Public Sector Exit Payments – £95,000 cap is imminent

21st October 2020

Update: On 25 February 2021, the Restriction of Public Sector Exit Payments (Revocation) Regulations 2021 (Revocation Regulations) were laid before Parliament.

They will come into force on 19 March 2021 and revoke the public sector exit payment regulations from that date. Please see our recent article on the revocation of the Restriction of Public Sector Exit Payments Regulations 2020 here.

Since 2015, the Government has been considering the imposition of a cap on public sector exit payments.

We have had two consultation processes and the Government responded to the most recent consultation process on July 2020.  See our earlier public sector exit payments article for more details.

In a significant development on 14 October 2020, the Restriction of Public Sector Exit Payments Regulations 2020 were finally made into law and will come into force 21 days from then on 4 November 2020.

The Regulations impose a cap of £95,000 on exit payments made by public bodies.  There is a long list of bodies in scope contained in the Schedules to the Regulations but the draft guidance accompanying the Regulations makes it clear that HM Treasury will also be considering those bodies who are classified by ONS as “public sector” and they will be expected to voluntarily comply with the Regulations. We are awaiting the final version of the guidance for clarification of exactly which bodies might be in scope where it is not obvious or they are not named in the Regulations.

The list of payments in scope is wide and include redundancy payments (save for statutory redundancy pay), notice payments (over ¼ of annual salary), ex gratia payments, payments under a settlement agreement or COT3 (save in respect of payments for whistleblowing or discrimination), and “pension strain” costs (see our earlier articles for what this means). There have been some concerns about including “pension strain” payments because of the impact on employees on modest earnings but who have lengthy periods of service. The list excludes payments for accrued but untaken annual leave, death in service, payments in respect of illness or injury.

Full details of the payments in and out of scope are listed in the Regulations here.

HM Treasury has issued a draft Direction setting out certain mandatory waivers (such as where the obligation to make the payment arises as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006,  and payments for discrimination and whistleblowing) and these are to be extended further to cover payments for unfair dismissal and health and safety related detriment.  Ministers also have a discretionary power to relax the cap but this is expected to be exercised in the most exceptional circumstances, for instance:

  • Not exercising the power would cause undue hardship; or
  • Not exercising the power would significantly inhibit workforce reform; or
  • An exit agreement was made before the coming into force of the Regulations and: (i) it was the intention of both parties that the exit would occur before that date; and (ii) any delay to the date of exit was not attributable to the employee.

As you would expect there are strict rules on record keeping and reporting requirements, to ensure that there is a clear audit trail of payments made which exceeded the cap.  This will include details of the amount of the payment, the date of the payment, the reason for the cap being waived and details of who approved the waiver.

We are awaiting a final version of the HM Treasury Direction regarding these waivers.

For those of you engaged in discussions about exits in the public sector where the payment is likely to be in excess of £95,000 we recommend that advice is sought immediately.

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