management and control, financial planning, delivering value for money, and keeping its arrangements for the management of resources under review in the light of guidance from HEFCE or the NAO. The powers of the council of a chartered university are not prescriptive, but the articles of a statutory HE corporation fix the governors with non-delegable responsibility for, amongst other things, oversight of the institution’s activities, approving the budget, the effective and efficient use of resources, and ensuring solvency. Governors are also responsible as charity trustees for the organisation’s compliance with charity law.

The wide legal responsibilities of a university’s board may seem difficult at first sight to reconcile with the cardinal distinction between governance and management. What are the limits of board members’ oversight of activities, or securing the management of resources? How would governors know whether the assumptions behind an institution’s financial planning were valid, or that its statistical returns were accurate? It is clear that if they are not, the university’s assets and even solvency could be at risk. Does good governance preclude defective management whilst poor governance encourages it? Defenders of the ancien regime in Oxbridge governance are quick to point out the absence of any connection between institutional success and acceptance of modern precepts of either governance or management.

The characteristic strengths of HE governance identified by Schofield really ought to be capable of being taken for granted: the quality of board members; their concern for the university’s best interests and understanding of their own roles; respect for academic values; timely availability of robust information; a high level of support from clerks and secretaries; constructive relationships with senior managers; the commitment of institutional heads; and the guidance of funders. As well as the reverse of these strengths, he lists as reasons for ineffective governance more insidious issues such as weak chairmanship, especially when combined with a dominant CEO; reluctance to challenge conventional assumptions; and “a lack of motivation, willingness or time….to address difficult issues or challenge an executive constructively”.

Risks like these show how difficult it can be to get governance right, but they are at least remediable by the individual application and commitment of members of governing bodies. What they may find even more alarming is whether the basic model of HE governance leaves them open to responsibility for defaults in areas where they have no practical means of control. Identifying real lines of responsibility in the governance of universities raises similar issues to those faced by non-executive directors and company managers (the subject of a series of reports beginning with Cadbury in 1992), or ministers and civil servants (still thought of by many in terms of a TV sitcom).

The non-delegable functions and strategic responsibilities of the board must be seen to determine the wider operation of the undertaking, whilst being clearly distinguished from management. The system depends on structured delegation of non-core decision making, informed review of the results, and an appropriate degree of trust in the head of the institution and other senior managers, derived from the appointment and monitoring process. Those post-holders in turn are responsible for other staff. Governors ought to be able to identify how delegated powers exercised on their behalf are subject to controls operating effectively both in advance, by identifying risks and having systems in place to manage them, and retrospectively, by monitoring outcomes and assessing performance against objective criteria.

No-one could reasonably expect members of the governing body to sign off the accuracy of statistical returns, and any attempt to be involved in their production would probably be an inappropriate interference with management. But a university’s risk register will identify the risk and consequences involved in the submission of returns, and safeguard against that risk materialising by the employment of suitably qualified staff whose work is regulated by appropriate procedures. Since last year, HEFCE’s financial memorandum has required audit committees to give an annual assurance on the effectiveness of arrangements for data returns. Auditors are thus required to do what board members cannot do themselves, in subjecting processes and outcomes to informed scrutiny and reporting. Benchmarking information may be available which would flag up irregularities and prompt questions.

Whilst it might be assumed that all governing bodies would recognise these routes to the identification of problems as squarely within their responsibilities, Allan Schofield’s report is not wholly encouraging. He found little criticism of universities’ approach to risk management, but the evidence seemed to suggest that the work of the audit committee was not sufficiently well known to all board members. A substantial proportion of respondents to the OPM survey were critical of their ability to assess institutional performance based on benchmarking data.

The Charity Commission’s recent guidance on the status of research in universities, which HEFCE will adopt in its capacity as principal regulator for the sector, illustrates the boundaries within which members of governing bodies must work. The guidance recognises that they cannot scrutinise individual contracts or sponsorship arrangements in order to determine whether or not the research and the income it generates match the requirements of charitable activity. But it does require them to ensure that a proper framework of policies and procedures is in place, to enable fair and justifiable decisions to be reached in each individual case. The guidance confirms that, provided such procedures have been adopted and are followed by managers making the decisions, a university’s judgment on the status of research is unlikely to be queried by its regulator for this purpose.

