Latest plans for public sector exit payments

The Government first announced its intention to end ‘six figure exit payments’ for public sector workers in 2015. The Small Business, Enterprise and Employment Act 2015, as amended by the Enterprise Act 2016, provides the power for the Government to introduce this cap.

On 10 April 2019, the Government published a consultation which ran until 3 July 2019 and invited responses on the implementation of a £95,000 cap on public sector termination payments and associated operational aspects. We covered these proposals in our Employment Update Capping exit payments in the public sector.

Last week the Government published Public sector exit payments: Response to the consultation, which confirmed the Government’s intention to proceed with these proposals and publish revised regulations and draft guidance.

When will the Regulations come into force?

On 27 July 2020, the Government published the draft Restriction of Public Sector Exit Payments Regulations 2020 (Draft Regulations). At present we have no confirmed timescale for these Regulations to come into force. The timeframe for the publication of the finalised guidance and necessary Treasury directions is also yet to be announced.

The response makes it clear that the Government has decided to scrap its planned ‘phased introduction’ of the cap and will implement the changes across all of the public sector at the same time (with certain exemptions).

Which public sector bodies are caught by the Draft Regulations?

A full list of the bodies in scope of the regulations is set out in Schedule 1 of the draft regulations, but the new rules will broadly apply to the civil service, NHS and local government employees, the police and all academies and maintained schools.

The Armed Forces, the Secret Intelligence Service, the Security Service, and Government Communications Headquarters will be exempted along with certain publically owned financial institutions.

What exit payments are within scope?

The cap, set at £95,000 but to be kept under review, will apply in respect of employees and office holders leaving a ‘relevant authority’ as defined in the Draft Regulations.

The cap applies to the aggregate sum of payments made in connection with the termination of employment or loss of office. In addition, where two or more relevant public sector exits occur in respect of the same person within any period of 28 consecutive days, the total amount of the exit payments made to that person in respect of those exits must not exceed the exit payment cap.

The relevant payments in scope apply to most elements of any exit payment, including:

• redundancy payments, whether statutory or contractual (an individual is entitled to receive their full statutory redundancy payment but this counts towards the cap)
• payments of compensation under a COT3 or settlement agreement (but see below for certain payments which are excluded)
• 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 (but only any amount in excess of one quarter of annual salary)
• payments to extinguish any liability under a fixed term contract
• any other payment in consequence of termination of employment or loss of office; and
• employer-funded early retirement pension payments (including any “pension strain” payments to provide unreduced pension before normal pension age).

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.

What payments will be excluded from the Regulations?

• Subject to the above, as a general rule accrued pension rights, including rights to pension commutation lump sums, are not within scope of the draft regulations because they do not normally involve any cost to the employer. The exemption for specific payments connected to the Firefighters Pension Scheme was supported by respondents to the consultation and will remain.
• Payments which are not strictly “exit payments”, such as death in service payments or for incapacity due to accident, injury or illness, the part of any payment in lieu of notice that does not exceed one quarter of the relevant person’s annual salary, and pay in lieu of accrued but untaken holiday.
• There will be a mandatory waiver in respect of a payment where liability has arisen as a result of a health and safety detriment-related claim, whistleblowing, discrimination or as a result of the TUPE regulations.
• In addition, Crown Ministers and the full council of a local authority will have the power to relax the cap in certain ‘exceptional’ circumstances and either with the consent of the Treasury or in compliance with Treasury directions. Where this power has been exercised, a written record must be maintained for a period of three years.

Note that the order in which payments are counted towards the cap will not be prescribed, giving employers and employees discretion and flexibility based on individual circumstances. Individuals will be entitled to receive their full statutory redundancy payment, which means that in practice the Government expects employers to cap the contractual redundancy payment in the majority of cases.

The revised guidance, once published, will provide public bodies with more details of how the new rules will apply in practice.

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

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