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Public sector exit payments: The long & winding road…

Emlyn Williams explores the government’s proposals to limit exit payments in the public sector.

Remember the government’s proposals to limit exit payments in the public sector? If you need a quick refresher you are certainly not alone!

The Small Business, Enterprise and Employment Act 2015 gave the government power to implement a global cap of £95k on public sector exit packages but, although proposals have been in the pipeline for a number of years, it still hasn’t been exercised.

However, reform moved a step closer this month with the publication of the government’s response to its Spring/Summer 2019 consultation exercise (see our previous update).

The detail

The government’s most recent consultation on public sector exit payments ran for around three months from April-July 2019. The documents put out to consultation included draft regulations, and draft guidance around how the cap to exit pay should be applied. Around 600 responses were submitted by public sector stakeholders, representing a high level of engagement for this type of consultation exercise.

The key points to note from the consultation response are as follows:

  • It is confirmed that the £95K cap will represent “the aggregate sum of payments made in consequence of termination”. The amount of the cap will be kept under review. Payments falling in scope remain as outlined in the draft regulations.
  • So, broadly, the cap will include salary (including benefits in kind); any severance or ex gratia payments, and payments in the form of share options. Redundancy payments of any kind (statutory, contractual or otherwise enhanced, compulsory or voluntary) and the cost of any pension related payments or enhancements will also count towards this total.
  • The most notable exclusion is any payment for injury to feelings (for example, following an allegation or claim of discrimination). The government has resisted pressure from stakeholders to exclude pension ‘top-up’ payments from the cap, citing this as one of the costliest elements of exit pay.
  • The previous position re pay in lieu of notice (PILON) was confusing (see our previous update for details). However, the consultation response clarifies that “the only part of the payment in lieu of notice that will be capped is the amount that exceeds one quarter of an individual’s salary”. This suggests pay in lieu of a standard three-month notice period will fall outside the cap, while any additional payments for longer notice periods will count towards the £95K maximum. This may be an anti-avoidance measure to prevent employers circumventing the cap by agreeing to artificially long notice periods, but may spell danger for senior employees who, for example, already have a six-month notice entitlement.
  • It is confirmed that the order in which the cap should be applied to various elements of pay will not be prescribed by the legislation. However, the consultation response expresses an ‘expectation’ that an employee’s full statutory redundancy payment will come first, followed by their full pension top-up. The cap will therefore likely be applied to any additional, contractual elements of pay (e.g. contractual enhanced redundancy).
  • It remains the case that, if an employee leaves more than one public sector position within a period of 28 days, multiple exit payments will be added together for the purposes of the cap.
  • A staged roll-out across the public sector was originally envisaged. However, due to objections from stakeholders, capping will now be implemented across all eligible public sector employers at the same time.
  • It is envisaged that the vast majority of public sector employers will be captured, with the exception of the Armed Forces, Secret Intelligence Services and GCHQ, “due to the unique natures of the careers of their staff”.
  • Crucially, the consultation response confirms that the £95K cap “will take precedence over existing contractual arrangements, where they are less stringent that the exit payment cap regulations”. The government’s response specifically (at 3.22) states’ The government has expressed its expectation that pension schemes, employment contracts, and compensation schemes will be amended to reflect the introduction of the cap.’ So, plenty of easy work to look forward to there.
  • The draft Regulations stipulate that the cap must be relaxed where payment is made in respect of a grievance or claim involving discrimination or whistleblowing, and in certain TUPE scenarios. Following the consultation, this mandatory relaxation will be extended to cases involving Health and Safety detriment and unfair dismissal. However, the response also states (at 3.29) that ‘The waiver process has been designed to ensure there is accountability for the way the waiver is being used at all stages, therefore it’s appropriate that uses of the waiver receive ministerial clearance’. Anyone who has been through the Treasury approval process for special severance payments or settling public sector ET cases will know how easy that is to navigate and how efficiently it tends to work.

What does this mean for me?

Unfortunately, there is still more waiting to do. We don’t yet know when the Regulations that will implement these reforms will be introduced, or when the new regime will take effect.

The consultation response states that revisions will be made to the current draft Regulations and guidance, and final versions published at a non-specified ‘later date’.

Any revised Regulations will then need to be approved by Parliament using the rigorous ‘affirmative procedure’, meaning that the draft legislation will be subject to committee scrutiny and potentially debate in the House of Commons. This is perhaps an acknowledgement of the wide-reaching impact the proposals will have, and how controversial they are likely to be.

Hopefully, public sector employers will receive adequate notice of implementation, as contracts, compensation schemes and pension schemes will need to be amended to reflect the changes. Alternatively, employers may find themselves facing litigation where they are unable to honour their current contractual commitments to employees.

Clarity on the PILON position is welcome, although the interaction between the capping provisions and the separate, technical legislation on calculating ‘post-employment notice pay’ is likely to make designing employee exit packages rather complex.

The confirmation that pension ‘top-up’ payments will be included in the cap going forward will disappoint many who will remain concerned that this will adversely impact long-serving but lower-earning staff.

Comment

The cap to public sector exit payments was first scheduled to come into force around four years ago, in October 2016; but it appeared to have been pushed down the government agenda. It is not clear why the government has taken over 12 months to respond to this consultation, as the consultation outcome document is relatively brief, and the substantive work of amending regulations and guidance has not yet been done. It may be that this response has been carefully timed to signal the government’s commitment to saving public money, as the country faces a difficult period of post-COVID economic downturn.

Interestingly, there is still no indication of whether the government intends to resurrect its plans ‘claw-back’ public sector exit payments; it was originally proposed that exiting employees returning to any part of the public sector within 12 months should pay back the whole of their severance payment to their former employer. Perhaps this part of the proposal has been discarded as simply too complex, or potentially too unpopular, to implement.

Alternatively, the government may be planning to tighten public sector purse-strings by degrees, by re-introducing claw-back once ‘capping’ has been accepted and adopted.

The road goes ever on and on…

Read the full consultation response

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