Of course there can be no absolute guarantee that a governing body which seeks faithfully to discharge its high level responsibilities in this structured way will not find that its trust in managers has been betrayed. Fortunately instances of deliberate deceit or reckless incompetence in the sector are rare; there is a marked contrast between the performance of the 1988/92 universities and the problems encountered by the newly independent FE sector at around the same time.

The speed with which irregularities come to light will be a strong indicator of the adequacy or otherwise of a university’s systems. Ultimately the board may have to accept that the buck stops with them. Should the matter be so serious that sanctions need to be invoked, they will be financial and applied under the memorandum with HEFCE. There is no equivalent in HE of the regulator/funder’s statutory power in FE to intervene in the conduct of an institution, triggered by mismanagement or inadequate quality of provision, and capable of resulting in the dismissal of governors or the appointment of new ones. Although the Secretary of State has power to dissolve statutory HE corporations (but not chartered bodies or universities established as companies), the power has been exercised only by consent in the course of restructuring, and would need to be backed by the strongest evidence in order to withstand legal challenge from an institution on which it was imposed. HEFCE’s quality intervention policy involves financial consequences for the university rather than directly personal ones for its governors or managers.

However, a new level of regulation of universities as exempt charities will shortly be in place under the Charities Act 2006. If the Charity Commission is satisfied that there has been misconduct or mismanagement in the administration of a university, it will have power to remove employees or trustees - i.e. council or board members - who have been responsible for such failings, or have contributed to them. HEFCE as principal regulator must be consulted before these powers can be exercised, providing it with a powerful new option when one of the rare cases where such draconian steps may be appropriate arises. The Commission has little knowledge of the sector, so the principal regulator’s role will be critical. Experience of statutory intervention in the FE sector suggests that the head of a failing institution will be in the line of fire ahead of board members, and that they will informally be given the option of resignation before formal moves for dismissal are initiated.

This is a disaster scenario which would damage the reputation of the whole sector, as well as the institution concerned; it is to be hoped it will never happen. More effective and high performing governing bodies are the best way of ensuring that it does not.

Smita Jamdar
Partner and Head of Education
T: 0870 763 1332
E: smita.jamdar@sghmartineau.com

© Martineau 2009

HEFCE addresses unsatisfactory quality in higher education | back to top

In September HEFCE published its “Policy for addressing unsatisfactory quality in institutions”, which is concerned with cases where a judgement of no confidence is made following an institutional audit by the QAA.

Action plan

When the QAA audit team makes a judgement of no confidence a report is published, and a programme of follow up action is commenced within three months of the report publication. The QAA will require an action plan from the university and will request progress reports at regular intervals. This action plan will be approved and signed off by the QAA Board.

Although the primary responsibility for drawing up the action plan rests with the university, it is encouraged to use other available sources including advice and support from other institutions with a successful track record in the relevant area.

The action plan should be completed and implemented within a maximum of 18 months.

Causes for Concern

The HEFCE policy will apply as a last resort in situations where the action plan agreed with the QAA has failed to result in sufficient improvement or it is not considered possible for the university to address its problems within a suitable timeframe without input from other agencies.

The first step under the policy is for HEFCE to ask the QAA to carry out further investigation using the QAA’s “Causes for Concern” process.

If the preliminary enquiry concludes that there are grounds for concern requiring further follow-up action, then the second stage of the Causes for Concern process will be launched. This involves a full investigation carried out by an external reviewer. The outcome of this process will act as a guide in deciding what further action should be taken.

If the problem concerns a partnership between a university and an FEC, then the QAA could extend its Causes for Concern investigation to the partner institution and include it in any recommendations.

If the Causes for Concern preliminary enquiry identifies a need for a full investigation, HEFCE will arrange for a meeting to be held at the earliest possible opportunity with senior members of the university. Further meetings will be held on a regular basis to discuss progress until the university has satisfactorily addressed the concerns.

During these meetings, the reasons for the no confidence judgement will be discussed in order to understand and determine the actions to be taken to remedy the situation. This will lead to the development of the Unsatisfactory Quality Action Plan which would incorporate parts of the original plan as appropriate.

