Education Matters – Capping exit payments in the public sector

Proposals to restrict the level of payments made to departing public sector workers have resurfaced and will apply to the majority of public sector employees and office-holders, including those employed by publically-funded education bodies.

Back in 2015, the Government first announced its intention to end ‘six-figure exit payments’ for public sector workers. The power to impose a £95,000 cap on termination payments was introduced by the Enterprise Act 2016. Draft regulations setting out the detailed provisions were published in November 2015 but were not brought into force and disappeared off the legislative radar.

The regulations have now resurfaced in an amended form, and a further consultation has been issued. Alongside the draft regulations, draft guidance has been published to explain how relevant public sector employers are expected to implement the legislation. The consultation closes on 3 July 2019. No implementation date has yet been announced, but it is rumoured that the proposals will take effect later this year.

Which public sector employers are covered?

The cap will eventually apply to the whole of the public sector, but with exemptions for certain sectors such as the armed forces and security services. The Government is planning to adopt a phased implementation of the cap, but in effect most public sector employees will be covered in the first stage, including all academies and maintained schools. A full list of the bodies in scope of the regulations is set out in Schedule 1 of the draft regulations.

Which payments are included in the cap?

The cap applies to payments made in consequence of the termination of employment or office, whether or not a contract of employment is in place. It applies to the following payments, whether made to employees or office holders:

• redundancy payments, whether statutory or contractual (an individual is entitled to receive their full statutory redundancy payment but this counts towards the cap)
• payments to reduce or eliminate an actuarial reduction to a pension on early retirement (‘pension strain’ payments)
• payments of compensation under a COT3 or settlement agreement (but see below for circumstances when the cap can be relaxed in respect of such payments)
• any severance or ex gratia payment
• payments in the form of shares or share options
• any payment on voluntary exit
• payments in lieu of notice (unless such payment does not exceed one quarter of salary)
• payments to extinguish any liability under a fixed term contract
• any other payment in consequence of termination of employment or loss of office.

The cap imposed under the regulations will take precedence over existing contractual agreements, regulations and other schemes already in place that make more generous provision for exit payments.

Exempted payments and relaxation of the cap

Payments in respect of accrued but untaken annual leave and in respect of death in service or for incapacity as a result of accident, injury or illness are excluded, as well as payments made pursuant to an order of any court or tribunal.

In calculating whether the cap applies, employers must take into account all exit payments received by the individual within a 28 day period, including payments from another public sector employer. However, an individual is entitled to receive a statutory redundancy payment from a second relevant authority, even if this means the total amount exceeds the £95,000 cap.

The regulations also include a power for the cap to be relaxed by a Minister of the Crown (or a delegated authority) in accordance with HM Treasury Directions. Importantly, these directions provide for a mandatory relaxation of the cap in certain circumstances, including where payment is made as a result of TUPE, and where payment is made to settle a whistleblowing or discrimination complaint (provided the employer is satisfied that the claim would be upheld). Discretionary relaxation of the cap is also permitted in exceptional circumstances, subject to prior approval from HM Treasury. Public sector bodies are required to publish information about any decisions to relax the cap, which the guidance suggests should be included in their annual accounts.

What will be the impact of these changes?

The cap was originally intended to put a stop to large exit payments being made to so-called ‘fat cats’ in the public sector. In practice, the cap will potentially apply to a broad range of public sector employees, particularly if payments are required to ensure unreduced pension benefits on early retirement. However, the exclusion of payments for incapacity and payments to settle whistleblowing or discrimination complaints will be significant, in view of the potentially unlimited compensation awarded in such cases.

For further information or advice on exit payment caps, please contact Sonya O’Reilly or a member of our Employment Team.

This article is from the spring 2019 issue of Education Matters, our newsletter for our clients and contacts in the education sector. To download the latest issue, please visit the newsletter section of our website. Law covered as at May 2019.

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