Public Sector Exit Payment Cap

On 25 February 2021, the Government made the Restriction of Public Sector Exit Payments (Revocation) Regulations 2021. These Regulations will revoke the Restriction of Public Sector Exit Payments Regulations 2020 on 19 March 2021. In the interim, a Treasury Direction has been made to disapply the exit payment cap. This follows a review by the Treasury which concluded that the exit payment cap had led to “unintended consequences”.

Background

In 2016, the Small Business, Enterprise and Employment Act 2015 was amended to give the Treasury the power to make regulations to prohibit prescribed public sector bodies from making exit payments in excess of a £95,000 cap. The Government said that the measure was designed to prevent large exit payments to “public sector fat cats”, although bodies representing public sector workers expressed concerns that it could hurt lower-paid staff, especially those with long service.

Restriction of Public Sector Exit Payment Regulations

Following a consultation in 2019 the Government laid the draft Restriction of Public Sector Exit Payment Regulations 2020 before Parliament in July 2020. The Regulations were approved by both Houses of Parliament in September and were made (signed into law) on 14 October. They came into force on 4 November 2020.

The Regulations prevented relevant authorities from making exit payments in excess of the £95,000 cap. “Relevant authorities” were defined as public sector bodies listed in the legislation. It captured the majority of the public sector. “Exit payments” were payments made to employees on termination of employment or office holders who leave office.

Under the Regulations various payments counted towards the exit payment cap. These included redundancy payments, severance payments, settlement agreements and ‘pension strain’ payments (i.e. additional employer pension contribution to enable an individual to take early retirement on an unreduced pension). It was the total of all exit payments that could not exceed £95,000.

There were a number of payments that did not count towards the exit payment cap. These included payments for death in service, payments for accidents or injuries, certain payments relating to firemen and judicial pension schemes and payments pursuant to a court order.

Crucially, while the regulations prohibited the relevant authority from making the payment, they did not alter the employee’s entitlement to those payments. Some stakeholders, like the Employment Lawyers Association, suggested that this could lead to legal disputes.

A number of stakeholders, particularly local government employers and staff representatives, had expressed concern about the inclusion of ‘pension strain’ payments in the cap and how this would affect long-serving lower earning employees.

Concern had also been expressed that payments under settlement agreements – contracts that end a legal dispute – count as exit payments. Stakeholders and a number of MPs and peers suggested that this could encourage parties to litigate rather than settle.

Under the 2015 Act, Ministers have the power to relax the cap in certain cases. The Regulations also gave this power to local authorities, provided they acted in accordance with Treasury Directions or otherwise with the consent of the Treasury.

The Government published the Directions and guidance shortly before the Regulations came into force. ‘Mandatory cases’ where the cap must be waived included payments under settlement agreements in discrimination, whistleblowing and health and safety cases. ‘Discretionary cases’ in which the cap can be waived include cases where the cap could cause undue hardship or inhibit workplace reforms.

In mandatory cases the authority had to seek approval from their sponsoring department. In discretionary cases they had to seek approval from both their sponsoring department and the Treasury.

Revoking the Regulations

A large number of public sector trade unions and organisations made applications for judicial review of the Regulations. There were a number of claims, including that a proper procedure was not followed when introducing the Regulations, that the Regulations interfered with legitimate expectations and that the Regulations exceeded the powers provided in the 2015 Act.

On 12 February 2021, the Treasury announced that it had reviewed the Regulations and concluded that there had been “unintended consequences”. As a result, it said the Regulations would be revoked. In the interim, a Treasury Direction has disapplied the exit payment cap. Treasury guidance says employees who had their exit payments capped should ask their former employers for the balance of what they would have received.

On 25 February 2021, the Government made the Restriction of Public Sector Exit Payment (Revocation) Regulations 2021 which will revoke the 2020 Regulations on 19 March 2021. The 2021 Regulations will also require relevant authorities to make a payment to former employees who were impacted by the cap to cover the balance for the exit payment they would otherwise have been entitled to.