News - Public Sector Exit Payments

Employment & Discrimination - Hannah Freeman

As you may recall, Section 41 of the Enterprise Act 2016 gave the Government the power to issue regulations capping public sector exit payments at £95,000.  Although draft regulations were published for “illustrative purposes” to assist the parliamentary debate on what became the Enterprise Act, no further moves were made at the time to implement this cap.

In particular, although the Enterprise Act received Royal Assent last year, the provision enabling a cap to be introduced did not itself come into force until a day to be appointed by regulation.  The Government has, however, now taken the next step towards the cap becoming a reality and a statutory instrument (SI 2017/70) has been made bringing the relevant provisions into force from 1 February 2017.  The way is therefore now clear for regulations to be issued enforcing the £95,000 cap.

The operation of the cap will, of course, depend on the content of these regulations if and when they appear.  On the basis of the “illustrative” draft published last year, however, it would be expected to work in the following way.

The cap of £95,000 should be applied to the total aggregate value of most public sector exit payments in any period of 28 consecutive days. The scope of the cap is wide and should apply to:

  • redundancy and voluntary exit payments
  • payments to reduce or eliminate an actuarial reduction to a pension on early retirement
  • payments to discharge liability under a fixed term contract
  • payments by way of shares on loss of employment
  • any other payment made as a consequence of, in relation to, or conditional upon, loss of employment whether under a contract of employment or otherwise.

There are a number of exclusions, however, which mean that the cap should not apply to payments that are:

  • made for incapacity or death as a result of accident, injury or illness
  • payments of accrued but untaken holiday
  • bonus payments otherwise determined to be due under the contract of employment
  • made in compliance with an order of any court or tribunal
  • early retirement payments to firefighters
  • made to employees with protected terms following a TUPE transfer.

In certain (currently unclear) circumstances the cap may be waived but this will require ministerial consent or full council consent in the case of local government payments. It seems unlikely that this power will be exercised in anything but the most exceptional of circumstances.

The cap will apply to most public sector employees including local authorities, the police, the NHS and schools. The Regulations currently exclude Housing Associations, the armed forces, public broadcasters, the Financial Conduct Authority and the Bank of England.

It is important to remember that, although the Government has championed this proposal as ending six figure public sector exit payments (arguing that they far exceed the level of payments made to most workers and are not fair) the changes may well also affect individuals on relatively modest salaries but with long service. Local government employees on modest salaries are likely to be particularly affected, as anyone made redundant after age 55 is currently entitled to early retirement instead of redundancy. An early retirement settlement made directly to the pension scheme is often much larger than a straightforward redundancy payment and could be caught by the cap.

The Government will issue guidance in due course as to how the cap will operate and on how the waiver provisions may be exercised.

 

Hannah Freeman

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