Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
There is a cap of £95,000 covering contractual and voluntary exit payments (including pension strain costs other than on ill health retirement). This will cover all public sector bodies on a list to be provided by the Office for National Statistics (“ONS”) and may well include not only core public sector bodies such as local authorities and their trading companies but also arms-length management organisations, academies, housing associations and possibly public sector spin-outs.
The Enterprise Bill 2015/2016, currently making its way through Parliament, is going to give the Government the power to make regulations to restrict public sector exit payments. The Government has published draft regulations (“Regulations”) for the purposes of informing Parliamentary debate. The final regulations will be published after the Enterprise Bill becomes law.
The Regulations say that “listed” public sector authorities (in the list provided by the ONS) may not make exit payments which in total exceed the £95,000 cap and that an individual will not be able to enforce exit payments to the extent that they exceed the cap. Payments which will be taken into account in assessing whether the cap has been met or exceeded include:
- Redundancy payments;
- Ex-gratia payments;
- Pension strain payments on early retirement;
- Payments to buy out a fixed term contract;
- Payments for loss of employment made by way of shares; and
- Any other payment made on or in connection with loss of employment (whether contractual or not).
The following payments will not be taken into account:
- Payments made in respect of incapacity or death as a result of accident, injury or illness, such as permanent health insurance payments, pension strain payments on ill health early retirement or death benefits;
- Payments in lieu of holidays accrued but not taken;
- Bonus payments due under a contract of employment; and
- Any payment made in compliance with a court order.
There is apparently an intention that the cap will not apply to exit payments which individuals are entitled to as a result of TUPE protected terms. It will also be possible for the full council of a local authority to waive the cap and relevant ministers will also have the power to do so. It is still unclear whether any other employers or regulatory authorities will have the power to issue waivers. Any waiver granted will need to follow Treasury guidance.
There will be a new duty on individuals who leave employment with a listed public sector authority or who leave a prescribed public sector office and who are continuing in employment with a listed public sector authority or continuing in a listed public office. They will be under a duty to inform the on-going employing authority that:
- They have received an exit payment;
- The amount of that exit payment;
- The date on which they left employment or the office; and
- The name of the public sector authority that made the exit payment.
If the final regulations come into force in substantially their current form, this could mean that redundancy, early retirement and other compensation payments to high earning individuals at public sector bodies are substantially reduced. It is clear that the cap is intended to take into account contractual payments, including payments in lieu of notice. The inclusion of pension strain payments will also be significant as these payments can run into tens or even hundreds of thousands of pounds. It may also mean that it is more difficult to settle disputes with high earning staff or in discrimination or automatic unfair dismissal claims where there are losses over a long period.
The Regulations propose that all public bodies included on the list prepared by the ONS will be caught by these regulations, other than a very small number of excluded organisations. We anticipate that the list will most probably include academies, arms-length management organisations and local authority trading companies, as all these bodies receive or have received some public funding. Very recently, housing associations have been re-classified as public sector organisations by the ONS, so unless and until that status is reversed, there is no reason to think that the list will not include them as well. The Government has assured the housing sector that declassification will happen, but the devil is in the detail and declassification would potentially require the relaxation of a number of very significant controls, and regulation that the Government currently enforces. It is not clear whether spin-outs from the public sector will also be caught. No indication has yet been given which offices will be listed in the regulations, but it is likely to include the local authority councillors and board members of arms-length management organisations, academy governors and could include board members of housing associations (whether or not they are declassified in their own right) and spin-outs.
This could mean that the value of a confidentiality clause in a settlement agreement reached with a departing employee is significantly restricted because of the obligation to disclose. For instance, if a senior employee at a housing association was also a board member of another housing association or a local councillor and that individual left their employment at the housing association under a settlement agreement as a result of a dispute, but continued as a board member or local councillor, then the details of the exit payment would need to be disclosed to the organisation of which they are a continuing board member or councillor.
The disclosure requirement also increases the risk of reputational damage for organisations that are seen to be paying significant sums by way of exit payments. Even where there is an exemption, for instance because generous exit payments were put in place by a previous employer and have transferred under TUPE, organisations may well find that regulatory expectations (e.g. from the social housing regulator or the Charity Commission) around avoiding excessive exit payments mean that it would be wise to try to change those terms before exit payment situations arise. All affected organisations would do well to review their redundancy and pension discretion policies (for those participating in the LGPS) in any event to manage employee expectations by making reference to the cap.
There is a further problem with the draft regulations. If an employee who is over 55 is made redundant or leaves by reason of business efficiency and is in the Local Government Pension Scheme (“LGPS”), then they must take their pension early. The relevant pension fund will require the employer make a payment to cover the cost of that early retirement (a pension strain payment). However, if the pension strain payment alone is over £95,000 (as might be the case with a long-serving and well paid member of staff), then the employer will not be able to make the full payment. This is likely to mean that the pension fund has to get a court order to recover the full payment.
There is clearly a lot for organisations that may be affected by the final regulations to get to grips with and a need to do so quickly.
If you would like to discuss your remuneration strategy or review your policies in the light of these proposals with our expert team, please contact Doug Mullen.
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