The Government has this week resurrected its proposals to cap exit payments for public sector workers at £95,000.

In doing so, it dashed hopes that the draft regulations published in 2016, but never enacted, would be shelved by announcing a consultation on new draft regulations (Restriction of Public Sector Exit Payments Regulations 2019).

How relevant is this to you?

The Government has made it clear that the restriction will be implemented in two stages, although no proposed implementation date has been announced. Initially, these draft regulations will apply to local government employees (including maintained schools and fire authorities), academy schools, the NHS, police forces and the UK Civil Service. The second stage will then extend to cover any remaining public-sector employees. However, we envisage a ‘ripple effect’ for these restrictions. It is not clear from the current guidance whether the next implementation stage will extend the draft regulations to bodies that are publicly funded whilst not being public bodies themselves, for example, housing associations and care providers.

What does it mean?

The draft regulations propose that the following payments will be subject to the cap:

  • Any payment for dismissal (this includes redundancy; statutory redundancy must be paid, but there will be a cap on any additional payments that go over the £95,000);
  • Any extra payments made to an employee’s pension – it is important to note here that any payments flowing from an employee’s right to a pension, including an accrued entitlement to a lump sum, are not exit payments and will, therefore, not be restricted by the cap. However, a top-up payment by the employer, resulting in the employee receiving a greater pension than they would be entitled to, would be restricted by the cap. These are referred to as “pension -strain” payments;
  • Compensation payments (not including those related to TUPE or whistleblowing);
  • Severance or ex gratia payments, and any payment on a voluntary exit;
  • Pay in lieu of notice payments (only where this exceeds a quarter of the employee’s salary); and
  • Payment in the form of shares or options, or payment to distinguish any liability under a fixed-term contract or any other payment, contractual or otherwise, following termination of employment or loss of office.

What questions remain?

As is often the case, the draft regulations prompt as many questions as they answer! It is not clear how employers are to pay contractual pay in lieu of notice clauses or other contractual payments due to termination where such contractual payments exceed £95,000. Neither is it clear whether the cap applies to ill-health retirement lump sums. Regulation 11 refers to the discretionary power of the local authority to relax the cap in certain circumstances, e.g. where the cap would cause undue hardship or would significantly inhibit workforce reform. However, it is clear this discretionary power can only be enacted with HM Treasury consent, and only then in exceptional circumstances. There is a strong argument that the reason exits can be so costly is that they are necessary for the workforce to reform and regroup, and it is that necessity that drives up the cost. However, the guidance strongly hints that the discretion will not be exercised as frequently as those situations arise.

How can we help?

Contribute to the consultation process

We want to be part of shaping these regulations rather than just reacting to them. We will respond to the consultation process and are happy to do so on your behalf (you can find a copy of the consultation document via the link at the top of this briefing). Do contact us with your queries, your input and your comments. The consultation period ends on 3 July. We will be asking questions such as ‘what are the penalties for exceeding the cap and who will be liable?’ and ‘would consideration for separate restrictive covenants and/or legal costs be included?’.

Address any changes

If your organisation is covered by the first implementation, you may want to start to look at issues such as pay in lieu of notice clauses for executives – do they have a garden leave provision that would enable you to meet your contractual obligations and avoid the cap? Are there executives you want to exit before the cap comes into force?

Further information

If you have any queries regarding this article, or for any other employment-related issues, please contact Matthew Gregson, Sarah Harnett or Doug Mullen (pensions advice).