The UK Government first consulted on proposals to cap the level of public sector exit payments five years ago. Last month it confirmed that the restrictions would be introduced, with the publication of its response to the 2019 consultation and draft regulations (The Restriction of Public Sector Exit Payments Regulations 2020).

The cap is intended to be fixed at £95,000 but this will be kept under review. A £95,000 cap on public sector exit payments already applies to devolved Scottish public bodies.

Which public sector bodies are covered by the Regulations?

The public bodies in scope are set out in Schedule 1 of the Regulations and include, for example, the civil service, NHS and local government in England. The Regulations also cover Scottish public bodies where employment terms are subject to UK Government approval. Different rules are in place for devolved Scottish bodies – see below.

What is an exit payment?

The cap applies to the aggregate sum of payments made in connection with the termination of employment or loss of office (the order in which payments count towards the cap are not prescribed). Exit payments are defined in the Regulations as including:

  • Any payment on account of dismissal by reason of redundancy (an individual is entitled to receive their full statutory redundancy payment but this counts towards the cap).
  • Any employer funded payment to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect of the cost to a pension scheme of such a reduction not being made. However, payments that result from an individual’s accrued right to a pension, including additional pension purchased with the individual’s own monies, are not exit payments for purposes of the cap.
  • Any payment pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement.
  • Any severance payment or ex gratia payment.
  • Any payment in the form of shares or share options.
  • Any payment on voluntary exit.
  • Any payment in lieu of notice due under a contract of employment (but only the amount in excess of one quarter of annual salary).
  • Any payment to extinguish any liability to pay money under a fixed term contract.
  • Any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office.

    What payments are excluded from the Regulations?

    There are a number of exemptions from the Regulations including payments made in respect of death in service or incapacity as a result of accident, illness or injury (including injury to feelings); the part of any payment in lieu of notice due under a contract of employment that does not exceed one quarter of the relevant person’s salary; pay in lieu of accrued but untaken holiday; and payments made in compliance with an order of a court or tribunal.

    A Treasury Direction and guidance to accompany the Regulations have not yet been published. They are expected to include a mandatory waiver of the cap where liability has resulted from discrimination, whistleblowing or health and safety claims, or as a result of TUPE.

    Also, Crown Ministers and the full council of a local authority have the power to relax the cap in certain exceptional circumstances with consent of the Treasury or in compliance with a Treasury Direction.

    What about devolved Scottish bodies?

    Devolved Scottish bodies are not covered by the Regulations; however, they are already subject to a £95,000 cap on exit payments.

    The Scottish Government consulted on changes to public sector exit payments in relation to devolved bodies in 2017. It then chose not to legislate but instead introduced a £95,000 cap on exit payments by amending the Scottish Public Finance Manual in September 2019. The Manual states that payments to individuals will normally be capped at £95,000 but where a body considers that there are compelling reasons to exceed the cap, a full business case must be discussed with the relevant Minister setting out fully the reasons why applying the cap is not possible. The contractual and non-contractual elements included and excluded in the cap for devolved Scottish public bodies are listed here.

    Comment

    The explanatory notes to the Regulations state that public sector exit packages of over £100,000 amounted to £200 million in the 2017-18 financial year and that the total of all exit packages in the same year was £900 million. 

    There is as yet no implementation date for the new cap, but it is envisaged that it will be brought into force in the short term. When published the revised guidance and Treasury Direction will provide public bodies with more details as to how to apply the new rules in practice.

    To discuss anything raised in this blog in more detail, please get in touch with your usual Brodies contact or a member of our employment and immigration team.

    Update: The Regulations came into force on 4 November 2020. However, after a review the Government announced on 12 February 2021 that it had decided to revoke them. Guidance has been published for those directly affected by the cap whilst it was in force.

    Contributor

    Julie Keir

    Practice Development Lawyer