The time limit for implementing the plan will be agreed, but HEFCE does not expect this to exceed 18 months.

Implications

From the time the policy is triggered until HEFCE is satisfied that all required actions have been taken:

a) the university will not be permitted to bid to any HEFCE special funding programmes or for additional student numbers;

b) the university will be kept under regular review and will be monitored as part of HEFCE’s institutional risk assessment process;

c) if the institution has applied to the Privy Council for degree awarding powers (DAP) or university title, then, once HEFCE has confirmed that the unsatisfactory quality process is underway, the QAA will ensure that any institutional assessors are fully aware of the situation. The decision to award DAP ultimately rests with the Privy Council.

HEFCE may also take any of the following actions:

a) arrange for a support team to be made available to the university to help resolve the issue(s);

b) apply its support strategy for institutions at higher risk;

c) make recommendations to the university’s senior management team;

d) if the reason for the no confidence judgement could be attributed to a particular subject, then HEFCE may judge it appropriate to withdraw funding for that subject;

e) ask the QAA to bring forward the date of the next institutional audit;

f) withdraw funding where HEFCE deems this appropriate in order to ensure that public funds are not used to fund poor quality provision.

Outcomes

Once the university has successfully carried out the actions set out un the Unsatisfactory Quality Action Plan and these have been shown to be effective in addressing the identified causes for concern, HEFCE will ask the QAA to confirm that there are no further matters of concern.

If there are still major problems outstanding after the expiry of the time frames agreed in the Unsatisfactory Quality Action Plan, a further meeting of relevant bodies would be called and the matter taken to the HEFCE Board for a decision on next steps.

If a university receives a judgement of no confidence, the resulting report will be published on the QAA website. When an action plan has been completed and the audit/review approved by the QAA Board, a message will be posted on the website alongside the relevant report, to inform site users that the issues has been resolved.

Andrew Holden
Associate, Commercial Disputes Team
T: 0870 763 1661
E: andrew.holden@sghmartineau.com

Helen Tringham
Solicitor, Commercial Disputes Team
T: 0870 763 1607
E: helen.tringham@sghmartineau.com

© Martineau 2009

• Finance, Technology and IP

Flagging design | back to top

Universities considering a re-brand or a change of logo should be mindful to choose a mark that is not only distinctive and unlikely to confuse the public, but also one that does not fall foul of special rules on protected emblems, such as Royal crowns, flags and use of the Union Jack.

In a recent decision the Combined Armed Forces Federation UK (CAFF) applied for a mark combining a Union Jack flag, a crown and the name of the organisation (see below). CAFF exists to provide independent and impartial advice, help and representation on financial and legal matters affecting the welfare of Armed Forces personnel, past and present.

CAFF’s application (by its Secretary General, David Robson) was opposed by the British Armed Forces Federation (BAFF) on grounds that the mark contained a representation of the Royal crown; contained words letters or devices likely to lead persons to think that the applicant had Royal patronage; and contained a representation of the Union Jack, which on its own or in combination with the crown and the wording would be misleading.

The hearing officer upheld the BAFF’s opposition on the basis that the combination of the flag, the crown and the words would mislead the relevant average consumer into thinking that the user of the mark had Royal patronage or that it was an organ of the state. However, he held that use of the crown on its own would not be taken as a sign of Royal patronage, partly because the average member of the public would be unsure of precisely what a Royal crown looks like.

The case is a reminder to anyone who may be looking to use such symbols that it would be worth seeking professional advice before committing to any new design.

Des Burley
Partner, Intellectual Property & Technology Team
T: 0870 763 1107
E: des.burley@sghmartineau.com

© Martineau 2009

OPTIMISE: contracts and getting the best deal | back to top

Universities do not need to be told that these are straitened times and the financial constraints are unlikely to ease in the sector for some time to come. Therefore, any opportunity for savings without reducing purchases and sales is well worth pursuing and may be an easy win.

It is worth asking whether the contractual basis on which you are dealing might be renegotiated, at least to some extent. A supplier might perhaps be willing to give additional discounts or other incentives to keep your business. Maybe a customer is more trouble than he is worth – always complaining and paying late so that you wish you could remove the risk of his financial failure and devote your energies elsewhere.

