‘Return of the cap’? Public sector exit payments: consultation on new controls process
The HM Treasury has published a consultation on proposed new control and approval measures for certain categories of exit payment.
Just when it appeared that the contentious issue of restricting public sector exit payments had been kicked into the long grass, HM Treasury has published a consultation on proposed new control and approval measures for certain categories of exit payment.
After years on the Government’s back-burner, legislation capping exit payments in the public sector at £95,000 was hurriedly introduced in November 2020, only to be revoked just three months later in February 2021. The proposals in this consultation and accompanying draft guidance document appear to be intended to step in to fill this public policy gap.
What payments are in scope?
The proposals set out in the consultation apply to:
- Any ‘high value’ exit where the total exit payment to be made will exceed £95,000;
- Any exit where a ‘special severance payment’ is proposed.
According to the draft guidance, the term ‘special severance’ payment is likely to include, amongst other things: payments reached under a settlement agreement (which are in excess of the employee’s contractual entitlements); payments for any special leave such as gardening leave; and the value of any employee benefits or allowances which continue beyond the employee’s agreed exit date. The draft guidance also states that pay in lieu of notice (PILON) may also be a ‘special severance payment’ in some circumstances.
Payments ordered by a court or tribunal, or payments with statutory/contractual status are unlikely to be captured. Examples might include statutory redundancy payments, contractual redundancy payments clearly prescribed by a scheme, and payments for untaken annual leave.
What are the proposed control/approval processes?
Separate control/approval processes apply to each of these categories of payment. These are outlined below. In cases where an exit package totals more than £95,000 and has a ‘special severance’ element included, both approvals will need to be sought.
Exits exceeding £95,000
Exit packages exceeding £95,000 must be approved by the Secretary of State. The guidance document sets out the proposed administrative process that should be followed (at paragraph 4.6).
For large organisational transformations, where a number of exits above the threshold are expected, ‘bulk approval’ may be sought from HM Treasury or, alternatively, a limited delegation to make exit decisions may be granted to the employer or another appropriate body.
Public sector employers will be required to set out a ‘clear and compelling’ business case for making the exit payment; to demonstrate that the payment represents ‘value for money’; and to show that alternatives to exit such as continued employment, redeployment, or other management action have been fully explored.
Special severance payments
The process for approval of ‘special severance payments’ is set out at paragraph 4.10 of the guidance document.
Where the value of a proposed ‘special severance payment’ is £95,000 or above, or the salary of the individual in question is above £150,000, approval will be required from the Chief Secretary to the Treasury (CST).
For all other ‘special severance payments’ regardless of value, it is proposed that HM Treasury approval must be sought in advance and ‘in good time to allow reasonable consideration of the case’. The consultation suggests that employers should allow 20 working days for individual cases to be scrutinised.
Permission to seek settlement of a case (a ‘negotiation mandate’) must also be sought in advance from HMRC. Again, a strong business case must be presented together with evidence that options other than exit have been explored, and value for money carefully considered.
It is also expected that employers should ‘proactively seek to ensure’ that special severance payments are recoverable where the individual is re-employed in the public sector after a given period.
However, the consultation proposes that employers should retain discretion to determine the precise terms of recovery and acknowledges that claw-back may not always be appropriate (for example where it might prevent settlement of a claim, or where the special severance payment is relatively small).
The ill-fated legislation capping public sector exit payments was widely criticised for its inflexibility, and its disproportionate impact on mid-level earners. It is not entirely clear how linking this new set of proposals to the already clunky (and notoriously slow) Treasury approvals processes for special severance payments is regarded as being an upgrade on what was proposed before.
It is already difficult to get approval to settle even meritorious claims. Whilst it is easy to agree that ‘special severance payments’ should not be a ‘soft-option’ (e.g., to avoid management action, disciplinary processes or reputational damage), the current approvals process can force employers to fight cases which they might otherwise sensibly seek to settle.
The new suggested timescale of 20 working days for approval of all special severance payments, however small, seems optimistic — especially in cases where ministerial approval would also be required.
It is important to note that these measures are currently proposals only and have not yet become law. The detail of the proposals may change following consultation.
The consultation will close on 17 October 2022.