Capping exit payments for public sector workers

Following on from its decision to recover exit payments from high earners who leave the public sector and then return within 12 months (see here for more detail), the Government has now decided to also go ahead with its further proposal to cap exit payments for public sector employees at £95,000, as part of a manifesto commitment to address “six figure exit payments” in the public sector. According to the Government’s figures, between 2011 and 2014 the total cost of exit payments in the public sector was around £6.5 billion and more than £1 billion of this derived from exit payments costing more than £95,000.

Consultation took place over the summer and, despite the timing, over 4000 responses were submitted.  In the Response document, it was noted that a significant number of contributors were not in favour of a cap in light of other reforms, but few representations set out a different proposition to address the issue so the Government has decided to go ahead (albeit with some changes to what was originally proposed).

The Government has now published illustrative (not final form) legal drafting for how the rules would work.  This answers some questions but also creates some more.

Here are the headline points to note:-

  • Application – the regulations will apply to all entities classified as within central and local government, and public non-financial corporations as determined by the Office for National Statistics, subject to a small number of exemptions (although even those exempted are expected to implement their own commensurate cap). The draft Regulations were issued prior to the ONS’s reclassification of Private Registered Providers as Public Non-Financial Corporations.
  • £95,000 aggregate cap – to be kept under review to ensure it remains proportionate
  • Payments caught – those made in connection with loss of employment including voluntary and compulsory redundancy payments, ex gratia payments (including to settle potential or early stage Employment Tribunal claims) and PILON.
  • Some payments are excluded – including accrued holiday pay, contractual bonuses and payments in compliance with a court order (for example if Tribunal proceedings were pursued and were successful).
  • Unclear impact on those in the LGPS – the £95,000 cap will include “payments to reduce or eliminate an actuarial reduction to a pension upon early retirement” but elsewhere the limit is said to apply to payments to the individual. LGPS strain costs would obviously go direct to the Fund.  Amendments would be required to LGPS legislation to address the issue of what would happen to pension entitlement if strain costs were caught and could not be met in full.
  • Value for money – the level of payment must still be justifiable.
  • Unenforceability of any entitlement to more – save where it arises from TUPE protected terms.
  • Some discretion to seek a waiver – but this is likely to be exercised only in exceptional circumstances

Devonshires’ view

On the basis of the ONS reclassification of Private Registered Providers (PRPs) as Public Non-Financial Corporations, the Regulations as presently drafted would apply to PRPs unless the Government elects to specifically exempt the sector.  However even exemption may still come with a “strong expectation” that a commensurate cap will be voluntarily introduced, and PRPs may then find themselves in a more challenging position with their affected employees because they will not have a legislative basis upon which to limit the level of payment and may have to go through a contractual variation process.  The issue of payments into pensions (in particular, but not exclusively the LGPS) also needs further consideration (and potentially drafting) to clarify whether it is only discretionary payments that are caught or also those strain costs triggered automatically, for example by the redundancy of an active LGPS member over the age of 55.

It goes without saying that clarification is urgently required as to whether or not the intention is for PRPs to be caught directly or indirectly by this legislation.  If the intention is that PRPs should not be covered then they should be excluded from the Regulations but furthermore it should be clearly specified that they are not required to comply voluntarily.

However even if the Government opts to exclude PRPs from scope, the HCA, in its role as regulator, can continue to question RP’s about exit payments and take account of their responses when assessing compliance with the Regulatory Standards on Governance and Value for Money. When considering whether an exit payment can be justified on a Value for Money basis we consider that at least some regard will be had to what can be paid in the public sector.

For advice on the potential impact of these new rules on your organisation, please contact a member of the Devonshires Employment Team.

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