Proposed changes to public sector exit payments
The UK government has launched a consultation and published draft regulations setting out proposals on how the £95,000 public sector exit payment cap should be implemented. The regulations will, however, have only limited impact in Scotland.
This consultation sees the UK Government revisit the topic of public sector exit payments, following an initial consultation carried out in August 2015 which led to framework legislation being enacted in February 2017 giving the Treasury (as well as Scottish and Welsh ministers) the power to make regulations to impose the cap. Although draft regulations were published, they were never implemented.
The rationale behind the introduction of a monetary cap on exit payments is to ensure such payments provide ‘value for money’ and are fair on the public purse. There is no implementation date fixed, but the consultation closes on 3 July 2019.
Who will the cap apply to?
The £95,000 cap is intended to cover exit payments made by English, Welsh and Scottish public bodies, implemented in a two staged process. However, due to the nature of the devolved powers of the Scottish and Welsh administrations, the regulations contain a number of exceptions which limit their application in Scotland and Wales, discussed below.
Public bodies not currently listed as within scope are expected to voluntarily apply ‘commensurate arrangements’ to the cap. A full list of bodies to which the cap will apply can be found here (at Annex B).
The regulations will only cover Scottish public sector bodies where employment terms are subject to UK Government approval. Therefore, payments made by the Scottish Parliamentary Corporate Authority or any authority which wholly or mainly exercises devolved functions will be excluded (subject to limited exceptions for payments made to non-Ministerial office holders and staff of the Scottish Administration).
The Scottish Government consulted on possible changes to public sector exit payments in Scotland between March and June 2017, however no further action has been proposed. For more details on this consultation see our blog.
The regulations also cover Welsh public sector bodies, including the NHS, but will not apply to specific office holders including members of the National Assembly for Wales, members of a Welsh county council or county borough council and the Fire and Rescue Authority, amongst others.
It may be that separate regulations and guidance will be produced by the Scottish and Welsh administrations in due course.
Which payments are to be included within the scope of the cap?
Payments which are proposed to be subject to the cap (if made in consequence of an employment or office terminating, whether or not a contract of employment applies), will include the following:
- payments in respect of a redundancy dismissal (other than statutory redundancy payments)
- severance or ex gratia payments
- contractual payments in lieu of notice that exceed ¼ of the employee’s annual salary
- any voluntary exit payments
- payments in the form of shares or share options
- payments made to extinguish any liability to pay money under a fixed term contract
- compensatory award payments made under the ACAS arbitration scheme, or a settlement or conciliation agreement (although see below regarding relaxation of the cap in whistleblowing and discrimination claims)
- any other payment made in consequence of termination of employment or loss of office
In relation to pensions, any payment made to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect of the cost of a pension scheme of such a reduction not being made is also subject to the cap. This is likely to include certain pension top up payments or “pension strain” payments where there is an extra cost to the employer in relation to the employee’s exit.
Which payments won’t be included in the cap?
The following payments are proposed to be out with the scope of the cap:
- any payment made in respect of death in service
- any payment made in respect of incapacity as a result of accident, injury or illness (not including injury to feelings)
- certain payments made under various firefighter pension rules
- certain service award payments to the judiciary
- a service payment made in respect of annual leave due under a contract of employment but not taken
- any payment made in compliance with an order of any court or tribunal
- contractual payments in lieu of notice that do not exceed ¼ of the employee’s annual salary
There are some circumstances where the cap can be relaxed to allow payments that would otherwise be within scope to be excluded in exceptional situations, particularly if genuine hardship would be caused. Such circumstances include where a payment is made as a result of the application of TUPE; or to settle a grievance or employment tribunal claim involving discrimination or whistleblowing (where it can be satisfied on the balance of probabilities that the claim would be upheld and compensation awarded). However, specific rules on the relaxation of the cap apply to Scotland and Wales. Further information on the power to relax restrictions can be found here.
As yet, no clawback provisions have been proposed this time round to prevent an employee who returned to employment within the public sector within 12 months of leaving from keeping hold of their exit payment. It is unclear at this stage if these are to follow.
The draft regulations are clearly targeted towards senior exit deals involving individuals within the top echelons of public service, predominantly in England. Whilst there are clear public policy reasons for implementing the changes, the regulations do not currently make exit payments over and above £95,000 unenforceable.
In the short term, the publishing of the new consultation and draft regulations which look set to be implemented could lead to an increase in senior individuals trying to negotiate an exit package prior to the changes taking effect. In the longer term, however, if senior exit settlements are to be less attractive for individuals within the sector it could lead to higher levels of litigation surrounding termination of employment which would be a costly unintended side-effect of the regulations.
Please get in touch with your usual Brodies’ contact with any queries in relation to public sector exits. Users of Brodies Workbox, the employment team’s award-winning online HR portal, can access detailed FAQs on Settlement Discussions and Tax on Termination Payments.