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Public sector exits: are big payments 'on the way out'?

The recent spending review made plain that the 'age of austerity' is far from over. With savings to be made, the public sector faces a raft of further…

The recent Government spending review made plain that the ‘age of austerity’ is far from over. With extensive savings to be made, the public sector faces a raft of further cuts and spending restraints.

Amongst these measures are the Government’s proposals to cap the sum employees exiting the public sector can receive and to put mechanisms in place for exit payments to be repaid if the leaver returns to public sector employment, which have been welcomed by some and criticised by others.

We take a closer look at what these plans will mean in practice for public sector employers.

The payment cap

The Government has published its response to the consultation on its proposal to cap public sector exit payments confirming its intention to go ahead with the plans.

Powers to introduce the cap will be introduced in the Enterprise Bill, which receives its third reading in the House of Lords this week. The details of the scheme are set out in the recently published Public Sector Exit Payment Regulations 2016. These regulations have been published for ‘illustrative purposes’ to assist Parliament in considering the Enterprise Bill, so their final form and content may change slightly. However, they give a very strong indication of how the new rules will look.

The cap will initially be set at £95,000 and will apply to the vast majority of exit payments, including payments for voluntary or compulsory redundancy, payments in lieu of notice, payments to reduce or eliminate an actuarial reduction to a pension on early retirement, and ‘special severance’ payments such as those agreed in settlement of threatened litigation. ‘Special severance payments’ are likely to include most sums set out in settlement agreements.

Most public bodies in the UK will be covered by the cap, although it will be for the Scottish, Welsh and Northern Irish governments to decide whether they wish the cap to apply to devolved bodies.

The repayment provisions

Furthermore, section 154 of the Small Business Enterprise and Employment Act 2015 gives the Government power to make regulations requiring certain public sector workers to repay some or all of any ‘qualifying exit payment’ in certain circumstances. A ‘qualifying exit payment’ will include all of the payments mentioned above.

The legislation states that repayment could be required if the employee or office-holder is re-employed or engaged as a contractor in the public sector or is appointed to a public sector office within one year of their exit.

It also makes clear that the regulations, when published, may include provision to exempt some employees from the repayment rules, exempt some or all of the ‘qualifying exit payment’, or to taper the amount required to be repaid with reference to the period of time that has elapsed since the individual left public sector employment.

The Government has indicated that it intends to introduce the repayment provisions no later than April 2016, although no draft regulations have yet been produced. We can presumably expect to see some movement on this early next year.

Further proposals

It has been reported in the press this month that, in tandem with the £95k cap, the Chancellor also intends to reduce the maximum payment for voluntary redundancy across the public sector to 15 months. There is a suggestion that compulsory redundancy payments will also be reduced to a maximum of 12 months pay. It is also reported that payments for early retirement in the public sector may be significantly reduced.

These rumoured proposals have been greeted with consternation by unions, with Garry Graham, the Deputy General Secretary of the Prospect union, denouncing them as “a declaration of war by the government against its own staff” ahead of a “tsunami of public sector job cuts”.

It is expected that these proposals will be outlined in more detail in the near future in a consultation paper.

Fat-cats?

The £95k cap is to some extent intended to address the public perception that public money is often ‘wasted’ when so-called public sector ‘fat-cats’ receive large pay-outs. However, there is widespread concern amongst Unions that a cap set at this level will capture much lower earners who have worked in the public sector for extended periods. Matt Dykes, a senior Policy Officer for the TUC, expressed this view succinctly, calling the capped figure “a penalty for long service not high pay”.

