Public Sector Exit Payments

May 3rd, 2019

There has been talk for some time now (since 2015 to be precise) about introducing a £95,000 cap on public sector exit payments. However there hasn’t been much information disclosed about this subject matter since then … until now.

HM Treasury has launched a further consultation on the draft Regulations where it has specified how the Regulations should be applied. 

The Cap

At the time the decision was made to introduce a cap, there was concern that the value of some exit payments made to public sector workers were far higher than necessary and therefore disproportionate, making it unfair to the taxpayers who fund them. 

The Government therefore introduced powers to cap exit payments to the value of £95,000 in the public sector. This was specifically set out in the Small Business, Enterprise and Employment Act 2015.

So what does the introduction of the cap mean? Well, quite simply, it means a public sector body will not be able to make an exit payment exceeding the cap. If the cap is exceeded, sanctions may be applied.

What is important to note is that when calculating an individual’s exit payment, in determining whether such payment should be subject to the £95,000 cap, employers must take into account all payments that will be made to the individual within the 28 day period.

Where two or more relevant exits take place on separate days in any period of 28 consecutive days, the exit payments are treated as having been paid in chronological order for the purpose of calculating the cap. For example, where an individual leaves employment with A with an exit payment of £50,000, then leaves employment with B within 28 days, B should not make an exit payment in excess of £45,000.

Who will the Regulations apply to?

Essentially, all public sector bodies where the employment terms are subject to approval by the Government.

It has been proposed that there will be a 2 stage implementation process across the public sector. The first stage will capture most public sector bodies who will be listed in Schedule 1 of the Regulations. These will specifically include:

  • UK civil service its executive agencies, non-ministerial department and non-departmental public bodies;
  • Local government (including fire authority employees and maintained schools);
  • Police forces;
  • Academy schools; and
  • NHS in England and Wales.

The second stage will capture the remainder of the public sector employees. Where a public body has not been listed in Schedule 1, whilst there will be no legal obligation on them to apply the cap, although there will be an expectation that it will be applied. 

Who will be exempt from the Regulations?

  • The Secret Intelligence Service;
  • The Security Service;
  • GCHQ; and
  • Armed Forces.

Which payments will be subject to the cap?

  • Redundancy payments;
  • Pension top up payments;
  • Payments made under a settlement agreement or COT3 agreement;
  • Severance and ex gratia payments;
  • Payments in the form of shares and share options;
  • Payments on voluntary exits;
  • PILON’s that exceeda quarter of the employee’s annual salary; and
  • Any other payments made in connection with termination of employment.

Which payments are not included in the cap?

  • Death in service payments;
  • Accrued pension rights;
  • Payments made in respect of accrued but untaken holiday;
  • Payments made to comply with a court or tribunal order;
  • PILON’s that do not exceeda quarter of the employee’s annual salary; and
  • Payments made in respect of incapacity due to accident, illness or injury.

Can discretion be applied?

The simple is answer is yes, but only in certain circumstances. 

Where the payment relates to a whistleblowing or discrimination claim and a Government minister has the belief that an Employment Tribunal would rule in favour of the employee and make an order of compensation, or where the obligation to make a payment arises as a result of TUPE, the restrictions must be relaxed. It is worth noting that the minister would require proof of the prospects of success of any such claim.

In some instances, where imposing the cap would cause financial hardship or is necessary for workplace reform, the restriction can be relaxed. 

The consultation paper states that the employer must keep a record for a period of 3 years where the restriction has been relaxed.

It is worth noting that the cap will only apply to any exits which take place afterthe Regulations come into force. 

Whilst there had been previous discussion about a repayment obligation arising in instances where the exiting employee returned to work in the public sector within 12 months of leaving, there is currently no proposal to resurrect this. 

The consultation is due to run until 3rdJuly 2019. Responses can be submitted online, via email or by post.

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