29 Apr 2019

As most public sector organisations will know, the Government has been considering a cap on public sector exit payments of £95,000 since 2015. However, there has been little news on this over the last two years. It now looks like we are much closer to a cap being implemented.

HM Treasury has now launched a further consultation on draft Regulations to introduce the cap. It has also published draft guidance, which explains how the draft Regulations should be applied, and mandatory directions.

The Restriction of Public Sector Exit Payments Regulations 2019 (the Regulations) will implement sections 153A to C of the Small Business, Enterprise and Employment Act 2015. They will apply to England, Scotland and Wales but special provisions apply to Scotland and Wales.

The consultation will run until 3 July 2019 and is here. Responses can be submitted online, via email or by post.

This note summarises the draft Regulations and guidance. Both documents are subject to change as a result of responses received to the consultation.

Which bodies are included?

The Regulations extend to all bodies where employment terms are subject to approval by the Government. There will be two stages of implementation: Schedule 1 to the Regulations runs to 25 pages and lists all the bodies that will be covered in the first stage; the second stage will extend the Regulations to the whole of the public sector in due course.

Broadly, the following bodies are included:

  • The UK civil service, its executive agencies, non-ministerial departments and non-departmental public bodies (including Crown non-departmental public bodies and the Prison and Probation Service)
  • Local government (including fire authority employees and maintained schools)
  • Police forces
  • Academy schools
  • The NHS in England and Wales.

HM Treasury will be guided by the ONS classification of bodies. Where a public body is not listed in Schedule 1, there is no legal obligation to apply the cap but the Government expects them to apply similar arrangements voluntarily. Schedule 1 will be updated from time to time.

The Regulations will not apply to:

  • The relevant Scottish, Welsh and Northern Irish authorities
  • The Secret Intelligence Service, the Security Service, GCHQ and the Armed Forces.

What does the cap cover?

The cap will initially be £95,000 but can be changed. The following payments will be subject to the cap:

  • Redundancy lump sums
  • Pension top-up payments and pension strain payments if they involve a cost to the employer
  • Payments made under settlement agreements or Acas COT3 agreements
  • Severance and ex gratia payments
  • Payments in the form of shares and share options
  • Payments on voluntary exit.
  • Payments in lieu of notice that exceed a quarter of the employee's annual salary
  • Any other payments made in connection with termination of employment or loss of office.

These payments are not included in the cap:

  • Payments made in respect of death in service
  • Payments made in respect of incapacity due to accident, illness or injury (but not injury to feelings)
  • Accrued pension rights (including the right to pension commutation lump sums)
  • Payments made in respect of accrued but untaken holiday
  • Payments made to comply with a court or tribunal order
  • Payments in lieu of notice that do not exceed a quarter of the employee's annual salary.

How the cap works

A public sector authority must not make an exit payment exceeding the cap. If it does so, the payment (or the excess above £95,000) will not be void but sanctions may be applied to the authority. If the payment would exceed the cap, the authority has to reduce the payment but must not reduce any statutory redundancy payment. If two exits occur in respect of the same person in 28 days, the total amount of exit payments cannot exceed the cap. Where an individual is employed by two public sector bodies and is due to receive an exit payment from one of them, they must give details to the other employers.

The exit payment is considered to have been received in full on the date of termination of employment. This is presumably to avoid a situation where a payment is made in several stages to get around the cap.

Relaxation of the restrictions

Draft HM Treasury directions set out mandatory rules with regard to the relaxation of the restrictions in limited circumstances.

First, a Government minister must relax the restrictions if the obligation to make a payment arises as a result of TUPE, or where the payment relates to a whistleblowing or discrimination claim and the minister is satisfied on the balance of probabilities that an employment tribunal would make an order of compensation if it heard the complaint. The employer will need to make legal advice available to the minister to confirm the likelihood of a successful claim.

Secondly, a minister may relax the restrictions in some discretionary cases such as where imposing the cap would cause undue hardship, or where payment is necessary to achieve workplace reforms (in which case a business case will be needed). These are likely to be exceptional cases and HM Treasury approval will be needed.

Where the restrictions are relaxed, the public sector body must keep full records for three years.

The inclusion of Acas COT3 agreements in the cap means that the cap will impact more than just redundancy processes and other exit negotiations. For example, it may have a significant impact on litigation strategies for public sector bodies: the types of claims that may result in awards exceeding the cap go beyond merely whistleblowing and discrimination claims. Therefore, if the cap is implemented in its current form, public sector bodies will need to put processes in place to ensure it is taken into account both when employees are leaving and when dealing with litigation.

Implementation

The cap will apply to any exit after the date the Regulations come into force. No date has been given for this yet. However, if an agreement is entered into with the intention that the employee will exit before the Regulations come into force and the exit is delayed for reasons beyond the employee's control, the restrictions can be relaxed by a minister.

Other proposals

There is currently no proposal to resurrect the repayment of exit payment provisions, which was the subject of a previous Government consultation. It had been proposed that such a repayment obligation would apply if the employee returned to the public sector within 12 months after receiving an exit payment.

Consultation questions

The consultation seeks views on whether the correct bodies are included, whether the guidance is adequate and clear, and whether the proposals will have other impacts. One area that readers may have views on is whether the relaxation provisions go far enough or whether they should include, for example, a wider category of types of employment tribunal claim that a public sector organisation may need to settle.