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Cap on Public Sector Exit Payments – Latest News

  • United Kingdom
  • Employment law
  • Public

16-10-2020

As anticipated, the Government has pressed ahead with its plans to reduce public expenditure by placing a financial limit on the termination payments of public sector employees. The Restriction of Public Sector Exit Payments Regulations 2020 (the Regulations) were made yesterday evening and will come into force on the 4th November 2020. 

The Regulations

The Government consulted on draft Regulations back in 2019 and published its response to that consultation in July of this year (see our Alert for further details).

In short, the Regulations impose restrictions on the amount of an exit payment a listed public sector authority can make in connection with the exit of an employee or office holder, where that exit takes place after these Regulations come into force. They cap such exit payments at a prescribed amount, currently £95,000.

Schedule 1 of the Regulations sets out the list of public sector bodies in England, Wales and Scotland which will be affected.

The type of payments to which the cap will apply includes any non-exempt termination payments which represent a cost to the employer, including ex gratia sums, redundancy payments, payments in lieu of contractual notice, employer-funded early retirement pension payments (including, importantly, any “pension strain” payments to provide unreduced pension before normal pension age) and payment in the form of shares and share options.

However, to provide flexibility, a waiver system has been designed for use in exceptional circumstances, either in compliance with HM Treasury directions or consent. The Government has also asked those departments responsible for the main public sector workforces to negotiate and agree reforms directly with each sector. To this end, the Ministry of Housing, Communities and Local Government has published a consultation, running until 9 November 2020, which aims to bring forth legislation to amend the Local Government Pension Scheme which will account for the exit payment cap.

What next?

The explanatory memorandum to the Regulations states that HM Treasury will publish updated guidance for applying the exit payment cap which  “will explain the Regulations in plain English and provide users with further information on applying the cap and the waiver provisions”. There is currently no indication as to when this guidance will be available, other than that it will be published at some stage before 4 November.

It has been reported previously that the British Medical Association was seeking permission to apply for a judicial review and is arguing that, in implementing these Regulations, the Government is ignoring existing obligations, including agreed redundancy rights, in workers’ employment contracts. The current status of those legal proceedings is not known.

Comment

Employers will need to quickly assimilate the various exemptions and how the cap will apply, but will also need to carefully manage employee expectations based upon their perceived contractual or customary entitlement. It is to be hoped that the promised guidance is available very soon, given the fast-approaching implementation date of the Regulations.