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Tightening the purse strings on public sector exit payments…

Picture of a hand holding moneyThe UK Government has concluded its consultation on proposals to introduce a cap of £95,000 on exit payments made to public sector employees. It plans to press ahead with the proposals introducing the cap via the Enterprise Bill 2015 – 2016 which has already had its first reading in Parliament. Detailed Regulations are expected by April 2016. See the Government Response to the consultation on Public Sector Exit Payments.

Why is the cap being introduced?
To fulfil the Government’s manifesto commitment made in April 2015 to end six-figure exit payments to public sector workers and ensure that payments which are made are proportionate and represent value for money to the taxpayer.

Which employees will be covered?
All current and future employees and office holders of public sector bodies that are the responsibility of the UK Government. Ministers and Special Advisers will also be covered. It is important to note that the legislation will not affect employees of devolved public sector bodies in Scotland. The Scottish Government will have to decide if and how it takes forward similar arrangements for staff of devolved public sector bodies which fall outside the remit of the UK Government. It is likely that some arrangements will be made although there has been no announcement on it so far.

Which public sector bodies will be covered?
All entities which are classified as such by the Office of National Statistics for National Account purposes. There are some exemptions including some financial institutions like RBS, Northern Rock as well as the Financial Conduct Authority and the Bank of England. The armed forces and public broadcasters will also be excluded.

What payments will have to be included?
Most payments made in relation to leaving employment including ex gratia payments, pension strain costs for early access to unreduced pension, payments in lieu of notice and “cashing up” of outstanding entitlements. Payments will be aggregated and the cap applied before tax.

Some payments will be exempt including payments made “following” litigation for breach of contract or unfair dismissal although it is not yet clear whether this means payments made following the raising of proceedings or only payments made following a judgment on liability.

A process will be put in place for waivers of the cap to be approved and also for record keeping and reporting on severance payments made annually.

Recovery of exit payments
The proposals are part of a wider tightening of the purse on public sector exit payments. Last year the UK Government carried out a separate consultation on recovery of exit payments made to high earning public sector employees who returned to work in the public sector within 12 months after leaving. Those proposals were legislated for in the Small Business, Enterprise and Employment Act 2015 and further regulations setting out the detail are also expected by April 2016. See the Government’s response to the consultation on recovery of public sector exit payments.

Guidance on settlement agreements
These legislative developments should also be read against the Cabinet Office Guidance on Settlement Agreements, Special Severance Payments and Confidentiality Clauses on Termination of Employment which was issued on 1 February 2015. This Guidance applies widely to all civil service organisations including Government Departments, Executive Agencies, Non-Departmental Public Bodies and arms-length bodies. It sets out when settlement agreements should be used (and importantly when they should not!); the principles to be applied and the process to be followed where a settlement agreement is being considered; and use and styles of confidentiality provisions. It also provides for an approval process to be followed in certain circumstances including the departure of senior civil servants or where the proposed termination payment is in excess of £100k. Finally it sets out reporting requirements allowing the Cabinet Office to publish public sector severance payment statistics and information annually. This guidance does impact on the negotiation of agreements by affected bodies and the content of proposed settlement agreements. See the Cabinet Guidance. Similar guidance is set out in the Scottish Public Finance Manual which is applicable to a wide range of publicly funded bodies in Scotland.

We will update you further as the Enterprise Bill progresses through Parliament and Regulations become available on capping and recovery of public sector exit payments.

Lynn Marr Brodies LLP

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