March 2007
CONTENTS

Short summaries of each article are shown below. If you would like to view the full article, click on the underlined links. To return to the start, click on the "Go back" link.

 

STRATEGY, STUDENTS AND GOVERNANCE

Students' unions and the Charities Act 2006

Our article looks at the possibility of embedding a students' union within the university and highlights some of the questions which will need to be dealt with in order to achieve this.  Read more

Charities Act 2006:  the public benefit test

Our article comments on draft guidance published by the Charity Commission on the way they intend to approach the public benefit test, and how this might apply to universities. Read more

 

HUMAN RESOURCES

Court of Appeal widens whistleblowing protection

This decision overrules previous case law and extends the scope of protection for whistleblowers, shifting the focus onto the issue of reasonable belief of unlawful behaviour, provided the disclosure was made in good faith.  Read more

Implications for staff management of new USS funding charge

We comment on the implications for employment practices and staff performance management of the recent USS changes.  Read more

 

 

FULL ARTICLES

 

STRATEGY, STUDENTS AND GOVERNANCE

Students' unions and the Charities Act 2006

This article applies to England and Wales.

As we have reported in earlier editions of the Universities Legal Briefing, the Charities Bill obtained Royal Assent on 8 November 2006 and became the Charities Act 2006. Many of its provisions have now come into force but we are still awaiting the implementation of a number of significant provisions including those relating to exempt charities. These are expected in early 2008.

Students' unions presently enjoy exempt charitable status by reason of their association with their parent university.  They are treated as falling within the exemption in the Charities Act 1993 either by virtue of being administered by the university or because they were treated as established for the general purposes of, or for any special purpose of, or in connection with the university.  This exemption is being removed and students' unions will no longer be exempt from registration with the Charity Commission.

Embedding a students' union within a university

This change has motivated universities to consider the legal status and structure of their students' union and whether it is a part of the university or a separate entity. As a result some universities are looking at proposals to embed their students' union within the university, essentially as one of its departments, in order to avoid separate registration. While this may not be impossible, it is not a step that can be taken lightly.  We outline here some of the key questions which will need to be addressed and answered.

 

In our view, the provisions relating to students' unions contained in the Education Act 1994 will continue to apply, which means that the students' union must have a written constitution, be accountable for its finances and have democratically elected officers.  This raises the question of how a department of a university can have a written constitution of its own. The Oxford English Dictionary definition of the word "constitution" is "body of fundamental principles or established precedents according to which a state or organisation is governed" or "composition or formation" all of which tend to point towards a separate organisation. A written constitution would be expected to include an organisation's objects and powers to act and the procedures by which it is to operate. A department of a university would be confined by the university's constitution and any overarching regulations for its administration. These will therefore need to be reviewed as part of any plan to embed the students' union within the university.

Part II of the Education Act 1994 defines "students' union" as, amongst other things, "an association for the generality of students at an establishment……..whose principal purposes include promoting the general interests of its members as students". The Act clearly contemplates a students' union being a membership body as well as a representative body. How the students would become members of a department of the university with the ability to exercise voting rights over its activities is difficult to envisage. University regulations and departmental policies and procedures would need to be carefully drafted with these issues in mind.

Then of course there is the question of whether the students' union itself wants to be embedded within the university.  It would have to make its own decision, acting in accordance with its constitution, and this may well be the biggest hurdle.

 

Taxation

Even the most careful of drafting to comply with the provisions of the Education Act while at the same time trying to avoid the provisions of the Charities Act 2006, would not necessarily prevent HM Revenue and Customs (HMRC) from concluding that in law the students' union is a separate organisation. This would result in the students' union not being able to shelter under the University's VAT exemption - as we saw in the Court of Appeal decision concerning the University of Leicester's Students' Union.

In relation to other tax exemptions enjoyed by charities, HMRC will assess whether the students' union is a charity for tax purposes based on its governing documents and activities. A charity is defined in tax legislation as "any body of persons or trust established for charitable purposes only". When assessing the organisation, HMRC will not assume that just because it has not registered with the Charity Commission it should not be treated as a charity (charities being entitled to favourable tax treatment).  A charity is exempt from tax on most forms of income and capital gains if they are applied for charitable purposes.

Responsibilities of charity trustees

 

A further concern to universities considering embedding their students' union is what responsibility officers of the students' union will continue to have. Where the students' union is currently an exempt charity, its officers are considered to be charity trustees and subject to the responsibilities laid down in charity law.  If it became embedded within the university, officers would no longer have a trusteeship role and would not be accountable as such.

 

The university should also be mindful that any acts or omissions of the students' union department will be acts or omissions of the university and it will not be able to distance itself. This will mean that the university would be advised to take a greater control over the activities of the students' union; something which is not envisaged by the Education Act and perhaps not likely to be readily acceptable to the students themselves.