Depending on what the contract says, you may be able to have your way or at least open a conversation with the supplier or customer that can take you in the right direction.

Most of us know (broadly) what agreements and commitments we have, but if we are truthful we are not close enough to some of the specific contractual detail to know whether the terms would allow us to bring advantageous change about. That is not surprising: we all enter into so many agreements and arrangements and have other things to do than spend all our time reading the detailed terms.

However, now would be a good time to make an exception and do just that: have a look at all of your contracts. Perhaps start by considering which customers and suppliers are either not giving you a good deal (whether that be on price or for some other reason) and also those where you think there is some kind of heightened risk, for example a customer who might become insolvent owing you a large sum.

Have a close look at some of the key clauses in those documents. As is so often said, the devil is in the detail. Maybe the notice and duration provisions will allow you some way to terminate an agreement much earlier than you thought. Perhaps when you look closely, something a supplier has been doing is indeed a breach and would allow you to terminate. Perhaps a customer’s late payments allow you to suspend delivery of services to him until he pays. Perhaps the duration clause affords an early termination.

Exercising such rights is hardly the way to build a great relationship with the other party, but talking to him about the possibility that you might be doing so at some point if you do not get some improvements in your terms might be a very good way to open a negotiation and get a better deal. The improvements you are likely to be looking for include:

accelerated payment terms or the right to a deposit from a customer;
insertion of a retention of title clause;
the right to pay a supplier less or later;
changes in delivery arrangements – perhaps enhanced acceptance procedures before you have to pay.

These are just a few of the many possibilities and intended as food for thought. What is appropriate or relevant will depend on the individual circumstances of each contract you are looking at.

Peter Manford
Partner, Commercial
T: 0870 763 1390
E: peter.manford@sghmartineau.com

© Martineau 2009

• Estates

Universities leading the way | back to top

The consultation on a carbon reduction target and strategy for higher education in England was published in July 2009 jointly by HEFCE, Universities UK and GuildHE. The target and strategy must be seen in the light of recent developments in the energy sector and is just one of a number of initiatives being developed in the HE sector. Necessarily, the target and strategy will be complementary to the HEFCE strategy for sustainable development.

Background

At the end of 2008, the Climate Change Act came into force enshrining in law the UK’s commitment to achieve a 50% reduction in greenhouse gases by 2050 based on a 1990 baseline with an interim target of a 34% reduction by 2020. The UK is the first country to make a binding commitment, although questions remained unanswered about how it will be enforced.

Since the Act, there has been the publication of The UK Renewable Energy Strategy (which sets out the strategy for achieving the UK’s binding target of 15% of energy to be derived from renewable sources by 2020); another White Paper - the UK Low Carbon Transition Plan (which sets out the UK’s low carbon transition plan to 2020); a Carbon Reduction Strategy for Transport and a UK Low Carbon Industrial Strategy.

The Carbon Reduction Commitment has been consulted upon and is due to be introduced from April 2010. This is a mandatory cap and trade scheme applicable to any organisation which consumed 6,000 MWh of electricity in 2008 through half hourly meters under a supply contract. If caught by the scheme an organisation will have to measure and report emissions and purchase allowances to emit. Organisations in the scheme will be ranked at the end of the year and the income generated by the government from the sale of allowances will be paid back to participants according to their position in the league table. Those performing well stand to be paid more than it cost them whilst those performing badly may lose their money and/or suffer a penalty.

A consultation is currently ongoing on the introduction of feed-in tariffs and an export tariff for renewable electricity and we are eagerly awaiting publication of the consultation on a renewable heat incentive.

Building regulations are being revised again to impose more stringent requirements.

The HE sector

Now, as mentioned above, the HE sector is consulting on setting targets and agreeing a strategy for moving to a low carbon environment. A previous consultation on a sustainable development strategy demonstrated a very high level of support for a carbon strategy.

HEFCE has proposed targets which match the Climate Change Act targets, which are of course, national, but has also proposed that the sector should aspire to even higher targets. The public sector sometimes pleads that it should be treated as a special case in climate change matters on the basis that it does not have the same money-raising abilities or freedoms to invest as the private sector, so it is to the credit of the HE sector that it has aligned its own targets with those of the government and shown even greater ambition.

