Significant changes ahead for public sector exit payments

Posted by Paula Kathrens on
The shockwaves from the EU referendum result may have lessened over the past few weeks but the uncertainty about the implications of Brexit certainly have not. With the new Prime Minister now in place, we may soon get an indication as to when Article 50, which commences the EU withdrawal process, will be triggered.  

In the meantime there is a great deal to consider for public sector organisations. Take the higher education sector for example, it is reported that around £3.7 billion is generated for the UK economy by EU students every year. What arrangements will be put in place for the many thousands of students (and staff) from EU countries? What will happen to existing and planned EU-funded collaboration projects? In the health sector, there are concerns that Brexit will have a significant impact on staffing levels. Earlier this year, it was reported that 74% of all NHS trusts and boards in England and Wales were looking to recruit from overseas to meet the shortage of nurses and doctors. What will Brexit mean for their recruitment strategy? These are issues for the longer term because, even when Article 50 is triggered, we remain a member of the EU until either an exit is negotiated or two years have passed.

There are however more imminent developments that public sector organisations need to be aware of relating to public sector exit payments.  

Cap on public sector exit payments

The proposal to cap public sector exit payments at £95,000 was contained in the Enterprise Bill 2015 and the actual details were set out in the draft Public Sector Exit Payment Regulations 2016 published in November 2015. These were published for "illustrative purposes" to assist the parliamentary debate about the Bill which in fact received Royal Assent on 4 May 2016 and is now called the Enterprise Act 2016.

The government recently confirmed that implementation of the Regulations will not be before 1 October 2016.

According to the government, between 2011 and 2014 the cost of public sector exit payments was around £6.5 billion. In 2013/14 alone, almost 2,000 public sector employees received exit payments costing more than £100,000. The government wants an end to six figure exit payments on the basis that they far exceed the level of exit payments made to most public sector workers (or indeed workers generally) and because they are neither fair nor do they offer value for money for taxpayers.

It is important to bear in mind that it is not just high earners who may be affected by these changes. An individual with long service on a relatively modest salary, whose redundancy payment is based on actual salary, may exceed this cap. Note however that, regardless of the restrictions on the payment made, employees will be entitled to receive their statutory redundancy payment.       

Unless changed by the final Regulations, what we know so far is that the cap of £95,000 applies to the total aggregate value of certain public sector exit payments in any period of 28 consecutive days.

The cap will apply to a payment:

  • on account of dismissal by reason of redundancy;
  • made consequently upon a voluntary exit from employment;
  • made to a pension scheme;
  • made in lieu of notice due under a contract of employment;
  • made under a settlement or conciliation agreement; 
  • made to extinguish any liability to pay money under a fixed-term contract;
  • made by way of shares on loss of employment; and
  • any other payment made as a consequence of, in relation to, or conditional upon, loss of employment whether under a contract of employment or otherwise.

The cap will not apply to payments that are:

  • made in respect of incapacity or death as a result of accident, injury or illness;
  • made in relation to early retirement payments for fire fighters;
  • made in respect of leave due under a contract of employment but not taken;
  • bonus payments otherwise determined to be due under a contract of employment;
  • made in compliance with an order of any court or tribunal;
  • made to employees with protected terms following a TUPE transfer.  

Interestingly, public sector workers who receive an exit payment and who continue employment in the public sector must give their new employer certain prescribed details:

  • that they have received an exit payment;
  • the amount of any exit payment;
  • the date that they left employment or office;
  • the identity of the public sector authority that made the exit payment.

There will be a process for the restriction to be relaxed in exceptional circumstances, in other words, the cap can be waived. However, any waiver would require consent from the relevant Minister or from the full council in the case of local government exit payments. Relevant bodies will be required to publish annually details of all exit payments made in the preceding 12 months where they have exercised the waiver and the reasons for it. This information will need to be kept for at least 3 years.    

The Regulations list the relevant public sector authorities as defined by the Office of National Statistics (ONS). A number of organisations are excluded from the cap and these include the armed forces and public broadcasters such as the BBC, Channel 4 and S4C as well as the Financial Conduct Authority and the Bank of England.

The government will issue guidance in due course on how the cap will operate and this will include directions on how to exercise the waiver.  

Repayment of public sector exit payments  

The repayment or "claw back" proposal is contained in the Small Business, Enterprise and Employment Act 2015 and the details set out in the draft Regulations, the Repayment of Public Sector Exit Payments Regulations 2016. These were issued for consultation on 22 December 2015.

The Regulations were expected to come into force in April 2016 but have been delayed. The latest indication from the government is that they will be introduced "shortly" but no further information has been provided.   

The background to this measure is that the government is keen to recover qualifying public sector exit payments from high earning individuals who return to work in the public sector (or return as a consultant) shortly after receiving their payment. Accordingly, they will be required to pay back a sum of money if they return to any part of the public sector within 12 months of leaving it. The amount to be repaid is tapered and will reduce proportionately from day one over the 12 months. The repayment amount is calculated taking into account the net exit payment and the number of days between leaving employment and returning to the public sector.   