What will be the effect on a students' union of becoming a registered charity?

If the students' union remains independent of the university it will need to register separately with and become regulated by the Charity Commission. In seeking registration the students' union will need to show that it meets the public benefit test (see the separate series of articles on this topic in earlier Briefings):-

 

http://www.pinsentmasons.com/media/1165252368.htm

http://www.pinsentmasons.com/media/1769514434.htm http://www.pinsentmasons.com/media/1725626512.htm

 

Once registered with the Charity Commission, the students' union will then have a number of additional requirements to comply with over and above those experienced as an exempt charity, namely:

 

  • the production of accounts and audit of accounts;
  • completing an annual return; and
  • drafting an annual report;

As regulator, the Charity Commission will also have greater powers over the registered charity. It will be able to institute an inquiry into the activities of the students' union and call for documents relating to the students' union to be provided to it.

The Charity Commission will also be able to exercise its powers to act for the protection of charities in relation to the students' union. If, after the institution of an enquiry, the Charity Commission is satisfied that there has been misconduct or mismanagement in the administration of the students' union it can make an order to suspend or remove a trustee or make a scheme for the administration of the charity.

The students' union will also have to comply with the restrictions on dispositions and mortgaging of charity land contained in sections 36 and 38 of the Charities Act 1993.

Next month

In next month's Universities Legal Briefing we will be writing about the possibility of students' unions incorporating and whether the new Charitable Incorporated Organisation is an appropriate vehicle. Go back

 

gayle.ditchburn@pinsentmasons.com

 

Charities Act 2006:  the public benefit test

(This applies to England and Wales only).

The Charity Commission has published draft guidance on the meaning of public benefit.  This draft guidance gives us a clearer idea of the way the Charity Commission intends to approach the public benefit test and how it might apply to universities. 

Charities Act 2006

The Charities Act 2006 lists 13 purposes which are considered charitable, one of which is the "advancement of education".  A charity must show their purpose is for the public benefit.  Previously, the advancement of education was presumed to be for the public benefit – this will no longer be the case.

The Act does not define what is meant by "public benefit".  Public benefit will still be based on the existing case law but all charities will have to show their purposes benefit the public. 

Charity Commission Draft Guidance

The draft guidance is issued as part of a consultation exercise which the Charity Commission is required to carry out before the guidance is finalised.

The draft guidance sets out the Charity Commission's understanding of public benefit using a four-pronged test:

  • There must be an identifiable benefit.
  • The benefit must be to the public, or a section of the public.
  • People on low incomes must be able to benefit.
  • Any private benefit must be incidental.

An important point to note is that the guidance is based on existing case law – the Charity Commission have drawn these four principles out of the existing law and in each case the test has behind it the more detailed issues raised in the relevant cases.

Universities easily meet the first test – they provide students with an education which is clearly of benefit to the students but also has the indirect benefit to the wider public of others in society being educated at all levels.  The second part of the test is therefore also met – there is a benefit to the public, or a section of the public.  The fourth section of the test is that any private benefit must be incidental.  Charities can provide private benefits so long as the benefits directly contribute towards achieving the charity's purpose and/or are incidental to carrying out those purposes.  The draft guidance gives the specific example of providing someone with an education as directly contributing to achieving a charity's purposes, therefore universities will also meet the fourth part of the test.

The most difficult aspect of the test is that people on low incomes must be able to benefit.  According to the Charity Commission, people on low incomes will typically cover households living on less than 60% of the average income and people living on or below the level of income support.  The Charity Commission emphasises that the test does not mean every charity must have beneficiaries who are on low incomes but that people must have the opportunity to benefit whatever their income.

Charging fees

The media have paid particular attention to the Charity Commission's position on charities that charge fees for their services.  The Charity Commission draft guidance states that charities can charge for their services but where the charges are so high that they effectively exclude people on low incomes from benefiting (because they cannot afford the fees and do not have access to other funding to pay them) such charities may not be for the public benefit. 

Obviously universities charge fees to students, indeed they are specifically identified in the guidance as charging fees.  However, grants and loans are available to students who cannot afford the fees and therefore universities do not appear to exclude people on low incomes.  The availability of other sources of funding to help meet the costs of fees is included in the guidance as an example of a direct benefit to people on low incomes.  University statistics may also help to show that people on low incomes are not prevented from accessing university education.

Reporting on public benefit

A further element considered in the Charity Commission guidance is whether charities should report upon their compliance with this principle – this reporting element is considered in the consultation only in the context of registered charities.

