By David Hencke | 2 March 2012

Senior officials at the Student Loans Company discussed whether “the risk is worth running” to pay its chief executive ‘off payroll’.

That was the startling phrase used by one senior civil servant in anxious e-mail exchanges within Whitehall about the arrangements for Ed Lester to work as chief executive of the Student Loans Company (SLC).

The e-mails – obtained by Exaro under the Freedom of Information Act – reveal civil servants’ worries about the deal.

An investigation by Exaro, in conjunction with BBC2’s Newsnight, revealed four weeks ago how the SLC, which is overseen by the Department for Business, Innovation and Skills (BIS) paid Lester through a personal-service company rather than as an employee.

“When the terms of the interim CEO’s remuneration were cleared with Treasury, they raised no objection to the form of the contract”
– Michael Hipkins, then BIS appointment on the Student Loans Company board

Under a concession granted by HM Revenue & Customs (HMRC), the SLC paid for Lester’s services through Penna Consulting, the human-resources group, which passed payment on to his personal-service company.

The e-mail discussion about the arrangements took place in June 2010 soon after Lester’s initial appointment as interim chief executive was hastily agreed.

One official, whose name has been blocked out, told Sir Deian Hopkin, then chairman of the SLC, in an e-mail: “The terms for appointment have been agreed through BIS directly with the employment agency, Penna, again on a consultancy basis.

“The same risks apply to whether this would be deemed a true consultancy arrangement by HMRC. This is exacerbated by the issue of offices held by this post: accounting officer and director at Companies House.

“There is no absolute requirement in the terms of the Companies Act for an executive director to be an employee (absent anything in SLC’s constitution). However, it is unlikely that they would be otherwise, no matter the title or presence of a service agreement, given the likely level of involvement in the company would be enough for them to meet the common-law test of employment.”

A few days later, Daniel Jenkins of the BIS legal department, wrote in an e-mail: “Applying the tests of employment status, I wonder whether it is possible for a CEO to be anything other than an employee/office-holder, given the degree of integration into the company that he presumably needs to carry out his duties.”

And a few days after that, Michael Hipkins, the then BIS appointment on the company’s board said in an e-mail to Lester, Hopkin and Sally Smedley, an SLC non-executive director: “The legal advice I have received [from BIS] is that it does not appear that the articles of the company prohibit the CEO as a director of the company from holding a consultancy contract, though that does not say anything about the employment status of the interim CEO.”

“The legal advice I have received is… that the individual cases would be judged on a number of factors, including the degree of integration with the company which is needed for the CEO to carry out his duties.

“Having said that, the HR advice is that, in practice, interims on short-term contracts, often held through a limited company via a recruitment agency, hold all kinds of positions where they act as employees.

“The risk, which nearly the whole interim industry currently runs, is that a contract for ‘supplying an individual’ is deemed to be an employment contract, rather than a commercial contract for services. So it appears there is a risk, and there is a judgement whether the risk is worth running.

“For my part, I note that when the terms of the interim CEO’s remuneration were cleared with Treasury, they raised no objection to the form of the contract, nor that there was an agency acting as intermediary.”

“It looks as if the company would be running no greater a risk than any other company employing interims on consultancy contracts; and the fact that the Treasury raised no objection to the proposed arrangement in the case of the CEO must mitigate that risk further.”

Lester worked as interim chief executive from May 2010 until February 2011, when he was confirmed in “permanent” post in a further two-year-contract.

Documents show that the then cabinet secretary, Gus O’Donnell, was “content” with Lester’s “permanent” contract.

Nonetheless, Lester’s arrangements were especially notable because he would become the SLC’s accounting officer.

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