Whilst targets and an overall strategy will be set for the HE sector it will be for individual universities to decide how to reduce, measure, review and report progress on their own emissions. Whilst having the freedom to decide how to reduce will, no doubt, be welcomed by institutions, it would seem sensible to prescribe the mechanism for measuring, reviewing and reporting progress.

Measures such as the HEFCE proposed targets, carbon reporting requirements and the Carbon Reduction Commitment will drive behavioural change. It must also be borne in mind that in future, there will be a link between carbon reduction efforts and funding, and no doubt this will be a major contributor to changing behaviour.

HEFCE engaged consultants to measure emissions and so set the baseline against which reductions are to be measured. The research showed a 17% increase between 1990 and 2006. Whilst some of this can be accounted for by better measurement and the growth in the sector it is a surprising increase and a trend that must be reversed.

The proposals being consulted on by HEFCE are:

the targets should be absolute against a base figure i.e. not accounting for growth in the sector: this is a big ask when the government is continually encouraging greater numbers into higher education and each university is looking to increase numbers relative to other institutions, but the target will drive innovation in how courses are delivered, space is utilised and support services are managed;
the targets should only apply to direct emissions from owned assets and purchased electricity and not to indirect emissions from other sources, which have proven to be too difficult to measure at this time. No doubt those other sources will be included eventually but are not being allowed to delay implementation of the targets;
a commitment for the HE sector of an 80% reduction by 2050 and at least 34% by 2020 in direct emissions against a 1990 baseline;
an aspiration to achieve a carbon reduction target of 50% by 2020 in direct emissions against a 1990 baseline and carbon neutrality by 2050, with offsetting and trading expected to play a role in achieving this;
a commitment to making reductions in indirect emissions and setting targets for indirect emissions.

HEFCE is also consulting on whether there should be interim milestones, recommending 10% by 2012 and 30% by 2017. The 10% reduction appears ambitious in light of the 1990 - 2006 17% increase in emissions referred to above.

Within these overall targets individual universities will set their own specific targets.

The consultation highlights the following areas in which savings can be made:

energy use within the estate from fossil fuel combustion;
electricity consumption;
transport;
water consumption;
waste;
procurement.

Universities will be required to develop carbon management plans. These will address the concrete actions for meeting the targets but also “softer” issues such as teaching, research and public communications to raise awareness and educate. It is clear that sustainability and carbon management are to permeate through an institution at all levels.

The report which supports the consultation has highlighted the six most visible interventions, including renewable energy and efficient energy supply. Both of these already benefit from financial support under the Renewables Obligation and may benefit from the feed-in tariffs and export tariff for small scale renewable electricity and the renewable heat incentive when they are introduced.

The feed-in tariffs are a guaranteed price for electricity generated from renewable sources. The tariff applicable is dependent on the technology. The tariff will be paid for 20 years (25 years in the case of photovoltaic) and will be paid even if the electricity is consumed where it is generated. In addition, an institution which generates any such electricity and exports it to the grid will be paid an additional amount for that electricity; this is in addition to the savings to be made by not having to source grid electricity and the potential savings under the Carbon Reduction Commitment. The detail of the proposed renewable heat incentive has still not been published but is expected to be similar i.e. a guaranteed price. Of course, there is an initial capital outlay and to date little has been said about how the funding for that can be secured.

The consultation highlights the possible barriers to the successful achievement of the targets. Amongst these barriers are lack of funding and the planning regime. Some funding is provided by the Revolving Green Fund but much more is required to meet the ambitious targets that the sector is being asked to accept. Delays caused by the planning process are being addressed.

It is clear that the sector wishes to move carbon management from the preserve of the Estates Management team and give it a higher profile within organisations. New regulations will lead to serious cost implications which will drive change in a defensive way, but there are also fantastic opportunities for those universities prepared to lead the way and invest in the low carbon future.

The consultation closes on 16th October and the strategy will be published by the end of 2009.

Andrew Whitehead
Partner and Head of Energy, Projects and Commerce
T: 0870 763 1528
E: andrew.whitehead@sghmartineau.com

© Martineau 2009

Can we get insurance cover to pay the rent if our tenant goes bust? | back to top

Universities can face real difficulties if their tenants become insolvent leaving them with no income stream and premises which are then difficult to re-let. With the commercial property market still in the grip of recession it is perhaps surprising that some help may now be at hand, albeit from an unlikely source.