The Charity Commission guidance suggests that registered charities should report on how they meet the public benefit requirement by providing a statement in their trustees' annual report.  The Charity Commission gives the example of a high fee-charging charity – it could assess and report on the value of the benefits it provides (including financial and social benefits), alongside the value of the tax breaks, or other benefits, it receives.  These reporting requirements could be implemented for accounting periods from October 2007.  At present it is not clear if exempt charities (such as universities) would need to comply with any reporting requirement.

Current timetable

Once the guidance is finalised in October 2007, the Charity Commission will look at the public benefit test for specific groups of charities that may have difficulty meeting the public benefit requirement, including fee- charging charities, and carry out pilot public benefit assessments of such charities.  It is anticipated that the new definition of charity and the public benefit requirement will come into force in early 2008.

If you or your university wish to respond to the draft guidance which can be found at: http://www.charity-commission.gov.uk/library/enhancingcharities/pdfs/pbconsult.pdf you will need to do so by 6 June 2007.  Go back

janet.hoskin@pinsentmasons.com

katherine.nightingale@pinsentmasons.com

 

HUMAN RESOURCES

Court of appeal widens whistleblowing protection

Whistleblowers don't have to be right – this is the important point made by the Court of Appeal in Babula v Waltham Forest College, a decision which overrules previous case law and extends the scope of whistleblowing protection.  This article applies throughout the UK.

In order to benefit from the protections of whistleblowing legislation, workers have to show that they have made a "qualifying disclosure". This requires the disclosure of information which in the reasonable belief of the person making it tends to show that specified types of malpractice are being committed or are likely to be committed, such as including a criminal offence or a failure to comply with legal obligations.

The key issue in Babula was whether it was sufficient for the whistleblower to reasonably believe that a criminal offence had been committed or legal obligations breached, or whether it was necessary for the disclosure to relate to matters which would actually amount to criminal behaviour or an actual breach of an applicable legal obligation. An earlier EAT decision – Kraus v Penna in 2004 – adopted the latter standard, with the result that workers could not claim whistle blowing protection if the alleged malpractice did not in fact amount to a breach of criminal or civil law.

This decision has been widely criticised on the grounds that it was not intended under the Public Interest Disclosure Act that workers should have to take legal advice before reporting malpractice in the workplace, to ensure that their allegations were technically correct. The Court of Appeal in Babula rejects the approach taken in Kraus and stresses that it is the whistleblower's "reasonable belief" and whether the disclosure was made in good faith that are key to the scope of whistleblowing protection.

 

Background

Babula was employed by Waltham Forest College as a lecturer, teaching an Access to Business course. He was informed by students that his predecessor, Mr Jalil, had deviated from the standard course curriculum by splitting the class into Islamic and non-Islamic groups and teaching religious studies to those in the Islamic group while ignoring those in the non-Islamic group. Babula was further informed of certain remarks made by Jalil to students, including comments to the Islamic group indicating that he was in support of the terrorist attacks of September 11 and wished that a similar terrorist incident would occur in London.

A student informed Babula that she had reported her concerns to her tutor, the Head of School and the Vice-Principal, who had taken the view that no action was required against Jalil. On the basis of this information, Babula was concerned that Jalil would be involved in acts of terrorism or would continue to incite religious hatred in other institutional establishments, and accordingly raised his concerns to Jalil's previous supervisor. When the college continued to ignore his concerns, he proceeded to report these allegations to the Head of School, the CIA, the FBI and the local police. He subsequently claimed constructive dismissal on the basis of the College's treatment of him after these disclosures, invoking whistleblowing protection.


Babula claimed that he had made a qualifying disclosure that he reasonably believed that a criminal offence had been committed; that the College was unlikely to report the commission of this offence; that failure to report the offence would put the College in breach of its legal obligations; and that information tending to show that the offence had been committed was likely to be concealed.

An employment tribunal disagreed, ruling that there was no protected disclosure. The essence of the alleged criminal offence by Mr Jalil was the incitement of religious hatred, not at that time a criminal offence. Nor could Babula rely on alleged breach of the College's Equal Opportunities Policy, even though this was incorporated into the Principal's contract of employment and accordingly required the Principal to take a lead on race and equality issues and ensure that appropriate action be taken against those individuals who have engaged in discriminatory or harassing behaviour on the grounds of race. The policy did not cover religious discrimination or harassment. Babula's complaint therefore did not relate to any actual criminal offence or breach of legal obligation and the tribunal struck out his complaint.

The Court of appeal overrule Kraus

The issue before the Court of Appeal centred on the meaning and effect of the words "in the reasonable belief of the person making the disclosure". Babula successfully argued that there is a qualifying disclosure if the worker discloses facts which, in their reasonable belief, tend to show that there has been/will be a relevant breach of the law and that it did not matter that no actual unlawful activity was involved. The Court of Appeal accepted that Kraus was wrong in principle and that what is important is whether the worker has a reasonable belief that a criminal offence or breach of a legal obligation would occur. It was held to be too onerous a burden to place on a worker for them to be able to establish that the facts which they believed to be true actually constituted a criminal offence or breach of a legal obligation. To expect a worker to have such knowledge of the law would be at odds with the purpose of the legislation, ie to encourage employees to come forward and make disclosures of information that are in the public interest.

