Restrictions on Public Sector Exit Payments – the next step in a long-running process

This article is now out of date following recent news – please see Revocation of the Public Sector Exit Payment Cap.

Various Governments over the past 5 years have been keen to cap what they have seen as excessive payments to senior employees leaving Public Sector posts, and there have been numerous consultations and promises of regulations.

The Government launched its first consultation on 31 July 2015, which closed on 27 August 2015. The Government’s response to that consultation introduced new sections of the Small Business, Enterprise and Employment Act 2016 which are now in force.  Those provisions envisaged that Regulations would be made to put the flesh on how any restrictions on public sector exit payments were to be implemented.

Various draft Regulations have been published. The first version of these was made available in November 2015, and a revised version of the draft Regulations was then published on 7 March 2016.

That version of the draft Regulations made plain on its face that it was (at that time) envisaged that the legislation would not take effect until 1 October 2016 at the earliest, but the date was in fact missed.

A second related consultation was launched on 5 February 2016, which proposed to reform the methods and rules used to calculate the level of all public sector exit payments that fall within that upper cap. The government's response to that second consultation was published on 26 September 2016. No update was given as to when that legislation might take effect, and no new draft Regulations was produced at the time.

The Government has now published draft Regulations on the Restrictions of Public Sector Exits Payments. 

The expressed aim of the draft Regulations is to restrict prescribed public sector bodies (as defined in the Schedule to the draft Regulations, including County and District Councils, County Borough Councils, London Borough Councils, Common Councils of the City of London and Councils of the Isle of Scilly, from making exit payments over £95,000 to people leaving employment or vacating office.

The proposed exit payment cap is to be kept under review.

Where two or more exit payments are to be made to the same person within a 28 day period, the total amount of the exit payments must not exceed the exit payment cap.

Unless they are specifically exempted by the Regulations, payments to be included within the exit payment cap calculation include:

• payments for dismissal by reason of redundancy;
• payments to reduce an actuarial reduction to a pension on early retirement;
• payments following an award of compensation under a settlement or conciliation agreement;
• payments on voluntary exit;
• payments in lieu of notice under a contract of employment (which exceeds one quarter of the relevant person’s salary); and
• any other payment (contractual or otherwise) in consequence of termination of employment or loss of office.

In certain circumstances, exceptions will be made for:

• payments in relation to death in service;
• payments in respect of incapacity as a result of accident, injury or illness;
• payments in respect of accrued annual leave;
• any payment in compliance with an order of a court or tribunal; and
• any payment in lieu of notice under a contract of employment which does not exceed one-quarter of the relevant person’s salary.

The key exception for employers to note is statutory redundancy payments. Any statutory redundancy payment entitlement will not count towards the cap.

The draft Regulations include the power to relax restrictions on the cap of any exit payment in exceptional circumstances by certain authorities or with consent of the Treasury. The authority exercising this power must keep written records for three years detailing the decision made and the reasons for it. 

These draft regulations have been laid before Parliament for approval by resolution of each House of Parliament. They will be enacted on a future date that is not yet known, and will come into force on the 21^st day after the day on which they are made.

Although the draft Regulations are not currently in force, relevant public sector employers will need to start thinking about the possible effect this will have on their negotiations with departing employees and office-holders.