Kim Howell 07 May 2019

Capping exit payments in the public sector

Capping exit payments in the public sector image

Notwithstanding the apparent moratorium on the conduct of Government business in the run up to Brexit, the UK Government made time to progress its concerns about the size of exit payments made to employees leaving public sector roles by re-launching consultation on regulations which would cap public sector exit payments at £95,000.

It had been rumoured that the exit cap was 'old news' as the Government has consulted before without going on to implement its proposals. However, the fact that, this time, it has published new draft regulations, as well as Treasury Directions that outline powers to relax the exit cap in certain circumstances might suggest the Government intends to see it through this time.

The proposed regulations would limit the amount which public sector authorities may pay as an exit payment to £95,000. That is still a significant sum, of course, particularly given the maximum award which an employment tribunal can award in a redundancy situation is £15,750 and for unfair dismissal is an additional £86,444, or a year’s salary if less. However, The Treasury claimed that more than 1,600 workers received payments of more than £100,000 in 2016-17 when they left public sector roles, costing a total of £198m.

The Government proposes that, subject to specified exceptions, the cap on exit payments for the purposes of the draft regulations will apply to all or any of the following payments:

  • A payment on account of being made redundant.
  • A payment made to reduce or eliminate an actuarial reduction to a pension on early retirement.
  • A payment made pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement.
  • A severance payment or ex gratia payment.
  • A payment in the form of shares or share options.
  • A payment on voluntary exit.
  • A payment in lieu of notice due under a contract of employment.
  • A payment made to extinguish any liability to pay money under a fixed term contract.
  • Any other payment made in consequence of termination of employment or loss of office.

The wide range of payments that would be covered by the cap could have a significant impact on the application of the regulations. The inclusion of payments relating to avoid or minimise a reduction to a pension in the definition of exit payment means that the regulations could potentially apply to many public sector employees whose basic salary is much lower than £95,000 and could apply to a range of junior employees as well, particularly those who are members of the Local Government Pension Scheme which still provides a mandatory right for employees who are made redundant when over 55 years of age to have immediate access to an unreduced pension at the employer’s cost.

In future, in those circumstances, the capped compensation could well be insufficient to fund the pension strain cost. But the regulations do not address how that will be managed and, as yet, we have seen no proposals to make compensatory amendment to the Local Government Pensions Regulations to 'square the circle' of regulations. If employers have to face protracted disputes with trade unions over whether it is lawful to effect redundancies without fulfilling the pension scheme obligations in full, this could make it very difficult for a public authority to restructure and quantify its liability for exit payments, and associated dismissal liabilities accordingly.

Therefore, rather than simply acting as a curb on public sector spending, the regulations might result in increased spending if authorities find themselves needing to go through formal processes such as tribunals if difficulties arise in employment situations, particularly during the initial bedding in period.

The Small Business, Enterprise and Employment Act 2015, under which the proposed regulations would be made, makes some provision for public authorities to 'relax' the restrictions imposed by the regulations. However, autonomy for exercising this discretion has not been given to the employing body as it is subject to a requirement for authorities to comply with directions issued by the Treasury or to have the consent of the Treasury before they exercise that power.

Draft directions published with the guidance would make it mandatory for authorities to relax the restrictions if the need to make the payment arises as a result of: - the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”); or if the payment relates to a complaint that an employment tribunal has jurisdiction to consider and the authority is satisfied that the tribunal would award compensation if it were to consider the complaint.

Some commentators are concerned that this will incentive employees to raise disputes and become litigious as a means to maximise compensation and evade the cap.

The draft directions would also provide a discretion for an authority to relax the cap in certain limited situations: -

An authority would need to be satisfied that not relaxing the restrictions would cause undue hardship or significantly inhibit workforce reform. There is no guidance around what this means; or

an agreement for an exit would need to have been made before the regulations come into force.

However, all public bodies will also require external consent even where they believe they meet the relaxation criteria. This must be obtained from HM Treasury and in Wales from the Welsh Ministers, in relation to devolved services. Therefore, although individual bodies appear to have discretion to relax the restrictions imposed by the regulations, the obligations which are likely to be imposed by directions from the Treasury and / or Welsh Ministers could mean that in practice authorities have little potential to exercise the discretion.

There could be significant tensions between central and local governments if authorities seek to relax the restrictions imposed by the regulations in individual circumstances but find themselves thwarted by criteria set by the Treasury or by refusal to give consent for authorities to exercise their power.

Of particular concern is the ongoing uncertainly about whether or when these proposals will become law. This is unsatisfactory for employers and employees alike.

If implemented we might expect the influence of the cap to extend well beyond pure public bodies as auditors might consider the cap a useful bench mark when determining value for money considerations in other sectors such as universities, colleges and the charity sector, where severance payments have also attracted attention in recent times.

In preparing, employers will need to ensure that employees are made aware of the risk that severance payment policies will need to be reviewed so that any changes that are necessary to comply with the new law are in place or a robust business case for relaxation is prepared in consultation with the Treasury or the Welsh Ministers as the case may be.

Kim Howell is head of Geldards’ public sector employment team

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