Public sector cap on exit payments back on the agenda

29th July 2019

The Government has intended to put a cap on the amount a public sector employee can receive on leaving employment for some time. The Enterprise Act 2016 inserted a provision into the Small Business, Enterprise and Employment Act 2015 which would allow the Government to introduce regulations to cap public sector exit payments at £95,000. On 10 April 2019, the Government published a consultation (including draft regulations and accompanying guidance and directions) regarding the implementation of a cap.

The consultation closed on 3 July 2019, and the Government is yet to comment on the consultation. Before they do, we take a closer look on how the public sector might be impacted.

Why the cap?

Sections 153A to 153C of the Small Business Enterprise and Employment Act 2015 (as amended by the Enterprise Act 2016) enable the Government to make regulations restricting public sector exit payments.

Public sector employers are responsible for demonstrating they use public money efficiently and responsibly to ensure the terms are proportionate, justifiable, and fair to taxpayers. The question is whether a payment to a public sector employee in excess of £100,000 is fair to taxpayers? The Government believes the answer is no.

According to Whole of Government Accounts (year ended 31 March 2017) between 2016 and 2017 a total of £1.2 billion in exit payments were paid to public sector employees. Payments of £100,000 and above amounted to £0.2 billion. All of these exit payments were funded by the taxpayer. The Government believes that these six-figure payments are disproportionate and do not provide value for money to taxpayers.

Staged Implementation

The Government is proposing a two-stage implementation process. The first stage would include the most senior public sector employees, before being extended to the rest of the public sector in the second stage.

The draft regulations include a number of bodies that are exempt, including The Armed Forces, and the Security Service, but these are limited.

What’s included in the cap?

The draft regulations identify payments that will come within the cap. This includes:

  • payments received by reason of redundancy (there is a prohibition on the reduction of statutory redundancy pay or equivalent);
  • ex-gratia payments;
  • any payment in lieu of notice under a contract of employment (payments that do no not exceed one quarter of the employee’s salary will be exempt);
  • shares and share options; and
  • any payment made under the ACAS arbitration scheme or a settlement or conciliation agreement.

Essentially the cap will cover any voluntary exits with compensation packages.

The draft regulations do however list some payments that are exempt from the cap including, death in service payments, payments made in respect of incapacity as a result of injury or illness, and payments made for accrued but untaken holiday leave.

Employers must take into account all payments made to an employee related to their exit that have been paid within a period of 28 consecutive days. If an employee receives two or more exit payments the total amount of the exit payments made to the employee must not exceed £95,000. This would also therefore include an employee who receives an exit payment, who is re-employed in the public sector only to leave again (and receive a further exit package) within any period of 28 consecutive days.

What does this mean?

Public sector employers will need to keep an eye on the developments, and the Government’s response to the consultation. However, it is unlikely that there will be any significant changes to the draft regulations.

The cap has also been heavily criticised by the Association of Local Chief Executives and Senior Managers (ALACE) and Unison. ALACE raised particular concern about the uncertainty that has been created by the fact that the draft regulations do not have a specific implementation date. Unison condemned the proposals as an “unfair attack on local government workers” and have criticised the proposals as undermining collective agreements and negotiated settlements.

Furthermore, the level of the cap has changed since it was first proposed, and there does not appear to be any suggestion that it will be index-linked in the future.

The cap is wide-ranging and could mean that long-serving, albeit lower earning, employees are also caught out by the cap.

It is likely to place a greater strain on exit negotiations, particularly for senior high earning individuals. Employees may be less willing to engage in exit negotiations and in some cases may feel discouraged from accepting genuine redundancy packages subject to the cap. As payments made in compliance with an order of any court or tribunal will not be affected by the cap, but negotiated settlement payments will be, employees may seek to litigate claims to avoid the payment limitation. This is in itself an additional burden for the taxpayer, and will place further strain on an already stretched Tribunal system, as well as public sector employers. In some cases of poor performance, and where a negotiated exit payment is the most appropriate approach, such a cap may force employers to conduct a full performance management process, which could further damage the employer-employee relationship and add to the management time spent and cost to the organisation.

Many employers in the public sector already feel overstretched, with reduced budgets and fewer resources, and this shows no sign of easing.

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