269: Government confirms cap on public sector exit payments
The government has published regulations which confirm that it will introduce the long-awaited £95,000 cap on public sector exit payments (draft Restriction of Public Sector Exit Payments Regulations 2020). No specific timeframe has been given for implementation, but it is widely anticipated that the regulations will be in force by the end of this year, assuming they are approved by both Houses of Parliament. The changes will have significant implications for most public sector organisations, potentially including those currently involved in restructuring or redundancy processes.
Draft regulations to introduce a cap on public sector exit payments were first published at the end of 2015 but were not progressed. In 2019, the proposals were resurrected and a fresh consultation took place which ran until July 2019. The government’s response to this consultation was published in July 2020 with the draft Restriction of Public Sector Exit Payments Regulations 2020. A timeframe for publication of final guidance and Treasury Directions covering further details of how the cap will apply in practice has not yet been confirmed.
Below are the highlights from the outcome of the consultation that clarify a number of areas:
- a full list of public sector organisations covered by the cap is set out in a schedule to the regulations. These include local authorities, the Civil Service, the NHS, schools and the police. There are some exemptions, including the armed forces and some publicly owned financial institutions;
- most elements of any payments related to termination of employment or loss of office will come within the £95,000 cap, including:
- statutory and contractual redundancy payments;
- compensation made under an Acas or settlement agreement, except those made in respect of discrimination, whistleblowing or health and safety detriment claims, or as a result of TUPE;
- severance or ex gratia payments;
- payments in lieu of notice that exceed one quarter of the employee’s salary;
- payments made in the form of shares or share options; and
- employer-funded early retirement pension payments, including any ‘pension strain’ payments to provide unreduced pension before normal pension age.
- there are some exemptions where higher payments may be made, since they are not strictly exit payments. These include:
- death in service payments;
- incapacity payments arising from accident, injury or illness;
- pay in lieu of accrued but untaken holiday;
- contractual payments in lieu of notice that do not exceed one quarter of salary; and
- payments made to comply with a court or tribunal order.
- there is no prescribed order in which payments must be counted towards the cap, although employees must receive their full statutory redundancy payment;
- if an employee is involved in multiple public sector exits within any period of 28 consecutive days, the total payment must not exceed £95,000;
- the consultation states that the government expects pension schemes, employment contracts and compensation schemes to be amended in line with the introduction of the cap, although it is unclear how this will work in practice;
- further details will be provided of a mandatory waiver process which will apply to some of the exemptions, for example, where the obligation to make the exit payment arises as a result of a TUPE transfer, or where it is likely that a Tribunal would award a higher amount in discrimination or whistleblowing cases; and
- the Regulations also give powers to ministers and to the full council of a local authority to relax the cap in exceptional circumstances, with the consent of the Treasury or in compliance with Treasury Directions.
The regulations are a step in the right direction on placing financial limits on the termination payments of public sector employees. However, it is clear that there remains uncertainty over the timeframe of implementation as well as several operational aspects, which we trust will be addressed in the finalised guidance.