Articles

Public Sector Exit Payments: Cap, Clawback and Consistency

Currently there are three proposals from the government to change exit payments in the public sector:

The impact of these changes will be far reaching as set out below.

The £95,000 Cap on Exit Payments

On 16 September 2015, the government published its response to the (very brief) consultation on the proposed introduction of a £95,000 cap on the total aggregate value of all exit payments made to most public sector employees. It will apply, among other bodies, to local authorities, the NHS, the police force and schools.

The government intends to proceed by introducing the cap via the Enterprise Bill. The detail of the measures will be implemented through secondary legislation; this is anticipated for the summer or autumn of 2016.

On 3 November 2015 the government published the draft Public Sector Exit Payment Regulations 2016, which contain details of the restriction on public sector exit payments.

The exit payment threshold, or the cap, is set at £95,000, but may be varied by further regulations. The cap will apply to:

In relation to this last point, the government has confirmed that this will include payments in lieu of notice but it is not clear how this will affect existing contracts where a payment in lieu of the contractual notice period would exceed £95,000. It will be possible to waive the cap in a particular case with consent from the relevant minister, or from the full council in the case of local government exit payments, but it is not yet clear what would support such a waiver from full council.

The cap will not apply to:

As ever, the devil will be in the detail. We understand that HM Treasury has confirmed that the draft regulations have been published for illustrative purposes only as a means of informing parliamentary debate on the relevant provisions of the Enterprise Bill. The government intends to lay a further version of the regulations which will be subject to affirmative resolution after the Enterprise Bill receives royal assent.

Recovery of Exit Payments

On 25 June 2014, HM Treasury published a consultation on the recovery of public sector exit payments and responded to that consultation on 28 October 2014. Then on 21 December 2015, HM Treasury published a consultation on draft Repayment of Public Sector Exit Payments Regulations 2016 to implement its proposals, under the Small Business, Enterprise and Employment Act 2015. Since the consultation in 2014, the government has modified some elements of the policy. There have been some significant changes:

The consultation documents also list the types of payment and the public sector organisations that are in scope of the regulations and those that are proposed to be exempt. It makes clear that the policy would apply to all bodies within the definition of the public sector by the Office for National Statistics (ONS), except those granted an exemption. It states that housing associations would be granted an exemption, as the intention is to ensure that the ONS reclassifies them as part of the private sector.

The Secretary of State of the parent department of each subsector may decide whether to grant a waiver to an individual to remove the obligation to repay. Again, full council may grant a waiver for repayment in cases involving local authorities, and for the local government bodies for which they have oversight or control.
It is important to note that the legislation will cover individuals who return to work for a public sector organisation off payroll, for example, as an individual consultant or as an employee of a consultancy firm.

Review of Consistency in Redundancy Payments Across the Public Sector

If the above were not enough to be dealing with, on 5 February 2016 HM Treasury published a consultation on what it called ‘further cross-public sector action on exit payment terms, to reduce the costs of redundancy payments and ensure greater consistency between workforces’.

The proposals will apply to the majority of public sector employees, and the government is proposing to take action on some, or all, of the following elements across all major public sector compensation provision:

Comment

These changes raise a number of issues for local authorities.

The £95,000 cap is ostensibly to address the public perception that senior employees are being given six-figure pay-outs at the expense of the public purse. However, a cap set at this level could catch much lower earners with long service in the public sector. This is because the cost of enhancing pension for, for example, those in the Local Government Pension Scheme who are 55 or over, known as ‘pension strain’, is also included in the £95,000 cap.

A concern among authorities is that the cap, particularly including the strain on fund cost in the cap, would erode the ability of employers to manage their workforce reduction programmes in an effective way. There is likely to be an increase in the number of employees who are currently eligible for early retirement seeking to leave now, prior to the introduction of the cap, under voluntary redundancy arrangements, which could potentially mean a drain of knowledge and talent. In addition, after the cap is introduced, restrictions on pay outs for senior or long-serving staff could have an impact on how redundancy exercises are planned overall.

Authorities have questioned the necessity of applying the cap to local government, which already operates within a transparent framework. This includes published policies, whereby an exit payment of over £100,000 has to be approved by full council.

There is a concern 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 then to keep them out of the public sector, at least for an extended period.

These regulations are also complicated and detailed; having similar titles adds to the confusion. To have two sets of regulations dealing with similar issues seems unnecessarily piecemeal as an approach and it will be important to be familiar with the detail of all the regulations and the parent legislation.

Sarah Lamont | Partner, Bevan Brittan
0370 194 5477
sarah.lamont@bevanbrittan.com

Frances Woodhead | Partner, Bevan Brittan
0370 194 5477
frances.woodhead@bevanbrittan.com

Ashley Norman | Partner, Bevan Brittan
0370 194 5477
ashley.norman@bevanbrittan.com