Some in the insurance industry have launched an innovative product which provides landlords with protection against a loss specifically arising from the insolvency of a commercial tenant. Cover can be provided for single tenants or for all or part of a portfolio, provided it is commercial property. This form of cover may provide up to twelve months loss of rent following insolvency or default of the tenant (and this may be extended up to two or three years depending on quality of risk).

This sort of initiative may provide universities with a breathing space and continuing income stream for that period. It can be obtained against various types of insolvency including administrations and CVAs. Any university which has been involved with a pre-pack administration will know how the hands of the university as landlord are tied and it is very difficult to take any action.

Under this type of policy up to 100% of the rental value is insured, with typical premium costs ranging from 1% to 4% of rental value. We know of cover where there is no excess deductible although there is usually a minimum premium payable. There will be a maximum insured value (for example £1,000,000).

For some universities this cover may provide some certainty and peace of mind on a valuable income stream. There is also a possibility that it could allow continuing income stream to be used as security. This cover may prove to be an easier and less costly means of realising income stream than, for example, seeking to enforce personal guarantees from company directors.

Another feature of this type of policy (which will be of interest to those universities who let properties which are likely to be hit by a pre-pack administration, or which sub-let their property) is that, if the property is re-let at a lower rent value, then it is possible that the policy may continue to indemnify the shortfall in rent during the twelve month claims period.

As well as protecting the university’s income stream this sort of cover may free up a tenant’s working capital if it is taken in lieu of a rent deposit or bond.

As ever it is important to obtain professional advice as to your particular circumstances and the lease terms etc. when considering this sort of arrangement. If required we can put you in touch with the particular insurers providing this type of cover.

Martin Edwards
Partner, Commercial Disputes Team
T: 0870 763 1340
E: martin.edwards@sghmartineau.com

© Martineau 2009

• Human Resources

UK retirement age challenge fails - but law must change | back to top

The Employment Equality (Age) Regulations 2006 (the Regulations) allow employers to retire employees at the age of 65 provided they follow the prescribed procedure. Age Concern challenged the Regulations claiming that the default retirement age (DRA) was discriminatory on the grounds of age and contrary to the terms of the EU’s Equal Treatment Framework Directive.

In a significant judgment [[2009] EWHC 2336 (Admin)], the High Court has ruled that the UK default retirement age of 65 is lawful. However, Mr Justice Blake ruled that if the Regulations were introduced today they were unlikely to be lawful. He said that the government cannot rely on the economic climate in 2006, which is so different from today’s, to justify the continuing existence of the DRA.

In making his decision, Mr Justice Blake said he took into account the fact that the government had brought the date for the review of the DRA forward from 2011 to 2010. He gave an unequivocal indication as to what he thought should be the result of that review: “I cannot presently see how 65 could remain as a DRA after the review”.

This decision means that the approximately 300 age/retirement-related Tribunal claims that have been stayed pending the outcome of the case will now be dismissed. More fundamentally it means that employers can continue with current practice, particularly given that Age Concern has said it will not appeal.

Employers should not be breathing a sigh of relief just yet however because the strong words of the High Court mean that the end of the DRA is imminent. The 2010 review is not far away. We will have to wait and see how the review progresses and whether the government will use the Equality Bill as the vehicle for bringing in this substantial change, but one thing seems clear: change is bound to come.

Jane Byford
Partner and Head of Employment & Pensions Group
T: 0870 763 1378
E: jane.byford@sghmartineau.com

Sian Howells
Solicitor, Employment & Pensions Team
T: 0870 763 1446
E: sian.howells@sghmartineau.com

© Martineau 2009

Compromise agreements - tax issues | back to top

One of the points that needs to be considered by a university when negotiating a compromise agreement is the tax due on any payment or benefit under the agreement.

