Resurrected consultation on public sector exit payments

The Government has recently published a consultation resurrecting plans to put in place a £95,000 cap on public sector exit payments.

The Government first consulted on such a cap in August 2015, having revealed that public sector exit payments between 2011 and 2014 had cost around £6.5 billion and that 2,000 of these payments in 2013-14 alone totalled more than £100,000. The view of the Government was that six-figure exit payments were unfair, both on the majority of exiting public sector workers who did not receive such a high payment (97% received less than £95,000), and on the taxpayer.

Following the consultation, legislation was passed to empower the Treasury to implement regulations to impose a £95,000 cap. The draft Public Sector Exit Payment Regulations were published by the Government in 2016.

Fast-forward just under three years to 2019 and the 2016 draft regulations remain unimplemented. On 10 April 2019 the Government resurrected the proposals for the cap by publishing new draft Restriction of Public Sector Exit Payment Regulations 2019 for consultation.

It is the Government’s intention that the cap will apply to the whole of the public sector and, for the avoidance of doubt, a full list of public bodies to which the cap will apply has been published in a draft schedule to the regulations. However, the Government has made clear its expectation that public sector authorities not currently listed in the schedule will voluntarily apply the cap when agreeing exit payments, despite the lack of legal obligation to do so.

The proposed cap for exit payments remains at £95,000 and would apply to the following:

• Payments made on account of dismissal by reason of redundancy (with the exception of redundancy payments the payee is entitled to under statute);
• Payments made to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost of a pension scheme of such a reduction not being made (where the payment results in an extra cost to the employer);
• Payments made pursuant to a conciliation or settlement agreement or an award of compensation under the ACAS arbitration scheme (other than those made in respect of discrimination and whistleblowing claims, see below);
• Severance payments;
• Payments made in the form of shares or share options on loss of employment;
• Payments made consequently upon a voluntary exit from employment;
• Payments made in lieu of notice due under a contract of employment that exceed one quarter of the payee’s annual salary;
• Payments made to extinguish any liability to pay money under a fixed-term contract; and
• Any other payment made as a consequence of loss of employment, whether under a contract of employment or otherwise.

The following payments are not considered ‘exit payments’ under the draft regulations and, as such, are not proposed to be subject to the cap:

• Payments made in respect of death or incapacity resulting from illness, injury or accident;
• Payments made in relation to early retirement for firefighters;
• Payments made in the judiciary;
• Payments made in respect of annual leave due under a contract of employment but not taken;
• Payments made in compliance with a court or tribunal order; and
• Payments made in lieu of notice due under a contract of employment that does not exceed one-quarter of the payee’s annual salary.

Certain public sector exit payments made in the devolved nations will also not be subject to the cap. The draft regulations do not cover exit payments made to the holders of the following offices in Wales:

• Member of the National Assembly for Wales;
• The First Minister for Wales;
• Welsh Minister appointed under s48 of the Government of Wales Act 2006;
• Counsel General to the Welsh Government;
• Deputy Welsh Minister;
• Elected councillor of a county council or a county borough council in Wales;
• Member of a National Park Authority in Wales; and
• Member of a Fire and Rescue Authority in Wales.

Welsh ministers would be able to make similar regulations to cover these offices if they chose to.

In Scotland, the regulations do not cover exit payments made by the Scottish Parliamentary Corporate authority or any authority which exercises functions devolved to Scotland.

Draft regulations 11 and 12 give powers to ministers to relax the cap in compliance with any directions given by the Treasury. A mandatory direction has been issued by the Treasury requiring the cap to be relaxed in the following circumstances:

• Where the obligation to make the payment arises as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006;
• Where a payment of compensation is made in respect of a claim of discrimination and/or whistleblowing because the minister is satisfied that an employment tribunal would award compensation; and
• Where certain payments are made by the Nuclear Decommissioning Authority.

A discretionary power to relax the cap is provided to a minister who is satisfied that one of the following exceptional circumstances exists:

• Not exercising the power would cause undue hardship; or
• Not exercising the power would significantly inhibit workforce reform; or
• An exit agreement was made before the coming into force of the regulations and: (i) it was the intention of both parties that the exit would occur before that date; and (ii) any delay to the date of exit was not attributable to the employee.

The draft 2019 regulations are largely similar to those published in 2016. One important difference is that payments made in lieu of notice that do not exceed one quarter of the payee’s salary are included on the list of payments exempt from the cap in the 2019 regulations. Moreover, the 2019 regulations do not appear to include a provision making entitlement to an exit payment exceeding the cap unenforceable. As such, if a public sector employee were contractually entitled to an exit payment exceeding £95,000, the regulations in their current form might not interfere with this arrangement.

If you have been following public sector exit payments you may remember that separate regulations were drafted around the same time in 2016 allowing clawback of exit payments if the employee returns to employment in the public sector within 12 months. Currently it does not appear that these regulations are being resurrected but we will keep you informed.

The consultation on the proposed draft regulations remains open until 3 July 2019.