The Regulations will apply to individuals earning £80,000 or more a year. Average earnings are around £27,600 a year and this minimum salary level of £80,000 covers the top 2% of earners in the public sector (and the top 4% in the economy as a whole). Such public sector workers are likely to receive significant exit payments and the government wants to deter these high earners from taking redundancy and seeking re-engagement in any part of the public sector shortly afterwards.

A qualifying exit payment is an exit payment made by the public authority:  

  • on account of dismissal by reason of redundancy;
  • made consequently upon a voluntary exit from employment;
  • to reduce or eliminate an actuarial reduction to a pension upon early retirement;
  • to extinguish any liability to pay money under a fixed-term contract;
  • under a settlement or conciliation agreement;
  • made by way of shares consequent upon loss of employment; or
  • made as a consequence of, in relation to, or conditional upon loss of employment whether under a contract of employment or otherwise.

(Note that the list of qualifying exit payments is the same as the exit payments to which the cap applies, as mentioned above, save for payments in lieu of notice.)  

The following payments are not qualifying exit payments:

  • a payment made in respect of incapacity or death as a result of accident, injury or illness;
  • a payment made in respect of leave due under a contract of employment but not taken;
  • a payment made in lieu of notice due under a contract of employment;
  • a bonus payment otherwise determined to be due under a contract of employment;
  • a payment made in compliance with an order of any court or tribunal; and
  • a payment made to an employee, who, in the 12 months prior to the end of their employment (or ceasing to hold office) earned remuneration of under £80,000.                 

The organisations within the scope of the Regulations are those defined by the ONS. However, although the ONS recently classified Housing Associations as the public sector, they have in fact been granted an exemption from this recovery provision because it is the government's intention to reclassify Housing Associations as the private sector. 

The organisation making the exit payment has to keep a written or electronic record of it and keep this for 3 years. That record will need to include the identity, age, length of service and standard weekly hours of the exit payee, the amount and type of the qualifying exit payment, the date it was made and details of the employee's total remuneration (and tax and NICs paid) in the 12 months before receiving the exit payment.

But it's not just the employer that has to comply with certain formalities. The employee/exit payee is also under a duty to provide specific information "as soon as reasonably practicable" if they return to the public sector within 12 months of receiving the exit payment. The employee must inform their new employer that there has been a qualifying exit payment and that there may be an obligation to repay some or all of it.    

So what are the implications of finding and returning to a new job in the public sector within 12 months? Basically, the new employer, called the "hiring authority" in the Regulations, cannot allow the return unless the employee has paid back the repayment amount or, has made "relevant arrangements" with their former employer to repay that amount. If the employee returns to the public sector in breach of these provisions, they must arrange to make the repayment within 3 months of the return. The new employer has to keep a record of the breach (in written or electronic form for 3 years) and its reasons for permitting the employee's return. If the employee then breaches the arrangement to repay or does not enter into arrangements to repay, the former employer can seek to recover the sum as a debt. The new employer "must consider taking appropriate action" and the Regulations specify this as dismissing the employee (or terminating any contract for services). If the new employer does not take this action, it must keep a written or electronic record of its reasons for not doing so, which must be available for 3 years.

Once again, there is a waiver process in place whereby the requirement to make the repayment is waived in full or part. A record has to be kept, (in written or electronic form for 3 years) to include the identity of the employee, the amount of the qualifying payment and the date and reasons for the waiver.

In addition to increased administration for public sector employers there are many tricky issues arising out of these repayment provisions. For example, what happens if the employee returns to a lower paid job or returns part-time? How will the claw back work in relation to a pension payment made to a pension scheme? Will the claw back deter highly skilled individuals from returning to a public sector role until 12 months have passed? What happens to collective agreements which set out contractual, enhanced redundancy terms for example? What about continuity of service? There may be circumstances when an employee has had a generous redundancy package because of long service but repays a large proportion of that because of quickly taking up a new job in the public sector. Should the new employer be obliged to recognise that service? If not, in any future redundancy exercise the employee's redundancy rights will be significantly reduced.

Hopefully government guidance will be available in plenty of time before the Regulations come into force. While this may assist with some of the technical queries it may not cover all the other challenges public sector employers will face in the months ahead. Both the cap on exit payments and recovery provisions are likely to have a considerable impact on staff morale.            

Reform of public sector exit payments

The background to this measure is the government's intention to ensure greater consistency and fairness in such payments which vary significantly across the public sector.  In February 2016, the government published a consultation on its proposals which include:

  • a maximum tariff for calculating exit payments at 3 weeks' pay per year of service;
  • a cap of 15 months' salary for calculating redundancy payments;  
  • a maximum salary for calculating exit payments;
  • tapering the amount of lump sum compensation an individual is entitled to receive as they get close to the normal pension age or target retirement age of the pension scheme to which they belong.  

The consultation closed on 3 May 2016. The government has not responded to the consultation and there is no further information at the moment.

About the Author

Paula is a Partner in our Employment law team advising organisations in both the public and private sectors on all aspects of contentious and non-contentious employment law.

Paula Kathrens
Email Paula
029 2068 6213

View Profile