It is widely known that the basic tax position is that the first £30,000 of the cash sum is free of tax. However, the £30,000 exemption does not apply if and to the extent that the cash sum is not in settlement of claims but is in compensation for something else, for example, the employee’s agreement to new restrictive covenants. There are also numerous situations when the £30,000 exemption may not apply:

Where any part of the cash is payable to the employee under the contract i.e. s alary and benefits up until the termination date. Section 62 of the Income Tax (Earnings and Pensions) Act 2003 defines taxable earnings as:
1. any salary, wages or fee;
2. any gratuity/profit/benefit of any kind obtained by the employee for money; or
3. anything else that constitutes an emolument of the employment. It is important to note that this will include a contractual bonus (anything that is or looks like a reward for work done), holiday pay, a payment in lieu of notice (PILON) made pursuant to a PILON clause in the contract etc.
  
  Even if there is not a PILON clause in the employment contract itself, other documentation such as the staff/employment handbook may include a PILON or it could be implied into the contract by custom and practice if the employer regularly pays it. Where there is a PILON clause the Revenue says that a payment of compensation of the same or similar value as the payment that would have been made if the employer had exercised its contractual discretion to make a PILON payment will be treated as taxable. Therefore the fact that an employer has discretion under the contract cannot be relied upon to ensure that the amount paid comes within the £30,000 exemption.
If the employee’s retirement date is in the foreseeable future then the employer must be careful to ensure that the Revenue will not treat the payment as an unapproved lump sum retirement benefit which is taxable, rather than a compensation payment for loss of office. Provided the employer is terminating in breach of contract, or the payment is a realistic commercial one to avoid the risk of the employee suing and there is no motive to give the employee a lump sum to start off retirement then it should be safe to make the payment tax free, but it is worth considering a tax indemnity.
Another risk is signing a compromise agreement long in advance of the termination date. The Revenue could challenge the reason for the payment: for example, that it is a retention bonus or variation of contract payment rather than a termination payment in which case the £30,000 exemption from tax would not apply. In these circumstances, the employer has four options:
1. take the risk and arrange for the agreement to be signed and if the Revenue do decide to challenge the payment then seek to rely on the employee tax indemnity clause in the agreement;
2. arrange for the agreement to be signed in principle but agree not to date and complete it until nearer the termination date. Here the theoretical risk for both parties is that the other might decide not to complete;
3. allocate a certain amount of the compensation as “retention monies” which would be taxed in the usual way and pay the remainder as the termination payment; or
4. obtain Revenue clearance. However, this is likely to delay the severance process and indeed flag the issue to the Revenue at the outset.
There has been much discussion in relation to compromise agreements which include a “repayment clause”. This is a clause which says that, if the employee decides to breach the compromise agreement (i.e. bring a claim against the employer), then the employee must repay the settlement sum. It has been argued that because the settlement sum is lost if the employee brings a claim then the payment must, at least in part, be consideration for a restrictive covenant. The Revenue has agreed that:
1. compromise agreements contain an implied undertaking not to issue proceedings against the employer;
2. it makes no difference if that undertaking is set out expressly as part of a repayment clause provided the sum of money payable under the compromise agreement is a real attempt to compromise the substantive claims;
3. no tax is chargeable on any aspect of the monies paid under a compromise agreement even where that money is repayable if the employee breaches an undertaking not to commence litigation as long as it falls within the £30,000 figure. However, if the amount paid under the agreement is excessive with regard to the right to take action, the Revenue reserves the right to investigate.

It is important to note that statutory redundancy payments are included in the calculation of the total £30,000 exemption and therefore not taxable. This is also generally the case for any enhanced/contractual redundancy payment. It is important however to ensure that it is a genuine redundancy situation to benefit from this tax exemption.

There are many other taxation issues that can arise when negotiating a compromise agreement. If in any doubt it is important that employers seek advice. Even if there is a tax indemnity in the agreement, an employer will want to avoid the risk of a Revenue investigation.

Jane Byford
Partner and Head of Employment & Pensions Group
T: 0870 763 1378
E: jane.byford@sghmartineau.com

Sian Howells
Solicitor, Employment & Pensions Team
T: 0870 763 1446
E: sian.howells@sghmartineau.com

© Martineau 2009

Right to legal representation at internal disciplinary hearings | back to top

Under UK employment law, an employee who is called to a disciplinary hearing has the right to be accompanied by a fellow worker, a trade union representative or an official employed by a trade union where the disciplinary hearing could result in a formal warning or some other disciplinary action.

