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Cap on public sector exit payments likely by end of year

  • United Kingdom
  • Employment law - HR E-Brief

10-04-2019

Placing a financial limit on the amount public sector employees are able to receive on leaving employment has been a long-held objective of the Government, to reduce public expenditure. Provision for imposing a cap of £95,000 on public exit payments was added to the Small Business, Enterprise and Employment Act 2015 but was never brought into force. Even so, this issue has remained on the Government agenda.

Today, the Government has published a Consultation (with Draft Regulations and Guidance) regarding implementation of a cap, finally confirming it is no longer a matter of if public sector exit payments will be restricted but when.

Phased introduction

An implementation date is not yet confirmed but the Consultation closes on 3 July 2019 and refers to the reforms being introduced “without further delay”. The Chief Secretary to the Treasury has also alluded to the cap being brought in later this year, meaning it could therefore apply to some public sector employees as early as October 2019.

Currently, the Consultation refers to a two-stage introduction. From the draft regulations, it would appear that the majority of public bodies will be included in the first phase. These bodies will be identified in the final regulations, although a draft list, as included in the draft regulations, can be seen here. A limited number of security-related agencies and bodies, including the British Armed Forces, will be exempt from the regulations.

What payments?

The Consultation once more proposes a cap of £95,000.

If the Consultation proposals are applied without change, the type of payments to which the cap will apply are identified in the draft regulations but will include any non-exempt termination payments which represent a cost to the employer, including ex gratia sums, redundancy payments, pension contributions (including any “pension strain” payments to provide unreduced pension before normal pension age) and shares and share options.

Importantly, whilst payments in lieu of notice are included in principle, those which amount to less than ¼ of an individual’s contractual entitlement will not be included in the sums subjected to the cap. As a general rule, accrued pension rights (including rights to pension commutation) fall outside this category, not being payable by the employer, so will also not be included.

Payments which are not “exit payments”, such as death in service, injury compensation and pay in lieu of untaken holiday, are expressly exempted from the cap.

How the cap is likely to be applied?

The draft regulations prescribe the sequence in which exit payments will have to be paid when applying the cap, as follows:

• in chronological order if the payments are not made on the same day but otherwise,

• in descending order of salary;

• (where the salaries are equal) in the descending order of hours worked;

• (where the salaries and hours worked are equal), in descending order of the person’s length of the service in the employment or as holder of the office; or

• (where the salaries, hours worked and length of service in the employment or as holder of the office are equal), in the order determined by the relevant Minister 

Can the restrictions be relaxed?

The draft regulations identify various situations where public bodies will be obliged to relax the application of the cap. These include where a payment is a liability acquired as a result of the TUPE regulations or to settle whistleblowing or discrimination claims.

Deviation from the cap may also be permitted at the discretion of various public bodies on hardship grounds or grounds related to urgent workplace reforms. Any such step will be tightly controlled and monitored and must conform to Treasury requirements.

Disclosure obligations

The current proposals oblige public sector workers to disclose their departure and eligibility to an exit payment to any other interested or affected public bodies, for example those responsible for paying them as office holders.

Comment

Despite reference to a phased introduction of these reforms, pending conclusion of the Consultation and final regulations, it is not yet certain how this will operate in practice. Further clarification on this and precisely which public bodies will be caught in first phase will be needed.

The draft regulations also reveal a complex framework of principles and exemptions which public sector employers will need to plan for but, also, to work through carefully for each future, highly-paid departure. Although Government resolve to implement this change is indisputable, whether every proposal in the Consultation is carried forwards into final regulations as a realistic legal or practical solution, remains to be seen.

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