At first sight, this claim might seem difficult to support. An employee earning £45,000.00 per year in the NHS, for example, would already be entitled to a maximum redundancy payment of £90,000.00 and therefore would not be affected by the new cap in relation to receipt of that redundancy payment. However, the cap may have an impact further down the pay-scale than the £95K figure suggests largely because it includes payments to reduce or eliminate an actuarial reduction to a pension on early retirement. This covers the situation where public bodies are required under their contractual terms to make payments into the relevant public sector pension scheme to enable the employee to receive unreduced pension benefits upon termination of their employment due to, for example, early retirement upon being made redundant or early retirement in the interests of efficiency of the service. Such costs can be significant and can certainly exceed the £95,000 figure even where a redundancy payment would not. We are unsure what this will mean in terms of benefits from the scheme for the employee if the public sector body is unable to pay the full amount required, but this may mean that the employee will be given the option of either accepting the actuarial reduction in their pension benefits or making a payment to cover the shortfall themselves. This has already recently become the case, for example, in the NHS in situations where the value of the redundancy payment is not sufficient to buy-out the full reduction in pension benefits. 

Another controversial aspect of the cap is the inclusion of payments in lieu of notice. This was to prevent employees from negotiating extremely long notice periods to circumvent the statutory maximum. However, many existing public sector employment contracts already entitle employees to significant payments in lieu of notice. As the cap applies to the aggregate amount of exit payments, this is likely to result in some employees receiving total payments some way below their current overall contractual entitlements. There has been a strong view expressed in some quarters that any payments such as pay in lieu of notice, which are contractually due, should either be excluded from the cap or capped for new employees only.

Whilst the new law on capped payments is not yet in force it may have an immediate impact on any redundancy or restructure exercises you are currently planning. For example, you may see older employees, those with long service, or the highly paid, pushing to exit now rather than risk receiving less if they ultimately leave by reason of redundancy at a later date.

Likely impact

The pay cap will of course limit the overall cost of a redundancy or restructure exercise. However it may significantly curtail your ‘room for manoeuvre’. It may be difficult to offer senior or long serving employees sufficient incentives to leave voluntarily, perhaps resulting in a greater incidence of compulsory redundancies. Restrictions on pay-outs at the ‘top end’ will inevitably have a knock-on impact on how redundancy exercises are shaped overall.

Given the size and diversity of the public sector it is not uncommon for individuals who are made redundant by a public sector employer to find employment elsewhere in the same or a different part of the public sector. These new repayment proposals follow a number of high profile cases in the NHS and local government concerning individuals who received very large payments only to return to the public sector almost immediately leading to criticism of ‘revolving doors’. When it consulted on the repayment proposals back in 2014, the Government explained that it intended to focus on the highest earners in order to preserve good ‘value for money’ for taxpayers.

Implications

There is concern, however, that the repayment rules may disproportionately impact specific areas of the public sector where skills are less ‘transferable’. For example, UNISON highlight that the majority of NHS staff train for specific roles and ‘develop skill sets that are just not required outside of the healthcare sector’.

The repayment provisions will, however, at least provide some consistency across the public sector. Many settlement agreements entered into across the public sector currently contain claw back provisions. However, they tend to vary widely in what they seek to prevent an ex-employee from doing, who they are prevented from working for, and how long the restrictions last. The new provisions will remove any uncertainty for employers as regards whether the restrictions they impose on ex-employees will be deemed reasonable.

It has been observed that these limits on public-sector exit payments have been introduced in a confusingly piecemeal manner and seem to supersede, or at least cross over, many similar initiatives that were already in progress. For example, large parts of the public sector, including the NHS and Civil Service, have existing pay caps in place as part of agreements negotiated with Unions which will presumably be overridden by the new overarching statutory cap. Proposals had also been put forward to introduce within the NHS a ‘staggered clawback’ of redundancy payments and ‘tapering’ of redundancy calculations for staff approaching retirement age. Discussions with the relevant unions were well underway. However, these specific plans seem to have been overtaken, or at least pushed into the background, by the announcement of the £95k cap and new repayment provisions.

Some feel that the combined impact of the statutory cap and repayment provisions will be to drive talented employees out of the public sector ahead of the imposition of the cap and to keep them out of the public sector, at least for an extended period, post-exit. Whilst reduced exit payments obviously constitute a cash saving, many also argue that a diversion of talent to the private sector and a loss of skills and investment may be an unfortunate unintended consequence.