Implications

This decision clearly extends the scope of whistleblowing protection and shifts the focus squarely onto the issue of reasonable belief of unlawful behaviour. On this crucial issue the Court of Appeal also reiterated that a belief can be incorrect but still reasonable. However, what is "reasonable" is to be judged objectively by the tribunal and is not decided on the subjective belief of the worker.

The Court of Appeal also endorsed the approach taken by the EAT in Darnton v University of Surrey that a "reasonable belief" has to be based on some information which tends to show that the specific malpractice has occurred rather than unsubstantiated rumour or opinion. It also remains necessary for workers to show that the disclosure has been made in good faith and disclosures will not be protected if the worker has an ulterior motive for making it.

Universities may need to check that their whistleblowing policies are consistent with the approach taken in Babula. Additionally, it would be sensible to make managers aware of the circumstances in which whistleblowing protection will be granted and of the need to ensure that those making disclosures are not penalised or victimised as a result.  Go back

catherine.barker@pinsentmasons.com

jennifer.dallimore@pinsentmasons.com

 

Implications for staff management of new USS funding charge

This article applies throughout the UK.

In December 2006, USS announced immediate changes to the arrangements for financing early retirements. This change imposes a funding charge on a University which grants retirement to an existing member, with five or more years' qualifying service, who is aged between 50 and 60 and whose employment is terminated either on the grounds of redundancy or retirement at the employer's request. This includes termination on the grounds of medical incapacity. The cost of the funding charge can be spread over a period of up to 10 years.

The charge to the institution will be the actuarial cost of the early payment of benefits before the age of 60. There are transitional arrangements in place to protect institutions which agreed retirements with staff prior to 7 December 2006 but whose retirement will take place at a later date, provided these were notified to USS before 12 January 2007.

Although the notification from USS refers to institutions granting retirement to members, the USS Scheme Rules (Rule 10.5(c)) actually allow the member to elect to take the early retirement benefit. This right of election applies automatically where the member of staff is made redundant and meets the criteria referred to above. The right of election will also be triggered in dismissals under statute on the grounds of incapacity and other cases where the employer requests the employee to retire such as retirements in the management interest.

The previous lack of a funding charge allowed early retirement to be used as a no-cost option for the university, particularly where employees were leaving under compromise agreements. This will no longer be the case. Either the university will need to meet the funding charge or look at ways of avoiding it arising. Incapacity cases are an example of where this will be very difficult.

In a genuine compulsory redundancy case, age discrimination legislation will make it difficult to factor the potential funding charge issue into selection criteria unless there is clear and compelling evidence of the prohibitive cost involved – justifying discrimination on the grounds of cost alone is exceptionally difficult. In voluntary redundancy cases, there is possibly more flexibility as it is usual for employers to allow some discretion over whether an application for VR will be accepted. However, as there is still the risk of an age discrimination claim if a request is rejected on the grounds of increased cost, any such criteria would need to be very carefully thought out – one example might be where the aim was to achieve specified cost savings and careful evidence was produced about the salary savings which could be made versus the actual cost of making those staff redundant, including any funding charge. This could give a basis for objectively justifying rejecting those volunteers whose funding charge would be significant.

Where retirement is prompted by performance or other non-redundancy reasons, institutions will have to balance the potential funding charge against the merits of agreeing the termination of the employee's employment. In some cases, it may be more appropriate to implement performance management processes which could, if performance does not improve, lead to dismissal on capability grounds. If the member of staff is dismissed on such grounds they do not have the option to elect to take early retirement. In certain cases, this could also be used as a bargaining chip to encourage staff to leave before those processes run their course.

These changes are likely to lead to increased termination costs for universities and it will be necessary under this new regime to consider carefully the potential costs of termination and the alternative management processes available to deal with the situation.  Go back

christopher.mordue@pinsentmasons.com

 

We welcome your feedback, criticism and suggestions

 

If you have any comments, or if you would like further advice or assistance with any of the issues covered in this briefing, or for information about Pinsent Masons' National Universities Team, please contact Nicola Hart, Head of Education at Pinsent Masons.

Email: nicola.hart@pinsentmasons.com

Tel: 0121-260 4050

While our Universities Legal Briefing is copyright, you are welcome to copy or forward it to colleagues within the institution, and to quote from it as long as the source is acknowledged.

© Pinsent Masons 2007

 

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