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The palaver of public sector exit payments part 2: Return of the cap

The Government has announced its intention to press ahead with a cap on public sector exit payments.

We’ve said it once, and we’ll say it again. What a palaver.

Back in November 2016 (yes, 2016!) we updated you on the ‘progress’ of proposals to reform the entitlement to exit payments in the public sector (read our previous piece). At that point, the Government had been consulting on their proposals for over 18 months. 

Now almost two and a half years later, just when you thought this proposal had been buried by Brexit, the Government has announced its intention to press ahead with a ‘cap’ on public exit payments, following another period of further consultation. However, the status of plans to ‘claw-back’ exit payments when a departing employee later returns to the public sector is less clear.

We don’t yet know when these Regulations will come into force. 

What's the point?

The recently published consultation document emphasises that the principal drivers remain the same as when this idea was first floated back in 2015. The changes are intended to combat the perception that, even though public sector finances remain incredibly tight, senior employees sometimes receive significant (or excessive, depending on your view) exit payments, often to return to the public sector a short time later. This is essentially a money saving exercise to make sure that, in the Government’s words, public sector employers can “demonstrate that they are using public money efficiently and responsibly”.

Who is in scope?

The draft Regulations published alongside the consultation bring into scope some, but not all, of the public sector including: the UK Civil Service; the NHS in England and Wales; academy schools; local government (including fire authority employees and maintained schools); and police forces (including civilian and uniformed officers). The Regulations will be extended to the whole of the public sector in due course, subject to a limited number of exceptions. Key exemptions include the Armed Forces, The Security and Intelligence Services and GCHQ. Clearly these organisations cannot be expected to demonstrate efficient use of public money for some reason.

Certain specified Scottish, Welsh and Northern Irish Exit payments will also be exempt from the Regulations.

How will the cap work?

The core of this proposal has not changed. The essential idea is that there will be a global maximum payment with a ceiling of £95,000. This sounds like a big number and is intended to target high earners. However, when the different elements that might make up this sum are taken into account, the proposal has the potential to hit those much lower down the pay scale.

The idea is simple; an employee’s redundancy or exit package cannot, by law, exceed £95,000 regardless of what your contracts or workplace policies say (although nothing prevents a public sector employer implementing their own rules that hit harder than this). However, as ever, the execution of this new rule has the potential to be horribly complicated.

If an employee holds more than one public sector role, and exits two or more within a period of 28 days, the payments will be added together for the purposes of the cap. The draft Regulations set out in detail how this situation should be managed.

What counts towards the cap?

Payments included in the cap are listed in Regulation 6 of the draft Regulations and any those that fall outside it are listed in Regulation 7.

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 . This may quickly eat-up the maximum entitlement of even a relatively modest earner.

Pay in lieu of notice: in or out?

The position on PILON has the scope to be confusing. Regulation 6 states that “any payment in lieu of notice due under a contract of employment” counts towards the cap. However, Regulation 7 expressly excludes “a payment in lieu of notice under a contract of employment that does not exceed one quarter of the relevant person’s salary”.

So it seems that proportionately smaller PILON payments (e.g. a standard three month notice period) are exempt, but larger PILON payments will count towards the cap. This may be to close the potential loophole of employers agreeing to excessive or extended periods of notice with PILON clauses to bypass the capping provisions. Employers with senior directors entitled to six months notice – beware.

Settlement stress?

The real curve-ball in the draft legislation is that the cap appears to apply to settlement payments made to a former employee (who has already been dismissed) as well as to payments made to facilitate an individual’s exit.

At first sight this looks a bit odd as, arguably, a payment made many months post-dismissal to settle an Employment Tribunal claim is not truly an ‘exit’ payment at all. Again, however, this may be an anti-avoidance measure to prevent the parties agreeing that an employee will exit without payment and then receive an uncapped settlement sum later.

Importantly, awards made by a Court or Tribunal will be exempt from the cap. In high value cases this may make settlement considerably less attractive for claimants who may wish to push a potential claim to a hearing for the chance to obtain a higher award, rather than accept a capped settlement.

A potentially interesting scenario would be a senior director entitled to six months notice worth £50,000, enhanced redundancy worth, say, £50,000 and enhanced pension if dismissed by reason of redundancy. The total value will massively exceed the cap. Will it now be better for that individual to take you all the way to an Employment Tribunal hearing if you fail to pay them what they are entitled to contractually because you are no longer allowed to honour their contract. Perhaps unsurprisingly this kind of scenario isn’t covered in the consultation paper.

It's whistleblowing, so relax?

The draft Regulations contain another twist: the capping provisions must be ‘relaxed’ where a payment is made to settle a grievance or Employment Tribunal claim involving whistleblowing or discrimination (‘mandatory relaxation’). The cap must also be relaxed in certain TUPE situations.

The rationale behind this is clear, but again the thinking through of the practical consequences seems muddled. The rationale - the Government does not want to be seen to condone these types of wrongdoing or to financially disadvantage victims. However, these are precisely the kind of cases where transparency is urged upon the public sector and settlement agreements are discouraged by the Treasury. Further an obvious risk of this proposal is that departing employees will be advised to allege whistleblowing detriment or discrimination to get around the cap.

To sift out the genuine allegations from the speculative, it is ‘expected’ (according to the Guidance accompanying the Regulations) that an employer will make legal advice available to the decision maker to demonstrate ‘on the balance of probabilities’ that an Employment Tribunal would make a finding of whistleblowing detriment or discrimination.

This raises further red flags. Usually, settlement will be premised on the fact that the employer does not admit liability. Part of the attraction of settlement ‘out of court’ is that an employer can dispose of a matter without being ‘found guilty’ at an Employment Tribunal. Who will want to ‘admit’ that discrimination or whistleblowing detriment has taken place just so you can make a higher severance payment?

Please sir (or madam), can we pay some more?

There are also some circumstances where discretionary relaxation of the cap will be permitted, although these are narrow and the process for sign-off is complex. Circumstances where the cap may be relaxed include personal hardship (although it is difficult to envisage how a recipient of a £95K payment will genuinely be in ‘hardship’) and to ‘give effect to urgent workplace reforms’. It is not entirely clear what this is intended to cover, although the Guidance emphasises that using the power in this way will be ‘exceptional and a detailed business case will need to be prepared’. The cap may also be dis-applied where exit from an organisation was intended to take place before the Regulations come into force but which has been delayed for reasons outside the employee’s control (for example, they have been asked to stay on to complete a business-critical project).

Whatever happened to 'claw-back'?

At present, we don’t know. You might remember, from way back in the mists of time, it was proposed that exit payments for higher earners in the public sector would be repayable if the individual returned to work in the public sector within 12 months. There is no mention of this in the consultation or accompanying guidance, but neither is there anything to rule it out. Perhaps such ‘claw-back’ provisions have been deemed too complex to attempt in these uncertain times. Or, then again, perhaps Part 3 of this palaver is yet to come!

Emlyn Williams,, 0151 243 9569 is a Liverpool-based Partner in the Employment Pensions and Immigration Team and has extensive experience of advising the NHS and other public sector clients If you have any questions about the potential impact of these proposed reforms on your organisation please get in touch with Emlyn or speak to your usual Weightmans advisor.

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