The Government first consulted on a cap to exit payments in the public sector in August 2015, having revealed that public sector exit payments between 2011 and 2014 had cost around £6.5 billion and that 2,000 of these payments in 2013-14 alone totalled more than £100,000. The Enterprise Act 2016 inserted a provision into the Small Business, Enterprise and Employment Act 2015 allowing the Government to introduce regulations to cap public sector exit payments, to public sector employees leaving employment, at £95,000.
On 10 April 2019, the Government resurrected the proposals for the cap by publishing a consultation regarding the implementation of a cap together with draft regulations, accompanying guidance and directions. For further details, see our earlier article on public sector exit payments.
The consultation ran until July 2019 and the Government published its response on 21 July 2020. The consultation received around 600 responses which highlighted the complexities different bodies and workforces may experience in applying the regulations. As a result, the draft documents and regulations consulted on will be revised with a final version set to be published at a later date (together with updated guidance). The cap of £95,000 will apply to the aggregate sum of payments made in consequence of termination of employment.
Bodies in scope
The intention is for the regulations to apply to the whole of the public sector. The following categories of public sector employer have been stated to be within the scope of these regulations where they fall within the responsibility of the UK Government, regarding their employment:
- The UK Civil Service, its executive agencies, non-ministerial departments and non-departmental public bodies (including Crown non-departmental public bodies and Her Majesty’s Prison and Probation Service);
- The NHS in England and Wales;
- Academy schools;
- Local government including fire authorities’ employees and maintained schools;
- Police forces, including civilian and uniformed officers.
For the avoidance of doubt, schedule 1 of the draft regulations sets out a full list of proposed public sector bodies that would be in scope. This was supported by the majority of the respondents to the consultation and the Government has stated that a final schedule will be published at a later date (and kept under review thereafter).
The initial regulations proposed a staged approach to implementation, however following the consultation the Government has decided against this and the cap with therefore apply across the whole of the sector when implemented. However, certain specified bodies will remain exempt due to the nature of the careers and the importance of compensation, for example the Armed Forces and the Secret Intelligence Service.
Public sector exit payments in scope
The Government believes that all payments related to exit should be within the scope of the cap and therefore the payments that were initially published in April 2019 will remain in scope, despite a significant number of responses expressing concern over the inclusion of early access to pensions. The payments in scope are:
- Payments made on account of dismissal by reason of redundancy (with the exception of redundancy payments the payee is entitled to under statute);
- Payments made to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost of a pension scheme of such a reduction not being made (where the payment results in an extra cost to the employer);
- Payments made pursuant to a conciliation or settlement agreement or an award of compensation under the ACAS arbitration scheme (other than those made in respect of discrimination and whistleblowing claims);
- Severance payments;
- Payments made in the form of shares or share options on loss of employment;
- Payments made consequently upon a voluntary exit from employment;
- Payments made in lieu of notice due under a contract of employment that exceed one quarter of the payee’s annual salary;
- Payments made to extinguish any liability to pay money under a fixed-term contract; and
- Any other payment made as a consequence of loss of employment, whether under a contract of employment or otherwise.
However, certain public sector exit payments made in the devolved nations will not be subject to the cap. Separate regulations and guidance may be issued by the appropriate devolved nations.
The Government has expressed its expectation that pension schemes, employment contracts, and compensation schemes will be amended to reflect the introduction of the cap.
The order in which exit payments made are to be capped has not been prescribed in order to allow employers and employees discretion and flexibility based on individual circumstances (with the exception of where multiple exit payments include a statutory redundancy payment).
Draft regulations 11 and 12 give powers to ministers to relax the cap in compliance with any directions given by the Treasury. A mandatory direction has been issued by the Treasury requiring the cap to be relaxed in certain situations:
- Where the obligation to make the payment arises as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006;
- Where a payment of compensation is made in respect of a claim of discrimination and/or whistleblowing because the minister is satisfied that an Employment Tribunal would award compensation; and
- Where certain payments are made by the Nuclear Decommissioning Authority.
As a result of the consultation responses, the Government will add health and safety related detriment and unfair dismissal claims to the mandatory waiver list and will update the direction to reflect this.
There is also a discretionary power for a minister to relax the cap if the following exceptional circumstances exist:
- 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.
However, the responses highlighted uncertainty as to how the proposed waiver would work in practice. The Government response states that the waiver is in place to ensure that the cap can be relaxed in exceptional circumstances. It will provide policy direction in the published guidance document, however, employers should consult legal advisors on specific cases, including with regards to the mandatory TUPE waiver, once the cap comes into force.
The Government has committed to carrying out an updated impact assessment which will be published with the final guidance when the regulations come into force. The primary legislation also allows for the level of the cap to be amended through secondary legislation. As a result, the level of the cap will be kept under review.
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