The cap on public sector exit pay rears its head again
The government has recently launched a consultation exercise in relation to the introduction of a £95,000 cap on exit payments made to public sector staff.
The government previously drafted but did not bring into force powers to cap exit payments in the public sector via the Small Business, Enterprise and Employment Act 2015 (as amended by the Enterprise Act 2016), the consultation exercise sets out its proposed method of implementing that cap including the bodies that will be in scope.
The executive summary in the consultation documentation provides the underlying rationale for the proposals, specifically that exit payments to employees leaving the public sector workforce in 2016/17 cost the tax payer £1.2 billion and the government does not believe that the majority of six figure exit payments, which are far in excess of those available to most workers in the public sector and the wider economy are proportionate or provide value for money for tax-payers.
The draft Regulations (The Restriction of Public Sector Exit Payments Regulations 2019) set out in the consultation documentation, along with Guidance are intended to help public sector employers ensure the exit payments they make represent value for money to the funding tax-payer. There is no date set for the implementation of the draft Regulations, the terms of which it is important to note could be altered as a consequence of the consultation process.
Who is caught by the cap?
The cap is ultimately intended to apply to the whole of the public sector, however, the government is undertaking a staged process of implementation. The draft Regulations are the first stage of that process and capture the majority of public sector employees. Specifically, the following categories of public sector employers are within the scope of the draft Regulations:
- The UK Civil Service, its executive agencies, non-ministerial departments and non-departmental public bodies
- The NHS in England and Wales
- Academy schools
- Local Government including fire authorities and maintained schools
- Police forces including civilian and uniformed officers
Where a body or office is not caught by the draft Regulations there would be no legal obligation to apply the cap to an exit payment, however, the government makes it clear in the consultation document that it would expect public sector authorities not currently covered by the draft Regulations to apply commensurate arrangements voluntarily.
What are exit payments?
An exit payment will be subject to the cap if it is made in consequence of the termination of employment or office and whether or not a contract of employment applies.
Regulation 6(1) lists the type of specific payments which fall within the scope of the Regulations and to which the cap will apply, they are:
- Any payment on account of dismissal by reason of redundancy (statutory redundancy pay is not intended to be affected by the cap)
- Any payment 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
- Any payment made pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement
- Any severance payment or ex gratia payment
- Any payment in the form of shares of share options
- Any payment on voluntary exit
- Any payment in lieu of notice due under a contract of employment
- Any payment made to distinguish any liability to pay money under a fixed term contact
- Any other payment made whether under a contract of employment or otherwise in consequence of termination of employment or loss of office.
Some exit payments are specifically excluded from the scope of the public sector exit payment cap and are set out at Regulation 7, these include the following:
- Any payment made in respect of death in service
- Any payment made in respect of incapacity as a result of accident, injury or illness (not including injury to feelings)
- A service payment made in respect of annual leave due under a contract of employment but not taken
- Any payment made in compliance with an Order of any Court or Tribunal
- A payment in lieu of notice due under a contract of employment that does not exceed one-quarter of the relevant person’s salary.
The guidance documentation within the consultation papers confirms that the exit payment cap only applies where there is an extra cost to the employer in relation to that exit therefore payments or elements within payments that result from an individual’s accrued right to a pension including additional pension purchased with the individual’s own monies are not exit payments for the purposes of the cap.
The guidance document confirms though that pension “strain” payments are caught by the cap. These are payments made by an employer as an additional contribution to a pension scheme in respect of an individual’s exit such that the individual receives a greater pension than they would otherwise be entitled to.
It is the Government’s expectation that employment contracts, compensation schemes and pension schemes will be amended to reflect the introduction of the cap. However, the draft Regulations do not deal with this expressly.
The draft Regulations cover multiple exit payments in circumstances where two or more relevant exits for an individual take place on separate days in any period of 28 consecutive days.
Relaxation of the cap
The Government recognises that there will be some circumstances where it is necessary or desirable to relax the cap. However, it should be noted that this safeguard is for use in exceptional situations. Further, the power to relax the cap must be exercised by a Minister of the Crown or someone to whom authority has been delegated.
Separate HM Treasury (HMT) directions set out the circumstances where the power to relax the cap must be exercised in “mandatory cases” and may be exercised in “discretionary cases”.
In mandatory cases there is no requirement for a business case to be sent to HMT for approval. The mandatory situations include:
- Where a payment is made as a result of TUPE applying
- Where a payment is made to avoid Employment Tribunal litigation in relation to a complaint that someone has suffered a detriment or been dismissed as a result of whistle blowing
- Where a payment is made to avoid Employment Tribunal litigation in relation to a complaint of discrimination under the Equality Act 2010.
The discretionary relaxation of the capping restriction may be exercised at the discretion of the Minister or delegated authority where it is appropriate to exercise that power on the basis of one or more of the following conditions:
- There are compassionate grounds owing to genuine hardship
- It is necessary to exit an individual to give or effect urgent workplace reforms
- An arrangement to exit was entered into before the Regulations came into force but the exit was delayed until after that day and the delay was not attributable to the employee or office holder concerned.
Any payment that exceeds the cap and is not compliant with the relaxation directions detailed above would be considered to be a payment beyond the organisation’s legal competence and could result in sanctions for the organisation or, if appropriate, sponsoring department by HMT.
Following the introduction of the Regulations, to ensure transparency, public sector employers should keep a record of exit payments made for public accountability purposes although this is not expressly mandated in the draft Regulations.
However, the draft Regulations do require records to be kept in circumstances where the relaxation of the cap provisions are applied. In such situations there needs to be a separate record of the exercise of the power kept for a minimum of three years from the date the power is exercised showing:
- The name of the payee in respect of whom the cap was relaxed
- The amount/type of the qualifying exit payment for which the cap was relaxed
- The day on which the power to relax the cap was exercised
- The reason why the power was exercised (this should refer to the Guidance and be sufficiently detailed to enable HMT to assess it has been appropriately applied).
Public sector bodies must publish information about any decisions to relax the cap and the Government strongly recommends that such information is published in their annual accounts.
There are also individual responsibilities in circumstances where an individual has two or more public sector employments/offices that are in the scope of the exit payment cap obliging the individual to inform all of the other relevant authorities of the following information:
- That they are entitled to receive an exit payment
- The amount and type of that exit payment
- The date that they left employment or office
- The identity of the relevant authority that made the exit payment.
The draft Regulations raise a number of questions and depending on the responses received to the consultation they could be amended to address areas of uncertainty, so the matters outlined above could change when (it would appear there is a real appetite for the introduction of the legislation so it is a case of when rather than if) the draft Regulations are implemented.
The consultation is open until 3 July 2019 and we will provide further updates once the response to the consultation is published and the Government provides confirmation of the final position.