Limits on Public Sector Employee Exit Payments and new Claw-Back rules

This article is now out of date following recent news – please see Revocation of the Public Sector Exit Payment Cap.

In response to a number of recent high-profile cases, the Government is planning to crack down on what it believes to be excessive termination payments made to senior public section employees, particularly when such employees return to employment within the public sector shortly after their termination.

The Repayment of Public Sector Exit Payments Regulations 2016 are expected to take effect at the end of April.

They will apply to employees (earning £80,000 or more) of core public sector employers, such as the NHS and central and local Government - but employees of Universities and charities will not be caught, for the time being.

The main principles of the Regulations are likely to be:

  • Setting a cap on exit payments of £95,000; and
  • The duty of an employee to pay back all or part of an exit payment if the employee re-joins any part of the public sector within a certain period. This will be calculated on a sliding scale depending on the amount of months (up to a maximum of 12 months) that have passed since the exit payment was made.

The repayment rules will apply to employees and contractors.

"Exit payments" will broadly include any payment associated with termination of employment, including voluntary and compulsory redundancy payments, ex gratia termination payments, severance payments and any strain payment made to reduce or eliminate an actuarial reduction to an early retirement pension. The Government have indicated that payments in lieu of notice and holiday pay will be not be caught.

The new Regulations will also impose significant administration and record-keeping burdens on employers and employees. For each employee who is terminated, both the old and new employer will need to keep detailed records of the employee's previous exit payment, and date of termination, in order for the repayment to be calculated.

Significantly, a public sector employer taking on an employee who has previously worked in the public sector will need to consider disciplining, and even dismissing, the employee if the employee does not make the correct repayment.

For employers dismissing employees, the added burden of considering the funding of early pensions is also likely to generate an unwelcome layer of complexity, and the affected employee may be forced to accept a lower pension if the application of the cap means that there is not enough money available to make a full strain payment.

This article was written by Charles Pallot and Laura Wonnacott.

Send us a message