So what happens if an employee wants to be accompanied at the disciplinary hearing by a legal representative? Generally, there is no right to legal representation unless there is something to this effect in the contract or disciplinary procedure or the employer consents to this. However, following the Court of Appeal’s recent ruling in the case of Kulkarni v Milton Keynes Hospital NHS Foundation Trust [Court of Appeal, Civil Division, 23 July 2009] and the High Court’s recent ruling in R(G) v The Governors of X School [Queen’s Bench Division (Administrative Court) 18 March 2009], there are now some other circumstances in which employees of public authorities have the right to legal representation at internal disciplinary hearings.

Facts

In both cases, the claimants faced disciplinary action for allegations of serious misconduct.

Dr Kulkarni was accused of improperly touching a patient and was suspended with immediate effect, on full pay, pending an investigation into allegations of sexual assault. His employer said that he could not be accompanied at the disciplinary hearing by a legal representative. He applied to the High Court for an order compelling the Trust to allow him to have legal representation on the basis that failure to provide this infringed his right to a fair trial and was a breach of the implied term of trust and confidence. The High Court rejected his claim but the Court of Appeal overturned the decision. This was based largely on the wording of a new disciplinary procedure within the NHS. The Court of Appeal construed the procedure as meaning that Dr Kulkarni was contractually entitled to be represented at his disciplinary hearing by a lawyer.

The Court of Appeal also said that if it had been necessary for it to determine the matter from a human rights perspective, it would have held that employees of public bodies should be allowed to be accompanied by a lawyer at disciplinary hearings in circumstances where they are facing charges that are of such gravity that, if proven, they will effectively be barred from employment in the profession. Although the Trust has leave to appeal this decision to the House of Lords, this ruling is in line with the recent High Court ruling in R v (G) Governors of X School and it would be surprising if it were overturned.

In the High Court case, G worked as a music assistant at a school but was summarily dismissed for having kissed a 15 year old boy (about which he faced criminal charges). He also faced the prospect of being struck off as a teacher, by having his name added to a list of those not allowed to work with children.

The school refused G’s request to have legal representation on the grounds that an employee could only be represented by a colleague or trade union representative.

The High Court held that G was entitled, by reason of his right under article 6 of the European Convention of Human Rights, to a fair hearing in a civil matter. As such, given the seriousness of the allegations against him and the potentially grave implications for his future teaching career, G could not be fairly expected to represent himself at the disciplinary and appeal hearings. G was therefore entitled to legal representation at both hearings as an enhanced measure of procedural protection under article 6. The Court also held that G’s ability to pursue an unfair dismissal claim in an employment tribunal was an insufficient alternative remedy.

Comment

There has been much comment that these cases would apply in other public sector contexts such as universities, for example in the case where an academic was dismissed for a “career-threatening” issue such as plagiarism. But is this really the case?

The cases above both related to allegations which, if proven, would have resulted in the relevant supervisory bodies (the General Teaching Council and the General Medical Council) taking action to prevent the employees from practising their chosen professions. However, in a university context there is no requirement on most academics to register with a supervisory body. As such, it is highly arguable that dismissal by a university, even for a serious matter such as plagiarism, would not inevitably lead to the end of a career. Other universities would still have a choice of whether or not to employ someone who was dismissed by a previous university employer. It is likely that most would not choose to do so, but that is a long way from saying the end of a career was inevitable.

That said, if a disciplinary allegation involved a criminal offence which meant that the person was no longer able to work in a particular area by law, a right to legal representation might be appropriate. Examples could include offences against vulnerable adults, or a finance director who might be struck off by the relevant professional body if dishonesty allegations were proved. However, these circumstances would be highly unusual.

So, other than chartered universities where the Model Statute gives the right to legal representation in certain circumstances, and except in other highly unusual circumstances, universities should be robust and not give in to demands for legal representation at disciplinary hearings. Policies should simply refer to the normal position of employees having a right of representation by a trade union or work colleague.

Jane Byford
Partner and Head of Employment & Pensions Group
T: 0870 763 1378
E: jane.byford@sghmartineau.com

© Martineau 2009

© Martineau

The bulletin contains a summary of complicated issues and should not be relied upon for specific matters. You are advised to take legal advice on particular problems. Please contact us and we will be happy to assist.