HM Treasury Special Severance Payment Guidance Updated; the grip on the purse strings tighten
What are the key changes and implications for NHS and other public sector employers?
HMT updated its guidance on HMT approval requirements for special severance payments in the public sector, on 27 May 2021. Suzanne Nulty and Kate Shute explore the key changes and implications for NHS and other public sector employers.
On the gov.uk website the updated, guidance is referred to as “Guidance on Public Sector Exit Payments” but this is not to be confused with the short-lived public sector exit payment cap which was in place from 4 November 2020, until it was repealed with immediate effect on 12 February 2021 (read our update on that repeal).
Last week, NHS Employers announced on its website that, in light of the updated HMT guidance, it is now reviewing its own guidance (issued in December 2013) and it will be republished on the NHS Employers website as soon as the work is completed (read the current NHS guidance).
The HMT updated guidance on its approval processes for special severance payments:
- re-emphasises and reinforces the guidance already in place in Managing Public Money, specifically annex 4.13; but also
- extends the range of payments that are likely to be considered to be special severance payments and therefore require approval; and
- provides criteria for employers to consider before making such payments; and
- provides detail about the control process (i.e. approval process) for such payments; and
- introduces new transparency (i.e. reporting) requirements for these payments.
In general terms, the guidance refers to a need for clear justification for such payments which should be:
- exceptional (“because they are often novel, contentious and potentially repercussive” or can appear to reward failure or set a poor example for the public sector generally”);
- not seen as a “soft” option as an alternative to management action, disciplinary processes, unwelcome publicity or reputational damage;
- considered only after the exploration of alternatives, such other considerations having been documented;
- fair, proportionate and lawful.
Extending the categories of payments requiring approval
More specifically, at 2.4 it stipulates that the following, previously arguably “grey areas”, which potentially enabled Trust to make contractual payments without approval, are now “likely to constitute Special Severance Payments” and require HMT scrutiny:
a. Any payments reached under a settlement agreement; … [On the face of it, this means that even contractual payments, if bound up in a settlement agreement, would need approval] …
c. Write-offs of any outstanding loans; …
d. Any special leave, such as gardening (sic) leave; …
g. Payments for retraining related to the termination of their employment;
h. Compensation in lieu of notice (CILON); [this is included in addition to pay in lieu of notice (PILON) which is said to possibly constitute an SSP depending on the contractual terms and other relevant statutory/scheme provisions — paragraph 2.5. Presumably, if there is not a contractual/statutory/scheme provision allowing for PILON, then it will be an SSP]]
i. Payments agreed under judicial or non-judicial mediation.” [This suggests that an employer will be able to effectively engage in judicial mediation only if they obtain prior authority for any potential agreed outcome].
The process remains that the organisation proposing any special severance payment must satisfy their own internal governance processes first, including gaining the approval of their accounting officer. The request then goes forward to NHS England as the sponsoring department and, if NHS England is satisfied, it will forward the case for approval to HMT.
The guidance specifies that offers must not be made (whether verbally or in writing) before approval is obtained and departments (i.e. NHSE) are instructed to allow a “minimum of 20 working days for HMT to assess and scrutinise individual cases”. Adding to this the time that Trusts will need to put together their own internal case and the time that will be needed by NHS Employers to consider whether it is prepared to put the approval forward, it is clear that the process remains potentially cumbersome, although there is recognition that urgent approval may be needed in some cases, where departments are encouraged to “engage early” with the relevant HMT team.
Specific provision is made that additional scrutiny will be applied to cases where a special severance payment of £100,000 or more is proposed and/or where a special severance payment is proposed for an employee who earns over £150,000; in such cases, ministerial approval is required “due to the significant nature of the payments”.
HMT considerations/criteria for approval
In chapter 3, the guidance sets out the considerations that will be given by HMT to an application for approval. As well as the individual circumstances of the case, as one might expect, there are additional considerations such as the number of other special severance cases pending or agreed upon in the last 12 months (3.24). It is not clear whether this refers to the total number under consideration across the entire HMT, from a specific department or from individual employers.
In relation to settlement agreements, it is noted that “the Government’s default approach is not to settle, and HM Treasury will closely scrutinise any such cases to ensure [payments] are only made in exceptional circumstances and represent value for money for the Government as a whole”. Even then, the guidance states that approval will only be given if attempts have been made to settle any dispute without making a special (i.e. ex gratia) settlement payment. We foresee some instances where that will simply not be feasible/appropriate.
The guidance touches on the use of confidentiality clauses, by referring to previous Cabinet Office Guidance from July 2019, (read the guidance Cabinet Office Guidance from July 2019).
In Chapter 4, the guidance addresses transparency requirements. For employers, this involves including in the annual accounts confirmation of the number of exit payments made, specifying their values by reference to bands between £0-£25,000 and £150,000+.
Breaches and penalties
As well as the established legal position that any special severance payment made without relevant approval will potentially be ultra vires (i.e. unlawful), Chapter 5 of the updated guidance introduces potential discretionary financial sanctions that HMT may impose, such as:
- Deductions from departmental budget; or
- Increase in spending controls; or
- Financial penalties up to a maximum of five times the value of the special severance payment or £10,000, whichever is the highest.
Sponsoring departments also have an obligation to report potential breaches of these new guidelines within 20 working days of becoming aware of such a potential breach.
As most NHS Trusts/bodies have been working for some time on the basis that any ex gratia payment must be subject to NHSE/departmental/HMT approval, the process in the new guidance is not really a fundamental departure from the existing position, albeit that additional retrospective data reporting requirements are added in respect of payments made.
The main impact arises from the further tightening of restrictions on public sector employers’ ability to agree to make termination payments, which are now subject to scrutiny even where the payments emanate from the employment contract.
As such, the new guidance appears to pretty much eliminate any “wriggle room” that enabled employers, for example, to allow departing employees to be paid in lieu of a contractual notice period or to have garden leave for a period of notice or a portion of it. In doing so, the guidance hinders an employer’s ability to exercise the discretion or flexibility that can be needed to compassionately manage the departure of individuals who have been involved in a difficult/intractable workforce situation and need the psychological balm of a small “win” or concession.
The NHS Employers and any NHS England commentary/guidance specifically for Health sector employers are awaited with interest.
We have a team of employment lawyers who specialise in acting for organisations and individuals in the public sector. For more information, contact our employment law solicitors. We have an expert team of settlement agreement solicitors who can advise on all issues relating to settlement agreements.